INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPRoyalty payment vis-a-vis genuineness of transaction--The assessee herein was engaged in business of manufacture of polystyrene and expandable polystyrene. It is wholly owned subsidiary of M/s LG (Holding Company). The said holding company is 100% subsidiary of another company named M/s LG Chemicals, Korea. The TPO has depicted the ownership details of the impugned companies in the form of a chart. During the year under consideration, the assessee, company entered into an agreement titled as 'Trademark Sub-License Agreement' in the month of October, 2005 with M/s LG Chem Korea, as per which the assessee herein was given non exclusive sub-license for the use of 'LG' Trade Marks for its business. It is to be noted here that the right to use the 'LG' trade mark was granted by M/s LG Corporation to M/s LG Chem Korea, vide an agreement entered between the two companies in December, 2004 and according to the said agreement, M/s LG Chem Ltd Korea is entitled to sublicense the Trade marks to certain entities. Accordingly, M/s LG Chem Korea entered into the above said trade mark sub license agreement with the assessee-company. As per the terms of the sub license agreement the assessee-company paid the royalty amount of Rs. 1,27,27,343 during the year under consideration for the use of the trade mark cited above. During the course of assessment proceeding, the AO made a reference to the Transfer Pricing Officer (TPO) for estimation of Arms Length Price (ALP) for the impugned royalty payment made by the assessee. There is no dispute with regard to the fact that M/s LG Chem to whom the impugned royalty amount was paid, is an Associated Enterprise of the assessee-company. The TPO, vide his order dated 30-10-2008, passed under section 92CA(3), determined the ALP of the impugned royalty payment at NIL value. Accordingly, the AO disallowed the entire amount of Rs. 1,27,27,343 claimed by the assessee. The 'Dispute Resolution Panel' (DRP) also upheld the view of the TPO. The issue relates to the determination of ALP in respect of the royalty amount paid by the assessee to its AE. The TPO has come to the conclusion that the impugned royalty payment transaction is a sham one and the motive behind the same is to shift the profits of the assessee-company out of the country. Held: In the instant case, the TPO did not examine the arms length price of the impugned royalty payment in accordance with the provisions of section 92C. It is also the contention of the assessee that the TPO did not indicate to the assessee that he proposes to treat the impugned transaction as a sham one nor did he call for any objection from the assessee in that regard. The AR also relied up on host of case law in connection with this issue. Further the observation of DRP with regard to the trade mark registration, though defended by the assessee, requires examination at the end of the AO/TPO. Accordingly the ALP of the impugned royalty payment and the issue relating to the trademark registration need to be examined afresh. Accordingly the order of AO/TPO/DRP is set aside on this issue and restore the same to his file for examination of the same afresh in accordance with the law, after affording necessary opportunity of being heard.