Bombay High Court Ruling in case of Commissioner of Income Tax – 10 vs. M/s CA Computer Associates India Private Limited [ITA No.20 of 2011 Asst. Year 2006-2007]
Gist: Bad-debts cannot be the relevant factor to determine the arm’s length price of the royalty transaction between the licensee and the licensor.
Facts:
CA Computers India Private Limited (‘the respondent’) had entered into a Software Distribution Agreement with CA Management Inc. (‘CAMI USA’) where under the respondent was appointed as a distributor of the products of CAMI USA in India. Under the agreement, the respondent was liable to pay an annual royalty on all amounts invoiced at a rate of 30%.
The respondent filed its return of income for the A.Y. 2002-2003 declaring a loss of about ` 14,55,99,340/-. The Assessing Officer (‘AO’) referred the matter to the Transfer Pricing Officer (‘TPO’) u/s 92CA(1) of the Income Tax Act, 1961 (‘the Act’) for determining the Arm’s Length Price (‘ALP’) in respect of the royalty paid by the respondent to CAMI USA. The respondent claimed that the ALP at the contractual value of royalty paid was about ` 7.43 crores. The TPO did not dispute the rate of royalty being paid by the respondent. However, the TPO disallowed the amount of royalty paid by the respondent for the extent of the unpaid invoices written off during the year i.e. bad-debts. The TPO computed the ALP of the royalty at about ` 5.85 crores resulting in a reduction of loss of about ` 1.50 crores.
Aggrieved by the order of the TPO, assessee filed an appeal to the Commissioner of Income Tax (Appeals) [‘CIT(A)’]. However, CIT(A) upheld the action of the TPO.
On further appeal, Income Tax Appellate Tribunal (‘the ITAT’) vide their order ITA No 5420 and 5421/Mum/2006 deleted the addition made by the TPO and held that merely because the respondent paid royalty even in respect of the products sold by it to the clients, who had not paid for the same (Bad-debts), it would make no difference to the determination of the ALP of the transaction. ITAT further held that the TPO exceeded his limitation by following the method which is not authorized under the Act or Rules.
Aggrieved by the order of the ITAT, Department filed an appeal before the Bombay High Court
Questions before the High Court
