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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 ..... uestion 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% subsidiary of Oracle Corporation, USA and was incorporated with the object of developing, designing, improving, producing, marketing, distributing, buying, selling and importing of computer software. The assessee is entitled to sub-licence the software developed by Oracle Corporation, USA to its local clients. The assessee imports master copies of the software from Oracle Corporation, USA. These are then duplicated on blank discs, packed and sold in the market along with the relevant brochures and information by way of a sub-license. The assessee pays a lump sum amount to Oracle Corporation, USA for the import of the master copy and in addition thereto it also pays royalty at 30% of the list price of the licensed products. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 case and also the relevant rules in this regard held that the provisions of section 92 of the Act coupled with Rules 10 and 11 were squarely applicable to the case of the assessee. Consequentially, the disallowances of royalty of Rs. 17,10,24,600 was sustained for the specific reasons recorded in the order. Further, the assessee had also contended before the First Appellate Authority that the AO ought to have allowed provisions of leave encashment amounting to Rs. 30,67,728 created by the assessee during the year. However, the aforesaid ground was rejected by the CIT (A) by inter alia observing that no such provision was claimed by the assessee for the Assessment Year 1998-99 for denying the benefit of the aforesaid claim made by the assessee. 6. The order of the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 59.68 Crores. 30% thereof amounted to Rs. 17.9 Crores only whereas actual royalty paid was Rs. 35.01 Crores, as it was calculated on higher amount, viz., IPP. Thus, stressed the learned Senior Standing Counsel, the affairs were arranged in such a manner that though the assessee was earning lesser revenue, it was paying more royalty, even at its own loss. In this backdrop, according to the learned Senior Counsel, the AO had rightly disallowed Rs. 17,10,24,600 (Rs. 35,00,88,000 Rs. 17,90,63,400). 9. Predicated on these facts, the learned counsel proceeded to make following submissions with legal arguments: (1)The expenses were to be allowed under section 37 of the Act. However, when IPP was not the genuine basis, as it was not the price at which the commodity was sold by the assessee in India and no effort was made by the assessee with the parent company to get it changed to payment of royalty on actual sales, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment 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 of section 92CA of the I.T. Act, whereas the disallowance made on the issue here is in view of the fact that the payment made has been found not to be wholly and exclusively for business purpose of the assessee and hence is being made under section 37(1) of the I.T. Act." 11. He, thus, argued that it is clear that the AO was wrong in mixing up the provisions of section 92CA and section 37 of the Act thereby falling into legal error. It was also the argument of the learned Senior counsel that the assessee was making payments of royalty to its parent company under the same agreement on the same basis right from the Assessment Year 1994-95. However, in respect of Assessment Years 1994-95 to 1998-99, this expenditure was not even questioned and royalty paid in those years was allowed as expenditure in toto. [The decision by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable 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 expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enable it to cover the same under section 37(1) of the Act. As noted above, Ms. Bansal, learned counsel for the Revenue had argued that since the payment of royalty on TPO was not the genuine basis as the goods had not been sold at IPP, but at much lesser price, payment of royalty on IPP rather than on actual sales is superfluous and not permissible under section 37(1) of the Act. It is difficult to accept such an argument. Once it is held that the payment of royalty by the assessee to its parent company is not hit by the provisions of section 92 of the Act and the price fixed is ALP as determined by the TPO himself, there is no reason to hold that the expenses would not be allowed under section 37(1) of the Act. This provision reads as under: "Section 37: General (1) Any expenditure (not being expenditure of the nature described in section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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