TaxTMI 
TaxTMI 
TaxTMI 
2015 (12) TMI 298
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..... 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. Provision of software development services TNMM 446,07,64,693 4. Import of s....
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....as 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 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 roya....
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....lation 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 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 ....
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....ns 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 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 o....
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....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 enhancement of royalty rate from 30% to 56% is also not based on any sound commercial consideration for M/s OIPL. 9.4 In application before Foreign Investment Board (FIPB) on page 5 of the submission assessee has submitted as under:- "R&D initiatives in India and employee growth OIPL's R&D Centers in Bangalore and Hyderabad have played a significant role in Oracle Corp's worldwide development initiatives for premium product offerings like Oracle 9i a....
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.... 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 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 demonstrated that the effective royalty rate was lesser than the ....
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....e 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 were wholly or exclusively for the purpose of business to entitle the same for deduction. The AO committed serious error in mixing the provisions of Section 92 and section 37 of the act." 26. Ld. Sr. counsel pointed out that he Department has not filed any SLP against this order. 27. With reference to above decision ld. counsel further referred to 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.....
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....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 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 has not considered that the bases to which the royalty rates are being applied are different. 26.4. The assessee has placed the summary of effective rate of Royalty as percentage of actual sales paid by the assessee to its AEs on page 7 of the case synopsis. The TPO has not disputed this fact....
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....o 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 to FY 2003-04 the assessee made royalty payment, calculated at 30% of IPP of the products licensed to Indian customer, to comply with the then prevailing Exchange 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....
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....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 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 the claim of exemption u/s 10A of the Act of SDC Bangalore had already been disallowed and moreover, foreign remittance was received in India after expiry of statutory period of 6 months from the end of the relevant previous year, as stipulated in sub-section (3) of section 10A of the Act, therefore, the claim of prior period income was added back to the total income. 40. Ld. CIT(A) allowed the assessee's appeal on this issue, inter alia, observing that the assessee....
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.... 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. 2 the Revenue has challenged the action 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 allowing the claim of the assessee for exemption u/s 10A has been accepted ....