DE Diamond Electric India (P) Ltd. v. ACIT [ITA
No. 7167/Del./2019, dt. 23-7-2020] : 2020 TaxPub(DT) 2902 (Del.-Trib.)
Disallowance under section 40A(2)(b) of royalty paid to AE
(Associated enterprise) of assessee controverting previous year royalty amounts.
Interplay of section 40A(2)(b) vs. TP provisions.
Facts:
Assessing officer disallowed assessee's royalty to its AE
as excessive under section 40A(2)(b) by comparing the royalty rates and amounts
of earlier years which was upheld by Commissioner (Appeals). Aggrieved assessee
went in higher appeal-
Held in favour of the assessee that the royalty
disallowance was unwarranted as assessing officer has not established as to how
the same was excessive.
It was the plea of the assessee that the royalty was approved
by TP authorities to be at ALP in earlier years including the increased
percentage of royalty.
There being separate provision like TP for examining ALP of
royalty resort to section 40(A)(2)(b) could not be done.
The ITAT held that to invoke section 40(A)(2)(b) following
conditions ought to be satisfied --
Assessing officer, if he is of the opinion that such
expenditure is excessive or unreasonable having regard to:
(1) the fair market value of the
goods, services or facilities for which payment is made or;
(2) the legitimate needs of the
business of profession of the assessee or;
(3) the benefit derived by or
accruing to him therefrom.
It is only in either of the above three circumstances, the
assessing officer shall disallow the excessive by allowing only the reasonable
expenditure.
In this case the assessing officer has not demonstrated how
the royalty was excessive or was beyond fair market value so no addition under
section 40(A)(2)(b) could be invoked.
As for the specific provisions of TP override section
40(A)(2)(b) the ITAT did not have to decide due to the above point itself being
clear.
Editorial Note: If
there is a special provision like TP then that normally should override general
provisions like section 40(A)(2)(b), the scope of which is also more so to
domestic payments while TP is for cross border expenses with AE's. The maxim
"generalia specialiabus non derogant" would apply. It is
better if the department comes out with a circular to prevent overlapping
double disallowance possibilities like these for better clarity in tax
administration.