2015 (12) TMI 298 - AT - Income Tax

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 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 has 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. 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 financial year i.e. FY 2004-05 prior period income of ₹ 92,84,552/- on ₹ 2,27,43,899/- were noted and the effect of the same in the revised tax computation was to be given. Ld. CIT(A) has, in principle, accepted that the Bangalore unit was eligible for deduction u/s 10A but has directed the AO to verify the claim of the assessee on the basis of form 56F. Accordingly, he will be required to examine whether the amounts were received in time or not. We, therefore, do not find any reason to 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 admittedly similar.- Decided against revenue

Summary

Issues Involved:
1. Adjustment made by the TPO with respect to payment of royalty.
2. Allowance of assessee's claim of prior period expenses.
3. Allowance of assessee's claim for tax holiday under Section 10A of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Adjustment Made by the TPO with Respect to Payment of Royalty:

The primary dispute in this appeal concerns the adjustment made by the Transfer Pricing Officer (TPO) regarding the alleged excess royalty payment of Rs. 59,78,91,950/- for duplication and distribution of software. The assessee, a wholly-owned subsidiary of Oracle Corporation, paid royalty to Oracle Corporation under a non-exclusive, non-assignable right to duplicate and sub-license Oracle products in India. The royalty was calculated at 56% of the license, updates, and product support revenue realized by the assessee from sublicensing Oracle products in India.

The TPO required separate benchmarking for royalty payment and interest on royalty payments, which the assessee justified using the Transactional Net Margin Method (TNMM). However, the TPO restricted the royalty payment to 30% of actual sales, citing that the increase from 30% to 56% was not based on sound commercial grounds and was unilateral. The TPO's reasoning included the lack of demonstrated changes in functions requiring increased compensation and the absence of comparable royalty payments by other subsidiaries in the Asia Pacific region.

The CIT(A) accepted the assessee's contention, noting that the effective royalty rate was lower than in previous years and that the assessee's OP/sales margin was significantly higher than comparable companies. The Tribunal upheld the CIT(A)'s decision, emphasizing that the effective royalty rate was less than in prior years and that the overall profit margin of the distribution segment was much higher than those of comparables. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the ground.

2. Allowance of Assessee's Claim of Prior Period Expenses:

The assessee claimed prior period income of Rs. 92,84,552/- related to exports made by its Bangalore unit, for which it sought benefit under Section 10A of the IT Act. The AO disallowed the claim, noting that the foreign remittance was received after the statutory period of six months from the end of the relevant previous year.

The CIT(A) allowed the claim, relying on the matching principle and directing the AO to verify the claim based on Form 56F submitted by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had accepted the Bangalore unit's eligibility for deduction under Section 10A and had directed verification of the claim. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the ground.

3. Allowance of Assessee's Claim for Tax Holiday Under Section 10A of the IT Act, 1961:

The assessee claimed exemption under Section 10A for its software development centers in Bangalore and Hyderabad. The AO denied the claim, arguing that the units were formed by splitting or reconstructing existing businesses and did not maintain separate books of accounts.

The CIT(A) deleted the addition, and the Tribunal noted that the issue was covered in favor of the assessee by previous orders of the ITAT and the High Court, which had allowed similar claims for earlier assessment years. The Tribunal upheld the CIT(A)'s decision, noting that the Department had accepted similar claims in previous years and that the SLP filed by the revenue against the High Court's order had been dismissed by the Supreme Court. The Tribunal dismissed the ground, finding no reason to interfere with the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all three issues. The Tribunal found that the effective royalty rate was justified, the prior period expenses were allowable, and the tax holiday claim under Section 10A was valid based on consistency and previous judicial decisions. The order was pronounced in open court on 14/10/2015.