2010 (1) TMI 857 - AT - Income Tax

Disallowance of royalty - Arms Length Price - bad debts written off cannot be factor to determine the arm s length price of any international transaction - Held that - manner in which the A.L.P is to be determined by any of the method prescribed in Sec. 92C in provided in Rule 10B of the I.T. Rules 1962. 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. In our opinion the TPO has exceeded his limitation by following the method which is not authorised under the Act or rules Assessing Officer directed to adopt the Arms Length Price of the royalty payable as declared by the assessee in both the years.

Summary

Issues Involved:
1. Disallowance of royalty paid by the assessee to CA Management Inc USA (CAMI) for the distribution of software products in India.
2. Levy of interest under Section 234D for the assessment year 2003-04.

Issue 1: Disallowance of Royalty Paid to CAMI
The assessee, a 100% subsidiary of Computer Associates International Inc USA, engaged in licensing software products, filed returns declaring a loss. The Assessing Officer scrutinized the returns and referred the matter to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of royalty transactions with CAMI. The TPO determined the ALP at Rs 5,85,30,774/- against the assessee's valuation of Rs 7,43,22,376/-, and set the royalty payable to CAMI at 'nil' due to bad debts written off amounting to Rs 13,33,44,452/-.

The TPO's reasoning included:
- The decision to write off bad debts was made in a Board meeting on 07.03.2002.
- Monthly reports on product licenses and payments were submitted, indicating uncollected invoices.
- The licensor should not have claimed royalty on written-off amounts.
- Issues with software functionality were reported by customers.
- No royalty was payable on invoices raised and written off in the same year.
- The company lacked documents seeking waiver/write-off of royalty on invoiced amounts.
- The company did not pay royalty amounts for FY 1998-99 to FY 2001-02, and paid a reduced amount in FY 2002-03.
- Independent entities would likely have agreements for royalty payment based on actual collections, not invoicing.
- The TPO concluded that the ALP for royalty corresponding to written-off invoices should be 'nil'.

The assessee argued that the TPO's jurisdiction is limited to determining the ALP of international transactions as per prescribed methods, and bad debts should not factor into this determination. The Tribunal agreed, stating that the TPO exceeded his authority by using a method not authorized under the Act or rules. The Tribunal directed the Assessing Officer to adopt the ALP for royalty payable to CAMI as declared by the assessee.

Issue 2: Levy of Interest Under Section 234D
For the assessment year 2003-04, the issue of interest levy under Section 234D was addressed. The Tribunal noted that Section 234D was introduced from the assessment year 2004-05, and thus, should not be applied retrospectively. Referring to the decision in Ekata Promoters (113 ITD 719), the Tribunal directed the Assessing Officer not to levy interest under Section 234D for the assessment year 2003-04.

Conclusion
The Tribunal allowed both appeals, ruling in favor of the assessee on both issues. The ALP for royalty payable to CAMI should be as declared by the assessee, and interest under Section 234D should not be levied for the assessment year 2003-04.