INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Royalty payment to AE -

Assessee claimed deduction of royalty paid to AE. TPO held that payment on account of royalty to AE was for incidental benefit and not for intra group services and since no intra group services were found to exist and as such, the arrangements were not subjected to ALP, hence Arm's Length Price (ALP) of the services was held to be nil. TPO arrived at said finding by applying benefit test on the ground that once revenue was split in terms of the Profit Split Method, there was no justification for making any additional payment on account of royalty. Held: There was no meaningful analysis/evidence provided by TPO to hold that entire royalty payment should be reduced to zero. Assessee was able to demonstrate that technical, operations and strategic services received by assessee in lieu of royalty payment had a direct business nexus and no independent company will provide such services free of charge. The benefits derived by assessee from technical, operations and strategic services availed were critical to the smooth functioning of its business. The adequacy or quantum of royalty payment from arm's length perspective stood justified by the supplementary TNMM analysis carried out which showed that comparable uncontrolled entities' profit margins were comparable to that of assessee. It was also evident from the order of TPO, that he has not followed statutory principles to determine ALP. The order did not contain any analysis on the FAR, tested party selection or methods selected. The order was not supported with any evidence to prove that assessee\s business could be managed and operated by exclusion of various technical operating and strategic services extended by AE to assessee. So, in these circumstances, addition made by TPO was deleted.

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