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

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