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2015 (12) TMI 298 - ITAT DELHI

2015 (12) TMI 298 - ITAT DELHI - TMI - Adjustment made by the TPO with respect to payment of royalty - CIT(A) deleted the addition - Held that:- Once the assessee clearly demonstrates that the effective royalty pay out was less than earlier years then there was no reason to make any adjustment in the royalty pay out. Moreover, we find that the decision of Hon’ble Delhi High Court in assesse’s own case is also applicable to the present case. In the current assessment year the overall profit margi .....

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6-07 the ld. DRP has accepted the payment of royalty @ 56% of actual sales. No reason to interfere with the order of ld. CIT(A) on 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 fin .....

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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 exemption to the assessee by following the rule of consistency as the material facts relevant to this issue as involved in the year under consideration are a .....

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asstt. Year 2004-05. Effective grounds raised are as under: 1. That on the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the adjustment made by the TPO with respect to payment of royalty of ₹ 59,78,91 ,950/-. 2. That on the facts and circumstance of the case the Ld. CIT(A) has erred in allowing the assessee's claim of prior period expenses amounting to ₹ 92,84,552/- 3. That on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing .....

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Oracle licensed products and for providing contract software development to its associated enterprise (AE). The company has software development units in Bangalore and Hyderabad. The former unit works on systems software products and the latter on application software. The assessee also derived revenues from affiliates for services performed under global contracts. 3. During the year under consideration the major international transactions undertaken by the assessee with its AE were as under: S. .....

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t 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 Division - Duplication and Distribution of software, along with provision of other support services to third parties. - Provision of contract software development services to Oracle Corp. - Provisions of back office sup .....

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d sub license Oracle products in India. For this purpose, the assessee imported master copies of software from Oracle Corporation and Oracle EMEA Ltd., Ireland. These were duplicated in India and sub-licensed to third parties and users ( customers ) directly or through local sub-distributors or partners. In lieu of duplication and distribution rights granted by Oracle Corporation under the Distribution Agreement, assessee paid royalty to Oracle Corporation subject to 56% of license, updates and .....

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required the assessee to submit separate bench marking for royalty payment and interest on such royalty payments. The assessee s reply has been reproduced from pages 13 to 15 of TPO s order in which assessee primarily justified its approach of adopting TNMM method for bench marking the royalty payment. The assessee, inter alia, pointed out as under: The royalty being paid by oracle India is akin to a recurrent price for an intangible that provides Oracle India with recurrent business. The royalt .....

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long 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 .....

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d Latin America region. 11. In its reply the assessee, inter alia, pointed out that there had been no increase in the effective rate of royalty in FY 2003-04 for which assessee submitted a table of OP margin ratio since 2000-01, which was as under: Year OIPL Distribution margin Arm s Length margin Effective Royalty Rate 2001-02 37% 3% 67% 2002-03 44% 3% 62% 2003-04 23% 3% 57% 12. Ld. TPO, after detailed discussion, restricted the payment of royalty @ 30% of actual sales and, accordingly, held th .....

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e transaction (consulting, trading, education products. CD packs) 13. Ld. TPO has observed that assessee tried to demonstrate that effective royalty rate for AY 2003-04 was less than effective royalty rate paid by assessee for the previous financial year. However, he did not accept the same and observed that department has been taking a consistent stand that 30% of the royalty should be paid on actual sales. He pointed out that though the calculation of royalty base has been in line of the depar .....

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y 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 A .....

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to Oracle Corporation was not at arm s length because the decision to make enhanced royalty rate was not based on any sound commercial ground and this decision was unilateral. He further observed that no documents were submitted to demonstrate that assessee was a party in this price setting mechanism. There was no data base in the domain on the basis of which international transaction relating to royalty payment could be bench marked. 16. TPO s reasoning for rejection of assessee s claim of roy .....

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was no restriction on payment of royalty on more than 30% of the Indian published price. The only restriction was that if the royalty payment exceeds 30%, the applicant was advised to obtain specific approval from the Department of Electronics, Government of India. Therefore, the contention of the assessee that higher royalty could not be made because of the exchange control is totally baseless and on the basis of wrong assumptions. The other contention of the assessee that the new delivery busi .....

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matograph films or work on firm, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and (b) payments of any kind received, as consideration for the use of, o .....

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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 .....

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iness transaction without having an informed view on the nature and rates of the royalty payments. Therefore the royalty enhancement from 30% to 56% is not commensurate with the benefits for OIPL and therefore this transaction is being benchmarked as discussed in the other paras of this order. 9.3 For taking the approval for enhancement of royalty base from 30% to 56% In application report, the foreign investment promotion board dt. 27.09.2002 assessee has submitted that Oracle Corp. Research &a .....

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own loaded from NASDAQ Website is as under: Profit & Loss Account Consolidated data 31/05/2002 31/05/2001 31/05/2000 12 months 12 months 12 months Unqual Unqual Unqual Th USD Th USD Th USD 10-K 10-K 10-K Operating Revenue/ Turnover 9,673,000 10,961,000 10,231,000 Gross Sales 9,673,000 10,961,000 10,231,000 Adjustments/ Excise Tax n.a. n.a. n.a. Net Sales 9,673,000 10,961,000 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 2,551,00 .....

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hat R & 0 expenses to sales for ye«: 2002, 2001& 2000 is 11.1%, 10.3% & 9.8% respectively. It is seen that from 2002 to 2000 as• submitted by the assessee there is no significant entries in R& D expenses to the total sales. Therefore, the argument of the assessee that R&D expenses were increased substantially over the years and Oracle Corp. needs to compensate for increase R& 0 expenses is not correct. Therefore, the reason for enhancement of royalty rate from .....

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ploy more than 2,200 skilled Indian software professionals, the propose to tap the large Indian IT human resource base to continue its development efforts in India. OIPL proposes to more than double its employee strength in the next 2 years". As mentioned Para 4.1.1. Of this order OIPL gets a compensation for the development services on the basis of cost plus 15% model. The Bangalore and Hyderabad R& 0 centers have played a significant role in Oracle Corp's worldwide development ini .....

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order due to lack of availability of data 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 .....

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ew 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 on actual sales average out to be 59% during the period 1997-98 to 2002-03 as against which the effective royalty rate was 56% in FY 2003-04, which clearly demonstrated the fact that there had been no increase in the royalty paid. 18. Ld. CIT(A) after consi .....

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o linkage with the functions performed by the assessee. He pointed out that no comparables were given by the assessee. 20. Ld. Sr. counsel, Shri M.S. Syali, submitted that originally assessee was paying royalty @ 30% of the Indian published price ( IPP ) and now it was paying @ 56% on actual sales. He pointed out that assessee had duly explained the reasons for change in the base for computation of royalty from IPP to actual sales. 21. Ld. Sr. counsel further submitted that assessee had clearly .....

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d. Sr. counsel referred to para 4 of the decision wherein the Hon ble High Court has noted that royalty had been paid at 30% of the list price of the licensed products to Oracle Corporation. He pointed out that AO noted that the total revenue earned by the assessee at Delhi unit involved in sublicensing of software was to the extent of ₹ 98,16,72,000/- out of which assessee had earned following receipts: (a) Software Licensing fee ₹ 59,68,78,000/- (b) Software Technical Support servi .....

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eration 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 .....

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c. 92 could not be invoked because revenue had not discharged its onus by proving that the profit being earned by the assessee was not the ordinary profit in this type of business. The Revenue had to establish that the profits earned by the assessee were less than the ordinary profits by bringing comparable cases in this regard and then only section 92 could be invoked. 25. Hon ble Delhi High upheld the order of the tribunal, inter alia, observing in para 21 as under: Mr. Syali, learned Senior C .....

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page 13 of the TPO s order to point out that in the distribution and duplication segment the OP on sales of assessee was 23.3% as compared to the comparables of 2.2%. 28. Ld. Sr. counsel further referred to the decision of Hon ble Delhi High Court in the case of CIT Vs. Mentor Graphics (Noida) Pvt. Ltd. 354 ITR 586, wherein it has been held that Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, is lower than the profit level indicator .....

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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. .....

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royalty payment can be benchmarked. In absence of data and also in view of proviso to Rule 10B( 4) which allows use of prior two years data of comparables if it is demonstrated that they have an influence on determination of transfer prices, the royalty rate of 30% in FY 2003-04 can be used as an appropriate comparable." The assessee has demonstrated the margin of its distribution business by using Prowess and Capitaline databases. TPO has not brought out how the TNMM analysis used by the a .....

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inadequate in view of the valuable services provided for the premium products of its AEs, the same should have been analyzed in respect of those services with appropriate comparables that having not been done, the panel is of the considered view that TPO is not justified. in rejecting the analysis of the assessee without giving any cogent basis for its rejection. Besides, TPO has proceeded on the wrong assumption that royalty rate has increased with respect to FY 2003-04. While assuming so, TPO .....

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d of the assessee is therefore allowed. 30. Ld. counsel further referred to the order of DRP for AY 2007-08 contained at pages 51 onwards and pointed out that ld. DRP in para X4.4 has observed as under: X4.4.DRP has considered all the above' facts into 'account and also the submissions made by the assessee during the course of the hearing and the written submissions. The payment of royalty and interest on delayed payment on the royalty can inter-alia be benchmarked with the help of TNMM .....

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riod. 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 just .....

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r distribution division, in the current assessment year, the assessee had adopted TNMM as the arm s length standard for the inter company royalty expenses. The Assessee had earned an OP/sales ratio of 23.3%, which was much more than the mean OP/sales ratio of 2.2% earned by comparable companies. The assessee in June 2003 had changed its royalty arrangement for Oracle Corporation to a level of 56% of actual sales revenue from earlier level of 30% of the IPP (Indian published price). This change h .....

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ange Control Regulations. The provision of the Exchange Control Regime then authorized the Indian Master licensee to duplicate the software and sublicense to India customers. It restricted the consideration payable by the Indian Master licensee to 30% of the IPP of the software product sublicensed to Indian customers. This was an exchange control stipulation and the ceiling on the payment was meant to restrict payment from an exchange control perspective. However, the new Exchange Control Policy .....

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e percentage of list price to actual license and support review. The main object was to determine the royalty payment 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 th .....

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1998-99 60% Average excluding FY 2003-04 59% 37. The TPO has not at all commented on this plea of assessee. Once the assessee clearly demonstrates that the effective royalty pay out was less than earlier years then there was no reason to make any adjustment in the royalty pay out. Moreover, we find that the decision of Hon ble Delhi High Court in assesse s own case is also applicable to the present case. In the current assessment year the overall profit margin of distribution segment (23.3%) is .....

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yment of royalty @ 56% of actual sales. 38. In view of above discussion, we do not find any reason to interfere with the order of ld. CIT(A) on the issue in question. Ground is dismissed. 39. Ground no. 2: Brief facts of the case are that in revised computation of income, the assessee had shown prior period income of ₹ 92,84,552/- which was related to exports made by Bangalore Unit O5E and B5E for which the assessee had claimed benefit u/s 10A of the I.T. Act. The AO observed that since th .....

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eriod expenses relying on the matching principle. He also directed the AO to provide the benefit of deduction u/s 10A of the Act after verifying the claim of the assessee based on form 56F submitted by the assessee. 41. Having heard both the parties we do not find any 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 .....

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fere 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 unit .....

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stablish its claim of deduction u/s 10A of the IT Act. Thus, the claim of exemption u/s 10A of the IT Act of the assessee is disallowed and the amount of ₹ 17,46,02,964/- is added back to the total income of the assessee. It is also pointed out that the same issue was involved in AY 1998-99, 1999-2000, 2000-2001, 2001-2002, 2002-03 and 2003-2004 wherein the AO rejected the claim of the assessee u/s 10A of IT Act and treated the income earned from SDC Bangalore as part of gross total income .....

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n of the ld. CIT(A) in allowing the exemption claimed by the assessee u/s l0A. 18. At the time of hearing before us, the Id. Representatives of both the sides have agreed that a similar relief claimed by the assessee in A Y 1997-98 was allowed by the Id. CIT(A) vide his order dated 29-3-2001 passed u/s 154 and following the same, a similar issue has been decided by the Id. CIT(A) in favour of the assessee vide his impugned order. Since the decision rendered by the Id. CIT(A) in A Y 1997-98 allow .....

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rder 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 ord .....

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