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Tax Publishers 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.

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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.