Commissioner of Income Tax -7 vs Oracle India Pvt Ltd

July 12, 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.


JULY 12, 2016

ITA 334/2016                                                      Page 4 of 4


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