2010 (1) TMI 614 - AT - Income Tax

Arm s length Price - Disallowance of royalty - The assessee-company is a 100% subsidiary company incorporated in 1998 under the Indian Companies Act, which is one of the subsidiaries of Computer Associates International Inc USA - As the company had written off huge bad debts, the company should have asked for a waiver of royalty corresponding to such write off, any independent entity, who is just distributor of the products, could have asked for such waiver, irrespective of the agreement provisions - The Learned Counsel took us thorough the TPO s order passed u/s 92CA(3) and argued that write off of the bad debts cannot be the subject matter for determining the ALP so as to power of the TPO is concerned - After examining the parameters prescribed in Rule 10B, it can be seen that bad debts written off cannot be factor to determine the arm s length price of any international transaction Accordingly AO has directed to adopt the Arms Length Price of the royalty payable to CA Inc Management, USA as declared by the assessee in both the years Interest - This issue stands covered in favour of the assessee by the decision In the case of Ekata Promoters (2008 -TMI - 65270 - ITAT DELHI) - As admittedly, the assessment year involved is 2003-04 and section 234D is brought under statue book from assessment year 2004-05 - AO directed not to levy interest u/s 234D.

Summary

Issues Involved:
1. Disallowance of royalty paid by the assessee to CA Management Inc. USA.
2. Levy of interest under section 234D for the assessment year 2003-04.

Detailed Analysis:

1. Disallowance of Royalty Paid by the Assessee to CA Management Inc. USA:

The assessee, a 100% subsidiary of Computer Associates International Inc. USA, engaged in licensing software products, filed returns for the assessment years 2002-03 and 2003-04. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determining the Arms Length Price (ALP) of royalty payments to CA Management Inc. USA. The TPO determined the ALP at 'nil', contrary to the assessee's valuation of Rs 47,09,755/-. The TPO's reasoning included the timing of bad debt write-offs, the lack of waiver requests for royalty on written-off amounts, and the non-payment of royalties for prior years.

The Tribunal found the TPO's method of determining ALP, which included bad debts as a factor, to be beyond the authorized methods under Section 92C and Rule 10B of the Income Tax Act. The Tribunal emphasized that the TPO must adhere to the prescribed methods for determining ALP and cannot consider bad debts for this purpose. Consequently, the Tribunal directed the Assessing Officer to adopt the ALP of the royalty payable to CA Management Inc. USA as declared by the assessee.

2. Levy of Interest under Section 234D for the Assessment Year 2003-04:

The Tribunal addressed the issue of interest levied under Section 234D for the assessment year 2003-04. It referred to the decision in the case of Ekata Promoters (113 ITD 719 (Del)(SB)), which established that Section 234D applies from the assessment year 2004-05 onwards. Since the assessment year in question was 2003-04, the Tribunal directed the Assessing Officer not to levy interest under Section 234D for that year.

Conclusion:

The Tribunal allowed both appeals, directing the Assessing Officer to adopt the ALP of the royalty payable as declared by the assessee and not to levy interest under Section 234D for the assessment year 2003-04.