Delhi Tribunal estopped Assessing Officer to assume
Transfer Pricing Officer's power; Held that the arm's
length price determined by the TPO cannot be disregarded by the
Facts of the Case
YKK India Private Limited ["the taxpayer"] is engaged
in the business of manufacturing zippers and fasteners.
During assessment year ["AY"] 2003-04, the taxpayer had
made the following payments to its Associated Enterprises
Payment to royalty to YKK corporation Japan under a
collaboration agreement; and
Payment of technical fees to YKK Holdings Asia Pte Ltd
During the course of assessment proceedings, the Assessing
Officer ["the AO"] objected the payment of technical fees
to AE and held that since the taxpayer has already paid royalty to
its AE, there is no need of such separate payment of technical
fees. On the contrary, the taxpayer submitted that YKK Asia
is a support centre for 'production planning and
implementation' and the services received by the taxpayer were
in the nature of assistance in marketing and procurement, support
in research and development activities of the taxpayer,
informational technology support services and assistance and
support in administrative, secretarial, accounting and finance
The Assessing Officer was of the view that since the taxpayer
was entitled to receive know how under the royalty agreement, no
separate payment for production planning in manufacturing process
On the basis of above, the Assessing Officer concluded that
"it was legal duty of the licensor to provide such services
for which he was already paid as royalty charges, and therefore,
technical fees to its own AE is nothing but a diversion of income
and hence, is required to be disallowed" under provisions of
section 37(1) of Income-tax Act, 1961 ["the Act"].
Aggrieved, the taxpayer filed an appeal before Commissioner of
Appeals ["CIT(A)"] wherein the disallowance made by the
AO was partly confirmed.
In view of the above, the taxpayer filed appeal before Income
Tax Appellate Tribunal ["the ITAT"/ "the
The Tribunal's ruling: On determining the arm's length
price by the Transfer Pricing Officer
In this regard, the ITAT made following observations:
The payments made by the taxpayer to its AE were covered by the
international transactions reported by the taxpayer and the TPO had
accepted the same to be at arm's length.
It cannot be open to the AO to assume the powers of the TPO and
hold that these are not arm's length payments. Such a parallel
analysis of transactions by the AO and the TPO is not at all
contemplated under the Indian TP legislation.
AO is not entitled to deal with the matter once he has referred
the same for determination of arm's length price to the
Section 92CA(4) of the Act, provides that "On
receipt of the order under sub-section (3), the Assessing Officer
shall proceed to compute the total income of the assessee under
sub-section (4) of section 92C having regard to the arm's
length price determined under subsection (3) by the Transfer
Pricing Officer." Thus, it cannot be open to the
AO to disregard the arm's length price determined by the
It cannot, therefore, be open for the AO to say that even
though transaction value is held to be at arm's length by the
TPO, the arm's length price can be reduced on account of actual
rendition, or non-rendition, of services.
In view of the above, the Tribunal allowed the taxpayer's
appeal and set aside the additions made by AO.
The Indian TP provisions empower the TPO to determine arm's
length price of a transaction once the matter has been referred to
him by the AO. Such determination involves a detailed factual
analysis and is not just a theoretical exercise. Thereafter,
while computing the total income, the AO cannot disregard the
arm's length price determined by the TPO on the basis of any
Source: Deputy Commissioner Of Income Tax vs YKK India
Pvt Ltd (ITA No. 238/Del/16)
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