The Tax Publishers2020 TaxPub(DT) 0417 (Mum-Trib)

INCOME TAX ACT, 1961

Section 92C

'Agreement' dated 4-4-2008 between assessee and its AE, viz., M/s. Zodiac Clothing Company, UAE LLC, i.e. AE, was merely an extension of earlier 'agreement' dated 9-11-2001, with the same terms and conditions. Also, letter of understanding dated 2-1-2003 between assessee and AE, was valid and was required to be considered in conjunction with 'royalty' agreement dated 4-4-2008, which clearly provided that 'royalty' was to be received by assessee was on AE's manufacturing sales to other markets, i.e., excluding the gulf region. In fact, as claimed, the 'royalty' was consistently being received by the assessee on the manufacturing sales-exports of AE. Accordingly, TP adjustment made in the hands of assessee on account of 'royalty' shortfall in respect of international transaction of provision of technical assistance and advisory services to AE was deleted.

Transfer pricing - Determination of ALP - Royalty charged from AE -

TPO noticed that assessee received technical know-how fees from its AE, viz., M/s. Zodiac Clothing Company, UAE LLC. On a perusal of financials of AE, it was noticed by the TPO that technical know-how fees was charged by the assessee only on the manufacturing sales of AE and assessee had not charged any technical know-how fees on manufacturing sales (as per buyers specifications) and trading sales. On a perusal of the 'agreement' of assessee with AE for provision of technical know-how services, it was noticed by TPO that it nowhere provided that fees was only to be charged on manufacturing sales of assessee. On being called upon to explain as to why such fees was not charged in respect of other items of income of AE, assessee filed with TPO a letter dated 2-1-2003 of the AE stating by the AE that it would not require technical assistance/services/advice as regards its supply to the local market in middle east. As such, royalty was to be paid only for manufacturing sales to other markets only. However, TPO was not inclined to accept aforesaid explanation of assessee. Observing that while letter relied upon by assessee was dated 2-1-2003, royalty 'agreement' submitted during the course of the proceedings was signed on 4-4-2008, there was no mention about exclusion of any area or services as was claimed by assessee, TPO worked out 'royalty' @3% on entire sales which led to TP adjustment.Held: 'Agreement' dated 4-4-2008 between assessee and its AE, viz., M/s. Zodiac Clothing company, UAE LLC, i.e. AE, was merely an extension of earlier 'agreement' dated 9-11-2001, with the same terms and conditions. Also, letter of understanding dated 2-1-2003 between assessee and AE, was valid and was required to be considered in conjunction with 'royalty' agreement dated 4-4-2008, which clearly provided that 'royalty' was to be received by assessee was on AE's manufacturing sales to other markets, i.e. ,excluding the gulf region. In fact, as claimed, the 'royalty' was consistently being received by the assessee on the manufacturing sales-exports of AE. Accordingly, TP adjustment made in the hands of assessee on account of 'royalty' shortfall in respect of international transaction of provision of technical assistance and advisory services to AE was deleted.

REFERRED :

FAVOUR : In assessee's favour.

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