Transfer pricing: Arm’s length price: A. Y. 2002-03: Merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction: Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the product purchased by them from the assessee<

For the A. Y. 2002-03, the assessee had filed the return of income, declaring a loss of about Rs. 14.5 crore. Assessee had claimed the ALP of royalty at the contractual value of Rs. 7.43 crore. The Assessing Officer computed the ALP of royalty at Rs. 5.85 crore on the ground that the assessee had paid royalty even in respect of the products sold by it to the clients who had not paid for the products purchased by them. This resulted in the reduction of the loss of about Rs. 1.50 crore. The Tribunal allowed the assessee’s appeal and held that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal rightly came to the conclusion that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction. Section 92C provides the basis for determining the ALP in relation to international transactions. It does not either expressly or impliedly consider failure of the assesee’s customers to pay for the products sold to them by the assessee to be relevant factor in determining the ALP.

 ii) Indeed, in the absence of any statutory provision or the transactions being colourable bad debts on account of purchasers refusing to pay for the goods purchased by them from the assessee can never be a relevant factor, while determining the ALP of the transaction between the assessee and its principal.

iii) Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee’s customers failing to pay the assessee for the products purchased by them from the assessee.

iv) The question is therefore, answered in the affirmative in favour of the assessee. The appeal is accordingly dismissed.”