TPO cannot follow a method which is not authorized by the Income Tax Act or the Income Tax Rules to determine the arm’s length price

ITAT Ruling: The Tribunal held that the Transfer Pricing Officer cannot exceed his limitation by following any method to determine the arm’s length price which is not authorised by the Income Tax Act or the Income Tax Rules

Facts:

CA Computer Associates Pvt. Ltd. (assessee) was incorporated during the year 1998 and was a 100 % subsidiary of Computer Associates International Inc. USA (CA – USA). The assessee was primarily engaged in the business of (i) licensing mainframe mid range and system infrastructure software products of CA Management Inc. USA (CAMI – USA); (ii) software that can be generally deployed “Out of box” or with customer/ industry specified adaptations; and (iii) development software that can allow technologies and programmes to write custom applications and create new categories of packaged applications. The assessee had set-up a Technical Support Centre in Chennai to provide support services to end users of the software products on behalf of the CAMI – USA. As per the agreement with CAMI – USA, the assessee was appointed as the sole distributor of the products of CAMI – USA in India.

The assessee for the assessment year (A.Y.) 2002-03 had declared a loss in its return of income. The case was selected for scrutiny and was referred to the Transfer Pricing Officer (TPO) by the Assessing Officer (AO) for determining the arm’s length price (ALP) of the international transaction entered into by assessee with its associated enterprises (AEs). The assessee had paid royalty amounting to Rs. 7,43,22,376 to CAMI – USA for distribution of the software products in India. The assessee had bench marked this royalty payment using Comparable Uncontrolled Price Method. However, the TPO had determined the ALP at NIL in relation to the royalty to the extent of Rs. 47,09,755 paid to CAMI-USA, which was corresponding to sales of Rs. 13,33,44,452 written off as bad debts in the books of account, on the following grounds:

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