cit vs ca computer associates
DESCRIPTION
TRANSCRIPT
Transfer Pricing The CIT– 10 v/s.CA Computer Associates India
Pvt. Ltd. ITAT Appeal no-20 of 2011
That merely because the assessee had paid the royalty even in
respect of the products sold by it to the clients, who had not paid
for the same, it would make no difference to the determination of
the Arm's Length Price of the transaction.
8/14/2012
The CIT– 10 v/s.CA Computer Associates India Pvt.
Ltd. ITAT Appeal no-20 of 2011
That merely because the assessee had paid the royalty even in
respect of the products sold by it to the clients, who had not paid
for the same, it would make no difference to the determination of
the Arm's Length Price of the transaction.
Fact of the case
The CA Computer Associate India Pvt ltd (hereinafter referred to as
Assessee) had entered into a Software Distribution Agreement with
CA Management Inc. (hereinafter referred to as “CAMI”) where
under, the Assessee was appointed as a distributor of the products
of CAMI in India. Under the agreement, the assessee is liable to pay
an annual royalty on all amounts invoiced at a rate of 30%.
The assessee had filed its return of income for the A.Y. 2002-2003
declaring a loss of about Rs.14,55,99,340/-. The Assessing Officer
(AO) referred the matter to the Transfer Pricing Officer (TPO) under
section 92A(1) of the Act for determining the Arm's Length Price
(ALP) in respect of the royalty paid by the assessee to CAMI. The
Assessee claimed the ALP at the contractual value of about Rs.7.43
crores. The AO computed the ALP of the royalty at about Rs.5.85
crores resulting in a reduction of loss by about Rs.1.50 crores. The
assessee, aggrieved with the order of AO, made an appeal to CIT(A)
Assessee’s contention to CIT
Assessee contented that royalty paid @ 30% by him was at a lower
rate than in the comparable transactions
TPO’s contention
TPO contented that the Assessee had paid the royalty to its principal
even on the bad debts and in cases where the customers had raised
complaints regarding the quality of the products. It was held that
such cases ought to be dealt with on the basis that no sale had
occurred and that there was no question of payment of royalty as
the same has been written off in the book of accounts.
It was also contended by TPO that rate of royalty being justified was
not relevant, as there was no dispute regarding the same but the
issue was that the royalty should be allowed to be written off to the
extent of the unpaid invoices during the year itself.
CIT (A) Judgment
The CIT (A) made a similar observation in the order dated
27.7.2006; dismissing the assesse appeal on the ground that royalty
paid at a lower rate than in the comparable transaction was
irrelevant because the rate of royalty was not in dispute.
The assessee, aggrieved with the order of CIT(A), made an appeal to
ITAT and made the following contention
Assessee’s Contention to ITAT
Section 92C provides the basis for determining the ALP in relation
to international transactions. It does not either expressly or
impliedly consider failure of the customers to pay for the products
sold to them, which is thus not a relevant factor in determining the
ALP.
Indeed in the absence of any statutory provision or the transactions
being colorable bad debts on account of purchasers refusing to pay
for the goods purchased by them from the assessee can never be a
relevant factor while determining the ALP of the transaction
between the assessee and its principal.
If ALP of the royalty is justified by CIT, then there can be no
reduction in the value thereof only on account of the customers
failing to pay for the product purchased by them from the assessee.
Absent a contract to the contrary, the vendor or licensor is not
concerned with whether its purchaser / licensee recovers its price
from its clients to which it has in turn sold / licensed such products.
The two are distinct, unconnected transactions.
The purchaser's / licensee's obligation to pay the consideration
under its transaction with its vendor / licensor is not dependent
upon its recovering the price of the products from its clients.
ITAT order
The ITAT by the impugned order, rightly came to the conclusion that
merely because the assessee had paid the royalty even in respect of
the products sold by it to the clients, who had not paid for the
same, it would make no difference to the determination of Arm‘s
Length Price of the transaction.
CIT was aggrieved with the judgment issued by ITAT and made an
appeal under section 260-A of the Income Tax Act against the
order of ITAT, on the following substantial question of law:-
“Whether on the facts and circumstance of the case and in law, the
ITAT was justified in deleting the disallowance made of royalty paid
by the assessee to C.A. Management Inc. USA for distribution of
software products in India without appreciating that the royalty had
been paid on the amount of bad debts even where the software had
not worked at all?”
High Court Judgment
The question was thereafter, answered in the affirmative in favor of
assessee. The appeal was accordingly dismissed.
Summary of case law
Step 1- Assessee file return and contention is raised by TPO
regarding amount of Royalty paid to AE
Step 2 - Assessee was aggrieved with the order issued by AO and
made an appeal to CIT
Step 3 - Assessee contention to CIT
Step 4 – TPO’s contention to CIT
Step 5 - CIT decision
Step 6 - Assessee was aggrieved with the order of CIT(A) and
made a further appeal to ITAT
Step 7 - Assessee contention to ITAT
Step 8 - ITAT decision
Step 9 - CIT(A) appeal to High court
Step 10- High court decision
Our guiding philosophy is “To carry out every professional assignment effectively and efficiently, while upholding the virtues of independence and integrity, without compromising on the creativity and quality of work, so as to provide utmost satisfaction to our clients ”
A-380, Defence Colony, New Delhi –110024
Tel: +91-11-4980-0000
Fax: 91-11-4980-0088
Email: [email protected] & [email protected]
www.spnagrath.com
©Copyright S P Nagrath & Co. , All rights reserved
This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in this publication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this publication