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Commissioner Of Income Tax-7 Vs. Oracle India Pvt. Ltd.
July, 27th 2016
+                  ITA 334/2016
       COMMISSIONER OF INCOME TAX -7              ..... Appellant
                   Through: Mr. Dileep Shivpuri, Sr. Standing
                   Counsel with Mr. Sanjay Kumar, Advocate.


       ORACLE INDIA PVT.LTD.                        ..... Respondent
                     Through: Mr. M.S. Syali, Sr. Advocate with Mr.
                     Mayank Nagi and Ms Husnal Syali, Advocates.
       %             12.07.2016

       1. This appeal by the Revenue is directed against the order dated 14th
       October 2015 passed by the Income Tax Appellate Tribunal (,,ITAT)
       in ITA No. 1432/Del/2011 for the Assessment Year (,,AY) 2004-05.

       2. The question of law urged by the Revenue is whether the ITAT was
       justified in deleting the addition made by the Assessing Officer
       (,,AO) of Rs. 59,78,91,950/- on the basis of the adjustment made by
       the Transfer Pricing Officer (,,TPO) 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.

ITA 334/2016                                                     Page 1 of 4
       3. The brief facts are that, pursuant to the reference made by the AO,
       the TPO passed an order dated 13th December, 2006 for the AY in
       question on the basis of the Transfer Pricing (,,TP) Study submitted
       by the Assessee.      Inter alia, 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 was able to demonstrate 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.

       4. In the impugned order of the ITAT has after a detailed discussion
       concluded as under:

               "32. We have considered rival submissions and have
               perused the record of the case. There is no dispute that
               for distribution division, in the current assessment year,
               the assessee had adopted TNMM as the arms length
               standard for the inter company royalty expenses. The
               Assessee had earned an OP/sales ratio of 23.3%, which
               was much more than the mean OP/sales ratio of 2.2%
               earned by comparable companies. The assessee in June
               2003 had changed its royalty arrangement for Oracle
               Corporation to a level of 56% of actual sales revenue
               from earlier level of 30% of the IPP (Indian Published
               price). This change had been made after following due

ITA 334/2016                                                     Page 2 of 4
               procedure and approval from FIPB.

               33. The assessee, in its submission dated 8-11-2006, had
               stated that the change in royalty rate was prompted by
               present exchange control regime as the earlier agreement
               had been a result of the controls imposed by Government
               of Indias foreign exchange control policy. Prior to FY
               2003-04 the assessee made royalty payment, calculated at
               30% of IPP of the products licensed to Indian customer,
               to comply with the then prevailing Exchange Control
               Regulations. The provision of the Exchange Control
               Regime then authorized the Indian Master licensee to
               duplicate the software and sub-license to Indian
               customers. It restricted the consideration payable by the
               Indian Master licensee to 30% of the IPP of the software
               product sub-licensed to Indian customers. This was an
               exchange control stipulation and the ceiling on the
               payment was meant to restrict payment from an exchange
               control perspective.      However, the new Exchange
               Control Policy had removed the limits of such royalty
               payment for duplication and sub-licensing activity. The
               liberalized policy also did away with the requirement of
               domestic duplication by the Indian Master Licensee as
               well as requirement of necessarily computing the royalty
               payable with reference to the list price and not actual
               sales value."

       5. It 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.

       6. In the circumstances, the conclusion arrived at by the ITAT appears

ITA 334/2016                                                    Page 3 of 4
       to be perfectly justified. It is based on facts and does not give rise to
       any substantial question of law. It may also be noticed that in the AYs
       2008-09 and 2009-10, the TPO has accepted the royalty payment at
       56% of the actual sales. Also, the Dispute Resolution Panel has
       accepted the Assessees case for AYs 2006-07 and 2007-08.

       7. Accordingly, the appeal is dismissed.

                                              S.MURALIDHAR, J

                                              NAJMI WAZIRI, J
       JULY 12, 2016

ITA 334/2016                                                      Page 4 of 4
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