Is there a necessity of payment of royalty in case the Indian Entity is an extended arm of the appellant company?

IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD ‘A’ BENCH : Hyderabad
(Through Video Conference)

Before Shri S.S. GODARA, Judicial Member
and
Shri L.P. SAHU, Accountant Member

ITA Nos. 825 & 826/Hyd./2016
Assessment Years: 2005-06 and 2010-11

Owens Corning Industries (India) Pvt.Ltd 
Hyderabad Hyderabad
[Previously known as Saint Gobain
Vetrotex India Limited]
[PAN: AAACV9858N]
 (Appellant)

vs. 

Dy.CIT, Circle 3(1)
 (Respondent)

For Assessee : Ms. Suchita Kanedia, AR
For Revenue: Sri Sunil Kumar Pandey, DR

 Date of Hearing : 20/04/2021
 Date of Pronouncement : 21/06/2021

O R D E R

PER S.S. GODARA, J.M.

These two assessee’s appeals for A.Y. 2005-06 and 2010-11 arise against the CIT(A)-4 Hyderabad’s orders dated 24.3.2016 and 23.03.2016, passed in case nos.0349/2015-16 and 0108/15-16 involving proceedings u/s 143(3) rw.s. 92CA(3) of the Income Tax Act, 1961 [for short ‘the Act’]. Heard both the parties. Case files perused.

2. We notice at the outset that the assessee’s identical sole substantive grievance in former AY 2005-06’s appeal ITA 825/Hyd/16 and first  substantive grievance in latter A.Y. 2010-11’s case ITA 826/Hyd/16 seeks to reverse both the lower authorities’ action making arm’s length price “ALP” djustment on royalty payment to the tune of Rs.3,59,32,275/- and Rs.1,02,60,140/- @ 4% on net sales involving finished products; respectively.

Suffice to say, it emerges at the outset that we need not delve deeper in the relevant factual matrix on the impugned ALP adjustment pertaining to the impugned royalty issue. This is because of the fact that the CIT(A) has himself placed reliance on the tribunal’s decision in assessee’s case itself in AY 2009-

10. His lower appellate discussion to this effect in A.Y 2005-06 reads as under.

6. During this assessment year, with regard to issue of royalty, the Transfer Pricing Officer's disallowed an amount of Rs. 3,59,32,175/-. As per the detailed discussion in the assessment order, the Assessing Officer disallowed this amount by following the Transfer Pricing Officer's order u/s 92CA(3) of the Act. The TPO disallowed Royalty @ 5% on the net sales of Rs. 71,86,45,501/- i.e., Rs. 3,59,32,275/- out of this the sales ~ AEs amounting to Rs. 4,28,95,840/-, with a reason that the Indian Entity is an extended arm of the appellant company and captive unit of the AE hence there is no necessity of payment of royalty.

7. I have carefully considered the submissions and assessment order. As per the details available and from the assessment order, it is observed that the appellant company during this assessment year has debited Rs. 3,59,32,275/- as royalty as per the schedule 18 of the P & L account. The appellant company paid Royalty to Saint Gobain Vetrotex, International, France, on net sales of Rs. 93,40,93,097/-. Out of these net sales amount, Rs. 4,28,95,840/- were sales made to the AEs i.e., M/s Saint Gobain Technical Fabrics America SA de CV. Mexico, M/s NSG Vetrotex KK, Japan, M/s Saint Gobain RF Services Pvt. Ltd., Australia, and Saint Gobain Vetrotex Deutschland GmbH, Deutschland. On the above Royalty payment, the Transfer Pricing Officer asked the appellant to explain why the royalty payment attributable to these sales made to AEs should not be disallowed. Therefore, after going through the appellant's reply, the Transfer Pricing Officer concluded that the royalty at 5% on the sales of Rs. 71,86,45,501/- is within the Arm's Length Range for all International transactions and so the royalty payment of Rs. 3,59,32,275/- disallowed. Since this issue is similar to that of A.Y. 2004-05. In this case, for the A.Y. 2004-05, the appeals were decided by me by following the Hon'ble ITAT decision in the appellant's own case for the A.Y. 2009-10, wherein the Hon'ble ITAT has decided that 4% of the net sales has to be allowed as royalty. Hence, following the same, the Assessing Officer is directed allow 4% of the net sales as royalty. 

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