The assessee is obliged to carry out a bench-marking exercise with independent comparables and prove that its transactions with AEs are at arms length. Mere fact that the transaction is approved by the RBI and Govt is not sufficient.
The assessee did not bench mark the royalty payment separately. On enquiry by the TPO, it relied on RBI approval given in 1995 and also on the fact that the assessee earned a gross profit of 41.6%. TPO applied Press Note 9 (2000 series) and restricted it to 1% on the plea that the payment was for use of trademark without transfer of technology. This was confirmed by the CIT(A). On appeal by the assessee to the ITAT HELD:
The assessee has not separately benchmarked the Royalty transaction at the time submission of Form 3CEB or at the time of preparation of Transfer Pricing Report. It is settled proposition of law that it is the onus of the assessee to prove that the transactions were taken at arm’s length. Royalty is a separate international transaction, for this purpose, reliance can be placed on the decision of Punjab & Haryana High Court in the case of Knorr-Bremse India (P) Ltd., ITA No.182 of 2013. The RBI approval/FIPB approval is not determinative of ALP and cannot be considered to be a valid CUP. Automatic route under which FIPB approvals or RBI approvals are granted have been devised for the “ease of doing business”. These approvals emanate from other legislation or policy and are not in relation to determination of Arm’s Length Price. The purpose of the RBI approval/FIPB approval is entirely different and cannot be equated with the arm’s length principle. The approvals of rates given by the DIPP and the RBI are for different purposes, like for promotion of industries, management of foreign exchange etc. and it varies in accordance with the business practices prevalent at different times which are clear from the RBI approvals themselves. Going by the relevant TP provisions as enshrined under the Act and relevant Rules, it is mandatory that the appellant has to independently benchmark its international transaction with independent comparables so as to arrive at arm’s length price, which has not been made in this case. The comparability analysis is the substratum of determining the ALP, which has not been done by assessee at any stage. At the very same time we found that the revenue authorities have not properly appreciated the relevant clauses of the trademark licence agreement, precisely the clauses which were highlighted by ld. AR during the course of hearing before us. Therefore, in the interest of justice and fair play, this case should be restored back to the file of AO, ho shall require the assessee to bench mark its international transaction of ‘royalty’ with independent comparables following suitable methods prescribed under the Act and on its compliance, the AO after giving adequate opportunity to the assessee shall decide this issue in accordance with the TP regulations.