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TMI Blog2011 (3) TMI 1613X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction between the assessee and its parent company has resulted in no profit or less than the ordinary profits which might be expected to arise in the business. As assessee declared a certain amount of income, it is not a case of no profits . Next question regarding, how to determine whether the profits are less than the ordinary profits which might be expected to arise in the business? This can be found only when exercise is undertaken comparing the income of the assessee with other comparable business enterprises in India. However, the AO did not do this exercise at all. Definitely, onus in this behalf u/s 92 lays on the AO. This pertinent aspect coupled with the fact that price fixed is acceptable as Arm s Length Price by the TPO u/s 92 itself is sufficient to clinch the issue in favour of the assessee. In this backdrop, we have to examine whether such an expenditure could still be disallowed and the opinion of the AO was correct that the payment made cannot be treated to be wholly and exclusively for business purpose of the assessee to enable it to cover the same u/s 37(1). Once it is held that the payment of royalty by the assessee to its parent company is not hit by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter referred to as 'the Act') by the Revenue, parties are common. Whereas the Revenue is the appellant, same assessee is the respondents in all these appeals. Further though different assessment years are involved, there is singular question of law which has arisen for consideration. 2. ITA No.383 of 2009 which relates to the Assessment Year 1999-2000 was admitted on the following question of law: "Whether on the facts of the present case, Tribunal was justified in law in allowing deduction of ₹ 17,10,24,600 disallowed by the AO under section 92 read with section 37(1) of the Act being royalty paid by the assessee to its holding company beyond 30% of the sub-licensing fees earned by the assessee?" Question of law in all other appeals is identical and there is only difference of amount which is involved. Before we delve into the niceties, a brief narration of facts stating the background under which this question has arisen for consideration would be apt. For the sake of convenience, we may record facts from ITA No.383 of 2009, which would cover other cases as well. Brief facts entailing the present appeal are stated as under: 3. The assessee is a 100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,000, the assessee was required to explain as to why provision of section 92 should not be invoked since even if the royalty is paid at 30% of the sale consideration the amount payable was only to the extent of ₹ 17.90 Crores. Being dissatisfied by the explanation furnished by the assessee in this regard and for the reasons recorded in the order of assessment the disallowance of ₹ 17,10,24,600 was made by the AO under section 92 read with section 37(1) of the Act on account of payment of royalty beyond 30% of the sub-licensing fee earned by the assessee. The assessment was, however, framed by determining total taxable income at ₹ 38,36,55,851. 5. Feeling aggrieved by the assessment order, the assessee preferred the appeal before the CIT(A), which was allowed partly by the CIT(A). Insofar as the issue of royalty is concerned, the CIT(A), however, 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. As regards the applicability of provisions of section 92 of the Act, the CIT(A) after examining the facts of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe of business and hence, section 92 of the Act could not be invoked. 8. Ms. P.L. Bansal, learned Sr. Standing Counsel appearing for Income-tax Department, made a fervent attack on the aforesaid conclusion of the Tribunal holding that section 92 of the Act would not be applicable. She was vehement in her submission that the order of the AO as well as CIT(A) were replete with adequate justification invoking the provisions of section 92 of the Act which were glossed over by the Tribunal. She highlighted the fact that in the income tax return, the assessee had shown its total receipts from software sub-licensing to the tune of ₹ 59,68,78,000 and sale of software documentation was ₹ 52,85,000 only on which the assessee was profiting royalty to its parent company for sub-licensing sale of software duplicating in India. The affairs were managed in such a manner that the Indian Published Prize (IPP) was taken into consideration while calculating royalty at 30%. However, the software was sold at a lesser rate and income received on this account was ₹ 59.68 Crores. 30% thereof amounted to ₹ 17.9 Crores only whereas actual royalty paid was ₹ 35.01 Crores, as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted even by the Transfer Pricing Officer (TPO) after holding appropriate inquiry. He referred to the orders dated 10.03.2005 (sic. ) passed by the Joint Commissioner of Income-tax in his capacity as TPO-II under section 92CA(3) accepting the price as ALP for the Assessment Year 2002-03 in the following words: "After examination of the documentation and economic analyses contained therein the Arm's Length Price (ALP) of the international transactions, as declared by the assessee in Form 3CEB, annexed to the return of income is accepted." Orders to similar effect accepting this price by the TPO for other Assessment Years were also produced before us. The learned Senior counsel pointed out that the AO was conscious of these facts as is evident from the reading of the assessment order passed for the Assessment Year 2003-04 wherein it was inter alia recorded as under: "Although the Transfer Pricing Officer after examination of the company's transfer pricing documentation accepted the international transaction as per the Transfer Pricing adopted by the company vide order dated 27.01.2006. Payment of royalty was decided by the TPO with respect to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t between the assessee and its parent company which provides for payment of royalty @ 30% of IPP of the Oracle Software appliances. (ii)This agreement is approved by the Reserve Bank of India. The copy of the RBI Notification was filed before the AO who has mentioned about it in the assessment order. This Notification categorically permits the remission of foreign currency upto 30% of IPP. However, we may hasten to add that for the purpose of section 92, this may not be a relevant factor and therefore we are not influenced by the same. (iii)The price fixed is accepted as Arm's Length Price by the TPO under section 92 of the Act. (iv)From the Assessment Years 1994-95 to 1998-99, royalty paid as per the aforesaid agreement by the assessee to its parent company was allowed. 15. Section 92 of the Act, which is held to be applicable by the AO reads as under: "Section 92.Computation of income from international transaction having regard to arm's length price. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.-For the removal of doubts, it is hereby clarified that the allowance for any ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch might be expected to arise in the business. The assessee has declared an income of ₹ 1227.40 lacs. Thus, it is not a case of 'no profits'. The neat question is as to how one is to determine as to whether the profits are less than the ordinary profits which might be expected to arise in the business? Obviously, this can be found only when exercise is undertaken comparing the income of the assessee with other comparable business enterprises in India. However, the AO did not do this exercise at all. He did not bring on record any comparable case to find out what is ordinary profit in this type of business. Definitely, onus in this behalf under the provisions of section 92 of the Act lay on the AO. This pertinent aspect coupled with the fact that price fixed is acceptable as Arm's Length Price by the TPO under section 92 of the Act itself is sufficient to clinch the issue in favour of the assessee. 18. In this backdrop, we have to examine whether such an expenditure could still be disallowed and the opinion of the AO was correct that in the aforesaid scenario, the payment made cannot be treated to be wholly and exclusively for business purpose of the assessee to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , may yet be expended wholly and exclusively for the purposes of the trade." The above test was quoted with approval and applied by the Supreme Court in the case of Eastern Investments Ltd. v. CIT [1951] 20 ITR 1. 20. It is well-settled that it is not open to the Department to adopt a subjective standard of reasonableness and disallow a part of business expenditure as being unreasonably large, or decide what type of expenditure the assessee should incur and in what circumstances. This was so held by the Supreme Court in the case of CIT v. Walchand & Co. (P. ) Ltd. [1967] 65 ITR 381which principle has thereafter been often repeated and remains the bedrock of section 37 of the Act till date. Thus, the jurisdiction of the AO is only confined to deicide "Profits and gains of business or profession", i.e., whether the expenditure claimed was actually and factually expended or not and whether it was wholly and exclusive for the purposes of business. Reasonableness of the expenditure can be considered only from this limited angle for the purpose of determining whether in fact amount was spent or not. 21. Mr. Syali, learned Senior Counsel was right in his submission that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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