TMI Blog2015 (12) TMI 298X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue in question.- Decided against revenue Disallowance of prior period expenses - CIT(A) deleted the addition - Held that:- No reason to interfere with the order of ld. CIT(A) on the issue in question because vide letter dated 1-8-2006 the assessee had filed a revised computation and pointed out that during the audit of the immediately succeeding financial year i.e. FY 2004-05 prior period income of ₹ 92,84,552/- on ₹ 2,27,43,899/- were noted and the effect of the same in the revised tax computation was to be given. Ld. CIT(A) has, in principle, accepted that the Bangalore unit was eligible for deduction u/s 10A but has directed the AO to verify the claim of the assessee on the basis of form 56F. Accordingly, he will be required to examine whether the amounts were received in time or not. We, therefore, do not find any reason to interfere with the order of ld. CIT(A) on this issue and we uphold the same.- Decided against revenue Eligibility for tax holiday u/s 10A - CIT(A) allowed claim - Held that:- The issue is covered in favour of the assessee by the order of the ITAT in assessee’s own case for AY 1998-99 dismissing revenue’s appeal allowing the said exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution of licensed software TNMM 125,78,47,655 2. Revenue transfer inwards TNMM 17,38,55,586 3. Provision of software development services TNMM 446,07,64,693 4. Import of software master copy TNMM 19,20,456 5. Purchase of professional services TNMM 4,80,32,275 6. Software training and consulting services rendered TNMM 2,68,39,481 7. Interest on delayed royalty payment TNMM 1,10,64,710 4. In the present appeal the main dispute is in regard to adjustment made by TPO in regard to alleged excess royalty paid of ₹ 59,78,91,950/- for duplication and distribution. 5. The major functions performed by assessee have been divided under following divisions: - Sales and distribution Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as without the license from Oracle Corp. OIPL would not be able to generate any revenue by reselling Oracle software in India. 9. After considering the assessee s reply, the ld. TPO issued questionnaire dated 4-10-2006, requiring the assessee to submit reply on the following questions: (i) Royalty payment details of the last five years along with details of sales on which royalty has been calculated. Why Royalty should not be rest4ricted at the level of payment made in FY 2002-03? (ii) The reason for enhancement of royalty rates from 30% to 56%. (iii) Royalty paid by the other associated enterprises in the Asia Pacific regioin. (iv) Why interest paid on royalty should not be included in Royalty payment for benchmarking? 10. The assessee vide its letter dated 8-11-2006 submitted its reply which has been reproduced from pages 15 to 22 of TPO s order, after considering which ld. TPO again issued a questionnaire dated 16-11-2006, requiring the assessee to file following details: (i) Details of royalty rates received by M/s Oracle Corp. from other subsidiaries located in Asia Pacific and Latin America. (ii) The details of operating profit margin earned by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that during the TP proceedings the asesssee s representative also pointed out that by shifting the base for the calculation of the royalty, there would be a shift of risk from assessee and for this shift the AE needs to be compensated. 14. Ld. TPO has observed that during the course of TP proceedings the authorized representative was unable to demonstrate the changes in functions for which Oracle Corporation needed to be compensated and the reason that it should get more than what it was getting compensation for FY 2002-03. He further observed that during the proceedings, the AR was also asked to submit the royalty paid by other associate enterprises to Oracle Corporation in the Asia Pacific region. However, the AR pointed out that assessee as a subsidiary, was not privy to this information. 15. Ld. TPO observed that no independent enterprise in an uncontrolled economic environment would be willing to pay enhanced rate of royalty without any suitable gain for the enhanced payment. He, accordingly, concluded that the transactions relating to the royalty payment by OIPL to Oracle Corporation was not at arm s length because the decision to make enhanced royalty rate was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8 . It is clear from the above definition of the royalty that royalty is linked to the intangibles built into the product processes, knowhow, and secret formulas. The new e-business delivery model of the product is in no way linked with the intangible built in the product. Further due to the adoption of best practices in edelivery mode, there is cost saving not only to the OIPL but to Oracle Corp. also. Therefore, the contention of the assessee that the higher rate of royalty is on account of this new e-business delivery model is not acceptable as there are no linkages between royalty payment and e-delivery of the product. It is also to be mentioned here that during the transfer pricing proceedings, assessee was asked to submit the rates of royalty payments made by the other subsidiaries of Oracle Corp. who are located in the Asia Pacific region. It was also submitted by the OIPL that it is not privy to this kind of information. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,231,000 Other Revenues n.a. n.a. n.a. Sales 9,673,000 10,961,000 10,231,000 Costs off Goods Sold 2,042,517 2,551,000 2,653,390 Cost of Goods sold -2,042,517 -2,551,000 -2,653,390 Gross Profit 7,630,483 8,410,000 7,5777,610 Other Operating Expenses 4,059,483 4,6333,000 4,497,610 Research Development Expenses -1,076,000 -1,139,000 -1,010,000 % age of R D to sales 11.1 10.3 9.8 Other operating items -2,620,000 -3,148,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to separated sales figures from Oracle 9i Oracle IIi. The approach being followed in this order is that the change in function of both entities in F.Y. 2003-04 vis-a-vis F.Y. 2002-03. This approach will ensure that non compensation to OIPL for its R D initiatives get compensated for non payment of cost saving due to E - business model for delivery of the product. Therefore in this order the restriction of royalty at the rate 30% of the actual sales is to be seen in the overall approach of the function performed, asset used and risk assumed by both the entities. 9.5 In replay vide dated 1.12.2006. Assessee has submitted that increase in royalty rate was linked to change in exchange control regime and assessee submitted no reply on how new intangible are inbuilt in product-for which enhance rates are being charged from OIPL. This further corroborates the fact newly created intangible nor due to e-business delivery model but a new mechanism has been evolved to charge more royalty from OIPL. 17. Before ld. CIT(A) the assessee filed detailed submissions, inter alia, reiterating the fact that effective royalty rate calculated by taking percentage of the royalty pay out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,000/- (c) Consultancy charges ₹ 4,01,20,000/- (d) Trading receipts ₹ 7,93,81,000/- (e) Sale of software documentation ₹ 52,85,000/- 23. Considering that the receipts disclosed on account of software licensing, on which the assessee was paying royalty for sub-licensing, was only ₹ 59,68,78,000/-, the assessee was required to explain as to why provisions of sec. 92 should not be invoked since even if the royalty was paid at 30% of the sale consideration the amount payable was only to the extent of ₹ 17.90 crores. Being dissatisfied by the explanation furnished by the assessee in this regard and for the reasons recorded in the assessment order the disallowance of ₹ 17,10,24,600/- was made by the AO u/s 92 read with sec. 37(1) of the Act on account of payment of royalty beyond 30% of the sub-licensing fee earned by the assessee. Hon ble Delhi High court in para 5 has noted that ld. CIT(A) upheld the disallowance made by the AO on the ground that a significant amount of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has been accepted by ld. DRP, which is evident from para 26.3 to 26.4 of its order, as under: 26.3.4 It is noted that in the TP order, the TPO has not raised any objection on the TNMM analysis carried. out by the appellant. As per the TP Study provided by the assessee, it has earned an, OP/Sales margin of 16.11% in its distribution segment during the year as against 3.24% earned by the comparable companies. It has also been. submitted that the assessee has consistently earned an operating margin which is substantially higher than that of the comparable companies. 26.3.5 In the instant case, it is noted that the TPO has not brought on record any cogent reasoning based on which the royalty payment made by the assessee could be held to be not in line with the arm's length standard. The TPO has proposed an adjustment following the AO's order for the previous years which have also been struck down by the ITAT and the High Court. 26.3.6 TPO has stated There are no databases on the basis of which international transaction relating to royalty payment can be benchmarked. In absence of data and also in view of proviso to Rule 10B( 4) which allows use of prior tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method and by using OPI Sales as a PLI. The margin of the assessee is at 19.98%, whereas the comparables are having a margin of 2.23%.Even if the payment of royalty and interest on delayed payment is benchmarked separately, it has to be kept in mind that the calculation of royalty was at 30% of the listed price and the listed price was always more than the realized price. The assessee has changed base on which the royalty is being calculated as compared to the pre 2003 period. The present calculation is based on the realized price. Therefore, there is no justification to hold that 30% on the realized price is the ALP of the royalty. The calculation of the TPO does not take into account the change in the market realities and the business model. This leads to the erroneous conclusion of the TPO. In view of this, DRP is of the view that there is no justification in adjustment on account of royalty to the extent of ₹ 1516,16,16,253/-. Further, there is no justification in denying the interest payment on the delayed payment of royalty to the extent of ₹ 22,61,43,132/-. AO/TPO is directed to delete the addition made in this regard. 31. In view of above observations, ld. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment having regard to market forces. Thus, assessee had clearly pointed out the reason for shifting the basis from list price to actual sales which was not found to be wrong in any manner. 35. The TPO s conclusion that this exercise was undertaken to overcome the stand taken by the department of computing the royalty with reference to actual sales was not justified, keeping in view the object of Liberalized Foreign Exchange Regime. It sought to change the payment rate to 56% and the basis from IPP or the list price to actual revenue disclosed from finance updates and product support revenue. 36. Further, assessee had clearly demonstrated that the effective rate of royalty being incurred by assessee in prior years, as compared to FY 2003-04, was more, which is evident from following chart: Year Effective royalty rate 2003-04 57% 2002-03 62% 2001-02 67% 2000-01 52% 1999-00 59% 1998-99 60% Averag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -8-2006 the assessee had filed a revised computation and pointed out that during the audit of the immediately succeeding financial year i.e. FY 2004-05 prior period income of ₹ 92,84,552/- on ₹ 2,27,43,899/- were noted and the effect of the same in the revised tax computation was to be given. Ld. CIT(A) has, in principle, accepted that the Bangalore unit was eligible for deduction u/s 10A but has directed the AO to verify the claim of the assessee on the basis of form 56F. Accordingly, he will be required to examine whether the amounts were received in time or not. We, therefore, do not find any reason to interfere with the order of ld. CIT(A) on this issue and we uphold the same. Ground is dismissed. 42. Ground no. 3: Brief facts are that in the computation of income assessee had claimed exemption u/s 10A of the Act in respect of software development Centre at Bangalore and Hyderabad. The AO denied the assessee s claim, inter alia, observing as under: In view of the above, conditions laid down in sub section (2) to section 10A of IT Act, the assessee has failed to substantiate that the Bangalore units have been formed without splitting, reconstruction of already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel submitted that departmental appeal against the aforesaid order of the ITAT has been dismissed by Hon ble High Court vide their order dated 31-7-2009 in ITA no. 690/209, observing as under: 31.07.2009: Present: Ms. Sonia Mathur, Adv. for the appellant. Ms. Mahua Kalra, Adv. for the respondent. ITA No. 690/2009 The issue involved in this appeal relates to allowing .the relief to the assessee on ground of exemption under Section 10(A) of' the Income Tax Act. From the reading of the impugned order, we find that the IT AT has relied upon its earlier order relating the Assessment Year 1998-99, as per which, the similar claim of the assessee for exemption under Section 10(A) of the Income Tax Act was allowed by the ITAT, which was even accepted by the Department. Learned counsel for the appellant could not deny the fact that the CIT(A) had passed orders in respect of the same assessee for the Assessment Year 1997-1998, wherein various issues including the issue raised was decided by the CIT(A) granting exemption under Section 10(A) of the Act in respect of that year and the same was accepted by the Department as no appeal there against was preferred. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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