06_Joeri Van Speybroek_Dell_MeetupDora&Cybersecurity.pdf
Cit vs ca computer associates
1. 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
2. The CIT– 10 v/s.CA Computer Associates India Pvt. TPO’s contention
Ltd. ITAT Appeal no-20 of 2011 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
That merely because the assessee had paid the royalty even in complaints regarding the quality of the products. It was held that
respect of the products sold by it to the clients, who had not paid such cases ought to be dealt with on the basis that no sale had
for the same, it would make no difference to the determination of occurred and that there was no question of payment of royalty as
the Arm's Length Price of the transaction. the same has been written off in the book of accounts.
Fact of the case 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
The CA Computer Associate India Pvt ltd (hereinafter referred to as issue was that the royalty should be allowed to be written off to the
Assessee) had entered into a Software Distribution Agreement with extent of the unpaid invoices during the year itself.
CA Management Inc. (hereinafter referred to as “CAMI”) where
under, the Assessee was appointed as a distributor of the products CIT (A) Judgment
of CAMI in India. Under the agreement, the assessee is liable to pay
The CIT (A) made a similar observation in the order dated
an annual royalty on all amounts invoiced at a rate of 30%.
27.7.2006; dismissing the assesse appeal on the ground that royalty
The assessee had filed its return of income for the A.Y. 2002-2003 paid at a lower rate than in the comparable transaction was
declaring a loss of about Rs.14,55,99,340/-. The Assessing Officer irrelevant because the rate of royalty was not in dispute.
(AO) referred the matter to the Transfer Pricing Officer (TPO) under
The assessee, aggrieved with the order of CIT(A), made an appeal to
section 92A(1) of the Act for determining the Arm's Length Price
ITAT and made the following contention
(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 Assessee’s Contention to ITAT
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 Section 92C provides the basis for determining the ALP in relation
assessee, aggrieved with the order of AO, made an appeal to CIT(A) to international transactions. It does not either expressly or
impliedly consider failure of the customers to pay for the products
Assessee’s contention to CIT sold to them, which is thus not a relevant factor in determining the
ALP.
Assessee contented that royalty paid @ 30% by him was at a lower
rate than in the comparable transactions
3. Indeed in the absence of any statutory provision or the transactions by the assessee to C.A. Management Inc. USA for distribution of
being colorable bad debts on account of purchasers refusing to pay software products in India without appreciating that the royalty had
for the goods purchased by them from the assessee can never be a been paid on the amount of bad debts even where the software had
relevant factor while determining the ALP of the transaction not worked at all?”
between the assessee and its principal.
High Court Judgment
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 The question was thereafter, answered in the affirmative in favor of
failing to pay for the product purchased by them from the assessee. assessee. The appeal was accordingly dismissed.
Absent a contract to the contrary, the vendor or licensor is not Summary of case law
concerned with whether its purchaser / licensee recovers its price
from its clients to which it has in turn sold / licensed such products. Step 1- Assessee file return and contention is raised by TPO
The two are distinct, unconnected transactions. regarding amount of Royalty paid to AE
The purchaser's / licensee's obligation to pay the consideration Step 2 - Assessee was aggrieved with the order issued by AO and
under its transaction with its vendor / licensor is not dependent made an appeal to CIT
upon its recovering the price of the products from its clients.
Step 3 - Assessee contention to CIT
ITAT order
Step 4 – TPO’s contention to CIT
The ITAT by the impugned order, rightly came to the conclusion that
Step 5 - CIT decision
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 Step 6 - Assessee was aggrieved with the order of CIT(A) and
same, it would make no difference to the determination of Arm‘s made a further appeal to ITAT
Length Price of the transaction.
Step 7 - Assessee contention to ITAT
CIT was aggrieved with the judgment issued by ITAT and made an
appeal under section 260-A of the Income Tax Act against the Step 8 - ITAT decision
order of ITAT, on the following substantial question of law:-
Step 9 - CIT(A) appeal to High court
“Whether on the facts and circumstance of the case and in law, the
Step 10- High court decision
ITAT was justified in deleting the disallowance made of royalty paid
