The division bench of the Delhi High Court has recently allowed deduction on royalty which was computed on the basis of actual sales value. Earlier, the Appellate Tribunal has allowed the said deduction which was challenged by the Department before the High Court. The High Court, by upholding the order of the Tribunal held that while computing royalty, the actual sales value must be taken into consideration, not the list price.
The facts of the case in brief are discussed below;
Pursuant to the reference made by the AO, the TPO passed an orderon the basis of the Transfer Pricing Study submitted by the Assessee.In the order the TPO noted the submission made by the Assessee by its letter dated 8th November 2006 giving the reason for enhancement of the royalty rate from 30% to 56%. The Assessee drew a distinction between the royalty rate that was paid in the earlier years and the ‘effective royalty’ during those years.The assessee demonstrated that the average effective rate of royalty paid during the five years from 1998-99 to 2002-03 was 59% and that by revising the royalty agreement to 56%, it had actually resulted in a lower payout during the current year. The Assessee also attributed the enhancement of the royalty rate from 30% to 56% to the relaxing of controls by the Government of India.
On appeal, the Income Tax Appellate Tribunal decided in favour of the assesse Oracle India Pvt Ltd. Therefore, the Revenue, through appeal raised a question before the High Court that whether the ITAT was justified in deleting the addition made by the Assessing Officer of Rs. 59,78,91,950/- on the basis of the adjustment made by the Transfer Pricing Officer on account of international transactions of payment of royalty and not confirming the action of the AO in restricting the payment of royalty to 30% of the actual sales as against 56% claimed by the assessee.
The division bench comprising of Justice S Muralidhar and Justice Najimi Waziri, while confirming the order of the ITAT held that āIt has been rightly noted by the ITAT, once the liberalized policy did away with the requirement of computing the royalty with reference to the list price (Indian Published Price), the Assessee moved from the regime of royalty payment as a percentage of the list price to the actual license and support review.ā
The Court further observed that there do not arise any matter of substantial question of law since the conclusion arrived at by the ITAT appears to be perfectly justified.
Read the full text of the Judgment below.
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