Oracle India Pvt. Ltd, V. Addition Commissioner of Income Tax,

ITA 18/DEL/2007

• Counselvise Citation: [2007] 114 COUNSELVISE.COM (IT) 1381 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2007
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 23-07-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 02-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M K GAUTAM
• Keywords: Transfer pricing; Diversion of income; International transaction; Fair market value; Avoidance of tax
• Section: 92C; 10B; 28; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH `E : NEW DELHI) BEFORE HONBLE SR. VICE PRESIDENT SHRI R.P. GARG A ND HONBLE JUDICIAL MEMBER, SHRI A.D. JAIN ITA NO.18/DEL./2007 (ASSESSMENT YEAR : 2003-04) ORACLE INDIA PVT. LTD., VS. ADDL.CIT, RANGE 13, 3 RD FLOOR, A WING, IFCI TOWER, NEW DELHI. 61, NEHRU PLACE, NEW DELHI-110 019. (PAN/GIR NO.AAACO0158L) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI TARANDEEP SINGH, C.A., REVENUE BY : SHRI M.K. GAUTAM, CIT(DR) ORDER PER R.P. GARG, SR.VP THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER OF THE CIT(A) FOR ASSESSMENT YEAR 2003-04. THE FOLLOWING GROUNDS HAVE BEEN RAI SED IN THIS APPEAL: 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS)-XVI, NEW DELHI (LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.1 81,277,408 BEING PROFIT OF ROYALTY PAID TO ORACLE CORPORATION, USA. 1.2 ON THE FATS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN HOLING THAT THE PROVISIONS OF SE CTION 40A(2) OF THE INCOME-TAX ACT, 1961 (THE ACT) WOULD OVERRIDE THE SPECIAL PROVISIONS CONTAINED IN CHAPTER X OF THE ACT. 1.3 THE LD.CIT(A) ERRED IN NOT APPRECIATING THAT SE CTION 40A(2) OF THE ACT HAS AN OVERRIDING EFFECT OVER SECTIONS 28 TO 44 DA OF THE ACT, BEING PROVISIONS OF RELATING TO COMPUTATION OF INCO ME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION. 1.4 ON THE FATS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN HOLING THAT FIXING THE ROYALTY W ITH REFERENCE TO THE INDIAN PUBLISHED PRICE (IPP) OF THE SOFTWARE, AS AGAINST THE ACTUAL SALES PRICE, WAS UNREASONABLE EVEN THOUGH PA YMENT OF ITA NO.18/DEL./2007 (ASSESSMENT YEAR : 2003-04) 2 ROYALTY AT RATES UP TO 30 PER CENT OF IPP WAS A PRE SCRIBED CRITERION FOR AUTOMATIC APPROVAL BY THE RESERVE BANK OF INDIA . 1.5 ON THE FATS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE WHIC H WAS MADE IN COMPLETE DISREGARD OF THE ORDER OF THE TRANSFER PRICING OFFICER (TPO) ISSUED U/S 92CA(3) OF THE ACT WHEREIN THE R OYALTY PAID TO ORACLE CORPORATION, USA HAS BEEN HELD TO BE AT ARM S LENGTH. 1.6 ON THE FATS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN HOLING THAT THE ARMS LENGTH CON SIDERATION AS DETERMINED BY THE TPO WAS NOT IN ACCORDANCE WITH TH E PROVISION OF SECTION 92C(1) OF THE ACT AND IN ALLEGING THAT T HE ORDER OF THE TPO WAS SILENT ON THE ISSUE OR ROYALTY PAYMENT. 1.7 ON THE FATS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN NOT CONSIDERING THAT AS PER PROV ISIONS OF SECTION 92CA(4) OF THE ACT, THE ASSESSING OFFICER I S REQUIRED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REG ARD TO THE ARMS LENGTH PRICE DETERMINED BY THE TPO. 2. AFTER HEARING BOTH THE PARTIES, THE MATTER STAND S COVERED IN THE CROSS APPEALS IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2002-0 3 IN ITA NOS.1982 & 1755/DEL./2006 VIDE DISCUSSION IN PARAS. 4 & 5 OF ITS ORDER WHICH READS AS UNDER: 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, A SIMILAR ISSUE INVOLVING IDENTICAL FACTS HAD ARISEN FOR THE CONSIDERATION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARL IER YEARS AND DELHI E BENCH OF ITAT, VIDE ITS ORDER DATED 29.8.2008 PASSED FOR AY 1999-2000, 2000-01 & 2001- 02, DELETED THE SIMILAR DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) OUT OF ROYALTY PAYMENT FOR THE FOLLO WING REASONS GIVEN IN PARAGRAPH NOS.11 & 12 OF ITS ORDER:- 11. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PART IES AND PERUSED THE MATERIAL AVAILABLE ON RECORD AND THE JU DGMENTS CITED BY THE LD AR OF THE ASSESSEE. BEFORE PROCEEDINGS FU RTHER, WE FEEL THAT THE PROVISIONS OF SECTION 92 AS APPEARING ON T HE STATUTE BOOK DURING THE RELEVANT PERIOD SHOULD BE REPRODUCED HER EIN FOR READY REFERENCE. THE SAME READS AS UNDER:- SECTION 92: WHERE A BUSINESS IS CARRIED ON BETWEEN A RESIDENT AND A NON RESIDENT AND IT APPEARS TO THE ASSESSING OFFI CER THAT OWING TO THE CLOSE CONNECTION BETWEEN THEM, THE COURSE OF BU SINESS IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE RESIDENT EITHER NO PROFITS OR LESS THAN THE ORDINAR Y PROFITS WHICH ITA NO.18/DEL./2007 (ASSESSMENT YEAR : 2003-04) 3 MIGHT BE EXPECTED TO ARISE IN THAT BUSINESS, THE AS SESSING OFFICER SHALL DETERMINED THE AMOUNT OF PROFITS WHICH MAY RE ASONABLY BE DEEMED TO HAVE BEEN DERIVED THERE FROM AND INCLUDE SUCH AMOUNT IN THE TOTAL INCOME OF THE RESIDENT. 12. FROM THE ABOVE, IT IS SEEN THAT THE PRE CONDITI ONS FOR INVOKING PROVISIONS OF SECTION 92 IS THAT THERE IS NO PROFIT OR LESS THAN ORDINARY PROFIT ACCRUING TO THE RESIDENT ASSES SEE ON ACCOUNT OF BUSINESS CONNECTION BETWEEN THE RESIDENT AND NON RE SIDENT. SINCE, THE ASSESSEE ITSELF HAS DECLARED AN INCOME OF RS.12 27.40 LAKHS IN THE RETURN OF INCOME FOR THE PRESENT YEAR, IT IS NO T THE CASE OF NO PROFIT. REGARDING THE SECOND ASPECT AS TO WHETHER I T CAN BE SAID IN THE PRESENT CASE THAT THE PROFITS EARNED BY THE ASS ESSEE IS LESS THAN ORDINARY PROFIT, THE ASSESSING OFFICER HAS NOT BROU GHT ON RECORD ANY COMPARABLE CASE AS TO WHAT IS ORDINARY PROFIT I N THIS TYPE OF BUSINESS. UNDER SIMILAR SITUATION, IT WAS HELD BY T HE TRIBUNAL IN THE CASE OF REUTERS INDIA PVT. LTD. (SUPRA) THAT THE RE VENUE HAS NOT DISCHARGED ITS ONUS BY PROVING THAT THE PROFIT BEIN G EARNED BY THE ASSESSEE IS LESS THAN ORDINARY PROFIT IN THIS TYPE OF BUSINESS AND HENCE SECTION 92 CANNOT BE INVOKED. THE TRIBUNAL IN THIS CASE HAS FOLLOWED THE TRIBUNAL DECISION IN THE CASE OF NESTL E INDIA LTD. (SUPRA) IN WHICH IT WAS HELD BY THE TRIBUNAL THAT T HE BURDEN IS ON THE ASSESSING OFFICER AND NOT ON THE ASSESSEE TO PR OVE THAT THE CASE FALLS UNDER THE PROVISIONS OF SECTION 92. SINCE IN THE PRESENT CASE ALSO, THIS ONUS IS NOT DISCHARGED BY THE REVENUE BY BRINGING ON RECORD A COMPARABLE CASE TO SHOW THAT THE PROFITS E ARNED BY THE ASSESSEE COMPANY IS LESS THAN ORDINARY PROFIT, WE A RE OF THE CONSIDERED OPINION THAT THE PROVISIONS OF SECTION 9 2 CANNOT BE INVOKED IN THE PRESENT CASE TO MAKE ANY ADDITION IN THE PROFIT OF THE BUSINESS OF THE ASSESSEE DECLARED BY IT AS PER RETURN OF INCOME. WE, THEREFORE, DECIDE THIS ISSUE IN FAVOUR OF THE A SSESSEE BY RESPECTFULLY FOLLOWING THE PRECEDENTS. THE CONTENT IONS OF LEARNED DR OF THE REVENUE ARE DEVOID OF MERIT IN THE ABSENC E OF A COMPARABLE CASE TO SHOW THAT THE PROFITS OF THE ASS ESSEE IN THE PRESENT CASE IS LESS THAN ORDINARY PROFIT. 5. BESIDES THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE AS RENDERED ABOVE FOR AY 1999-2000, 2000-01 & 2001-02 WHICH SQU ARELY COVERS THIS ISSUE IN FAVOUR OF THE ASSESSEE, IT IS OBSERVED THAT THE ROY ALTY PAID AMOUNTING TO RS.70.60 CRORES BY THE ASSESSEE COMPANY TO ORACLE CORPORATIO N, USA FOR DUPLICATION AND DISTRIBUTION OF SOFTWARE WAS HELD TO BE AT ARMS LE NGTH BY THE TPO AS PER HIS ORDER DATED 25.2.2005 PASSED FOR AY 2002-03, A COPY OF WH ICH HAS BEEN PLACED ON RECORD BY THE LEARNED COUNSEL FOR THE ASSESSEE. TH IS BEING SO, WE FIND MERIT IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SAID ROYALTY PAYMENT HAVING BEEN ACCEPTED BY THE TPO AS ARMS LENGTH PAY MENT, THERE WAS NO JUSTIFICATION ON THE PART OF THE LEARNED CIT(A) TO HOLD THAT THE SAME WAS ITA NO.18/DEL./2007 (ASSESSMENT YEAR : 2003-04) 4 UNREASONABLE AND THE AO WAS JUSTIFIED IN MAKING THE DISALLOWANCE OUT OF THE SAME BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B ). WE, THEREFORE, DELETE THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LEARNE D CIT(A) OUT OF ROYALTY PAID BY THE ASSESSEE TO ORACLE CORPORATION, USA AND ALLO W GROUND NO.1 OF THE ASSESSEES APPEAL. 3. IT IS ALSO COVERED BY THE DECISION OF THE SPECIA L BENCH OF BANGALORE, ITAT IN THE CASE OF AZTEC SOFTWARE TECHNOLOGY SERVICES LTD. VS. ACIT, 107 ITD 141 BY DISCUSSION AT PAGES181-182 WHICH READS AS UNDER: 17. IN VIEW OF THE ABOVE JUDGMENTS, THE CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT AVOIDANCE OF TAX IS A CONDITION PRECEDENT FOR INVOK ING THE PROVISIONS OF SECTION 92C/92CA OF THE ACT. HE WAS ALSO NOT JUSTIFIED IN A TTACHING TOO MUCH IMPORTANCE TO BUDGET SPEECH, NOTES ON CLAUSES, MEMORANDUM TO F INANCE BILLS, APART FROM HEADING OF THE CHAPTER. THE ASSESSEE CAN FURTHER DE RIVE NO SUPPORT FROM PROVISION OF SECTION 52 OR DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF K.P. VARGHESE V. ITO [1981] 131 ITR 597 1 WHEREIN PROFIT ON ACCOUNT OF UNDERSTATEMENT OF CONSIDERATION WAS HELD TO BE ESSE NTIAL SPECIAL REQUIREMENT OF THE PROVISION. THERE IS NO SUCH REQUIREMENT OF ESTA BLISHMENT OF TAX EVASION BEFORE INITIATION OF PROCEEDINGS FOR DETERMINATION OF ARMS LENGTH PRICE AS DISCUSSED ABOVE. CONTRARY VIEW HELD BY THE LD. CIT (APPEALS) IS ACCORDINGLY HELD TO BE UNSUSTAINABLE. 18. BEFORE PARTING WITH THIS ISSUE, WE WOULD LIKE TO D EAL WITH ANOTHER CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHERE ANY PAYMENT IS MADE IN RESPECT OF AN EXPENDITURE WHICH IS EXCESSIVE OR UNR EASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS, SERVICES OR FACILITIES TO THE CONCERN IN WHICH ASSESSEE HAS SUBSTANTIAL INTEREST, THE DISALLOWANCE IS PERMI SSIBLE UNDER SECTION 40A OF THE ACT WHICH OVERRIDES THE OTHER PROVISIONS OF THE ACT AND CONSEQUENTLY, THE PROVISIONS OF SECTION 92CA COULD NOT BE INVOKED. WE ARE UNABLE TO ACCEPT SUCH CONTENTION OF LEARNED COUNSEL FOR THE ASSESSEE FOR THE REASONS GIVEN HEREAFTER. SUB-SECTION (1) OF SECTION 40A ON WHICH RELIANCE HA S BEEN PLACED, READS AS UNDER : 40A.(1) THE PROVISIONS OF THIS SECTION SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PRO VISION OF THIS ACT RELATING TO THE COMPUTATION OF INCOME UNDER THE HEA D PROFITS AND GAINS OF BUSINESS OR PROFESSION. ITA NO.18/DEL./2007 (ASSESSMENT YEAR : 2003-04) 5 19. THE PERUSAL OF THE ABOVE PROVISIONS SHOWS SECTION 40A HAS OVERRIDING EFFECT OVER THE PROVISIONS RELATING TO THE COMPUTAT ION OF INCOME UNDER THE HEAD PROFIT & GAIN OF BUSINESS OR PROFESSION. THA T MEANS, IT HAS OVERRIDING EFFECT OVER THE PROVISIONS CONTAINED IN CHAPTER-IVD I.E., SECTIONS 28 TO 44DA ONLY. HENCE, THE PROVISIONS OF SECTION 40A(2) WOULD NOT AND CANNOT O VERRIDE THE PROVISIONS CONTAINED IN CHAPTER X OF THE ACT. EVEN OTHERWISE, IF THERE ARE DIFFERENT PROVISIONS OVER THE SAME SUBJECT THEN IN LAW THE SP ECIFIC PROVISIONS WOULD PREVAIL. SO, EVEN ASSUMING THAT PROVISIONS OF SECTI ON 40A ARE ATTRACTED, THESE ARE THE GENERAL PROVISIONS APPLICABLE TO ALL TRANSACTIO NS WHILE THE PROVISIONS OF CHAPTER-X ARE SPECIFIC PROVISIONS RELATING TO INTER NATIONAL TRANSACTIONS ONLY. THEREFORE, THE PROVISIONS OF CHAPTER X WHICH ARE MO RE SPECIFIC WOULD APPLY TO THE PRESENT CASE. 20. AT ONE STAGE OF HEARING, LEARNED COUNSEL FOR ASSES SEE HAS ALSO SUBMITTED BEFORE US THAT INCOME OF THE ASSESSEE IS EXEMPT UND ER SECTION 10A OF THE ACT AND, THEREFORE, THE OVER-PRICING OR UNDER-PRICING OF AN INTERNATIONAL TRANSACTION WOULD NOT AFFECT THE COMPUTATION OF INCOME. THIS ARGUMENT IS WITHOUT FORCE IN VIEW OF THE SPECIFIC PROVISIONS CONTAINED IN THE FIRST PROV ISO TO SUB-SECTION (4) OF SECTION 92C WHEREIN IT HAS BEEN CLEARLY STATED THAT NO DEDU CTION UNDER SECTION 10A/10AA OR SECTION 10B OR UNDER CHAPTER VIA SHALL BE ALLOWE D IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SECTION. 21. IT IS ABUNDANTLY CLEAR THAT LEGISLATURE WHILE INTR ODUCING THE ENACTMENT DID COMPREHEND A SITUATION REQUIRING INVESTIGATION AND ADDITION ON ACCOUNT OF COMPUTATION OF ARMS LENGTH PRICE IN CASES OF THE A SSESSEE ENTITLED TO BENEFIT UNDER SECTIONS 10A/10AA OR SECTION 10B OF THE ACT. IN THE LIGHT OF SPECIFIC PROVISION, IT IS DIFFICULT TO CONTEND THAT ARMS LENGTH PRICES CA NNOT BE DETERMINED UNDER SECTION 92C OR 92CA WHERE ASSESSEE IS ENTITLED TO BENEFIT O F ABOVE SECTIONS. 22. IN THE LIGHT OF ABOVE DISCUSSION, WE HOLD THAT ALT HOUGH CHAPTER-X HAS TITLE SPECIAL PROVISION RELATING TO AVOIDANCE OF TAX AN D AIM OF VARIOUS SECTIONS UNDER CHAPTER-X IS TO CHECK AVOIDANCE OF TAXES, DIVERSION OF INCOME AND FUNDS BY NON- RESIDENTS FROM INDIA, IT IS NOT NECESSARY THAT ASSE SSING OFFICER MUST DEMONSTRATE SUCH AVOIDANCE AND DIVERSION OF TAX BEFORE INVOKING PROVISIONS OF SECTION 92C AND 92CA. CONSEQUENTLY, QUESTION NO. 1 IS ANSWERED IN NEGATIVE I.E. AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. IT IS FURTHE R HELD THAT THE LD. CIT (APPEALS) WAS WRONG IN ATTACHING IMPORTANCE TO THE FACT THAT THE TAXPAYER IS ENTITLED TO BENEFIT UNDER SECTIONS 10A/10AA OF INCOME-TAX ACT. ITA NO.18/DEL./2007 (ASSESSMENT YEAR : 2003-04) 6 4. THE INTERESTING QUESTION IS THAT THE TPO HAS ACC EPTED THE PRICE DETERMINED BY THE ASSESSING OFFICER AND THEREFORE, THE ASSESSING OFFI CER IS REQUIRED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE IN REGARD TO THE ARMS LENGT H PRICE DETERMINED Y THE TPO. 5. RESPECTFULLY FOLLOWING THE AFORESAID ORDERS OF T HE TRIBUNAL, WE ALLOW THE CLAIM OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DE TERMINE THE INCOME OF THE ASSESSEE AS PER THE VALUE OF SERVICES DETERMINED BY THE TPO. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED. 7. ORDER PRONOUNCED IN OPEN COURT ON 05.08.2009. (A.D. JAIN) (R.P. GARG) JUDICIAL MEMBER SR. VICE PRESIDENT DATED: AUG. 05, 2009. *SKB* COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A)-XVI, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. AR/ITAT