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2015 (12) TMI 298
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....ay u/s 10A of the I.T. Act, 1961 amounting to Rs. 17,46,02,964/- 2. Brief facts of the case are that the assessee is a wholly owned subsidiary of Oracle Corporation, US. Oracle US is the world's second largest independent software company and is a leading supplier for information management software products. It also provides consulting, support, education and software outsourcing services. The assessee company had been set up in India for distributing 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. No. Description of transaction Method Value (in Rs.) 1. Royalty paid for duplication and distribution of licensed software TNMM 125,78,47,655 2. Revenue transfer inwards TNMM 17,38,55,586 3. ....
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.... He, therefore, 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 royalty payment is not an independent or exclusive transaction in the distribution activity of OIPL. It is the basis of the entire distribution revenue earned by OIPL 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 enh....
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....has been in line of the department's approach, but the rates had been increased from 30% to 56%. He pointed out that reasons cited by the assessee that the rates were being increased due to change in Foreign Exchange Regulation Act and also because of the need that assessee and Oracle Corporation would like to adopt new delivery business models where the transaction cost will be reduced for assessee, we devoid of any merit. He also observed 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 a....
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....eproduction 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, 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 ....
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....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 -3,097,000 Depreciation -273,890 -275,000 -314,000 Amortization & Depletion -89,593 -71,000 -76,610 Operating P/L {=EBIT} 3,571,000 3,777,000 3,080,000 It is seen from the table that 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 en....
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....his 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 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 considering the analysis submitted before him accepted the assessee's contention, inter alia, observing that assessee had earned OP/ sales margin of 23% in its distribution scheme during the year as against 2% earned by the comparable companies. 19. Ld. DR referred to the reasoning given by TPO, as reproduced earlier, and pointed out that department has been considering 30% on actual sales as the proper royalty pay out and, therefore, 56% of actual sales paid by the assessee was very high which had no linkage with the functions performed by the assessee. He pointed out that no comparabl....
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.... upheld the disallowance made by the AO on the ground that a significant amount of profit had been siphoned off to M/s Oracle Corporation, USA by paying royalty by ignoring the saleable price of the product. Tribunal, however, allowed the assessee's appeal. 24. Hon'ble Delhi High Court in para 7 has, inter alia, noted that the Tribunal had concluded that since the assessee itself had declared profits of Rs. 1227.40 lacs in the return for this year, it was not the case of 'no profit'.The Tribunal also held that the provisions of sec. 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 Counsel was right in his submission that Section 37 was expenses oriented in nature and the focus of this provision was to see whether expenses incurred we....
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....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 assessee and also the databases used by the assessee for carrying out that analysis are not relevant. 26.3.7 TPO has stated "The OIPL is being compensated only cost plus 15% for developing premium' products like Oracle 9i and Oracle 11i. Reduction of royalty will compensate for lower compensation in IT services segment. If However, the TPO has accepted the margin of cost plus 15% shown in respect of software development services. If the TPO was of the view that the margin of 15% shown is 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 TP....
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....dition made in this regard." 31. In view of above observations, ld. Sr. counsel submitted that no basis existed for making disallowance in this year and, therefore, ld. CIT(A) was fully justified in deleting the adjustment made by ld. TPO. 32. We have considered rival submissions and have perused the record of the case. There is no dispute that for 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 had been made after following due procedure and approval from FIPB. 33. The assessee, in its submission dated 8-11-2006, had stated that the change in royalty rate was prompted by present exchange control regime as the earlier agreement had been a result of the controls imposed by Government of India's foreign exchange control policy. Prior ....
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....ty 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 much more than those of comparables (2.2%). Ld. TPO has not brought on record any comparable case of royalty payment so as to resort to the provision of sec. 92C. Therefore, the touch stone, on which the royalty payment was to be considered, was whether the payment was made wholly and exclusively for the purpose of business or not. This aspect ahs not been disputed because ld. TPO has allowed the royalty payment albeit @ 30% of actual sales.Further, in AY 2006-07 the ld. DRP has accepted the payment 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 Rs. 92,84,552/- which was related to exports ma....
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....its software development centre. The assessee has also utilized funds of its earlier entity and no fresh capital was employed for establishment of new unit. Except legal submissions assessee could not produce any factual evidence to establish 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 Rs. 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. The Ld. CIT(A) has deleted the disallowance made in the above mentioned years, the department has filed second appeal before ITAT." 43. Ld. CIT(A) deleted the addition. 44. At the time of hearing, ld. Sr. counsel pointed out 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 being ITA no. 606/Del/03 vide order dated 29-8-2007 by observing as under: 17. In ground no....