Commissioner of Income Tax v. Oracle India (P) Ltd.

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The Tax Publishers2012 TaxPub(DT) 0424 (Del-HC) : (2011) 243 CTR 0103 : (2011) 059 DTR 0222 INCOME TAX ACT, 1961 --Business expenditure--Allowability Royalty payment to parent company abroad--Assessee is a 100% subsidiary of Oracle Corporation, USA and was incorporated with the object of developing, designing, improving, producing, marketing, distributing, buying, selling and importing of computer software. Assessee is entitled to sub-licence the software developed by Oracle Corporation, USA to its local clients. Assessee imports master copies of the software from Oracle Corporation, USA. These are then duplicated on blank discs, packed and sold in the market along with the relevant brochures and information by way of a sub-license. Assessee pays a lump sum amount to Oracle Corporation, USA for the import of the master copy and in addition thereto it also pays royalty at 30% of the list price of the licensed products. For the year under consideration, assessee filed its return on 31-12-1999 declaring income at Rs. 12,27,40,360. The said return was processed under section 143(1) on 14-9-2000. The case was selected for scrutiny and notice under section 143(2) was issued. While framing the assessment order, assessing officer disallowed certain expenditure and made certain additions. It is not necessary to deal with other items except the one on which the question of law has arisen. It was further noticed by assessing officer that during the year, assessee had claimed to have paid an amount of Rs. 35,00,88,000 to M/s. Orade Corporation on account of royalty for duplicating and sub-licensing of software to its customers. It may be mentioned here that the assessee-company is 100% subsidiary of M/s. Orcade Corporation, USA. It was explained by the assessee that royalty was being paid at maximum of 30% of the Indian published price of the Oracle Software for sub-licensing. However, assessing officer noted that the total revenue earned by assessee at Delhi unit involved in sub-licensing of software was to the extent of Rs. 98,16,72,000. Considering that the receipts disclosed on account of software sub-licensing on which assessee is paying royalty for sub-licensing is only at Rs. 59,68,78,000, assessee was required to explain as to why provision of section 92 should not be invoked since even if the royalty is paid at 30% of the sale consideration, the amount payable was only to the extent of Rs. 17.90 crores. Being dissatisfied by the explanation furnished by assessee in this regard and for the reasons recorded in the order of assessment the disallowance of Rs. 17,10,24,600 was made by assessing officer under section 92 read with section 37(1) on account of payment of royalty beyond 30% of the sub-licensing fee earned by assessee. The assessment was, however, framed by determining total taxable income at Rs. 38,36,55,851. Feeling aggrieved by the assessment order, assessee preferred the appeal before Commissioner (Appeals), which was allowed partly by Commissioner (Appeals). Insofar as the issue of royalty is concerned, Commissioner (Appeals), however, upheld the disallowance made by the assessing officer on the ground that a significant amount of profit had been siphoned off to M/s. Oracle Corporation, USA by paying royalty by ignoring the saleable price of the product. As regards the applicability of provisions of section 92, Commissioner (Appeals) after examining the facts of the case and also the relevant rules in this regard held that the provisions of section 92 coupled with Rules 10 and 11 were squarely applicable to the case of the assessee. Consequentially, the disallowances of royalty of Rs. 17,10,24,600 was sustained for the specific reasons recorded in the order. The order of Commissioner (Appeals) was not accepted by assessee on this issue and by the revenue on other issues which led to filing appeals by both the parties before the Tribunal. The appeals filed by assessee had been allowed on the aforesaid issue and the appeals of revenue had been dismissed in terms of impugned consolidated order. *Held:* It is, thus, clear that what is to be seen is that the expenditure was incurred by assessee in the course of business and had nexus with the business of assessee. It could not be disputed that the payment of royalty is a business expenditure, which was expended wholly and exclusively for the purpose of business of assessee. The nature of the expenses is also not such which would fall in any of the exceptions carved out under sections 30 and 36. Once these conditions are satisfied, the expense is to be allowed in toto as business expenditure, and the Revenue cannot sit in the arm's chair of assessee and decide as to how affairs of the business are to be run and wasteful or excessive expenditure is to be curtailed. The question of commercial expediency is to be judged by assessee and not by assessing officer. The Tribunal was, therefore, justified in law in allowing the deduction disallowed by assessing officer, being royalty paid by assessee to its holding company,. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0424 (Del-HC) : (2011) 243 CTR 0103 : (2011) 059 DTR 0222

INCOME TAX ACT, 1961

--Business expenditure--Allowability Royalty payment to parent company abroad--Assessee is a 100% subsidiary of Oracle Corporation, USA and was incorporated with the object of developing, designing, improving, producing, marketing, distributing, buying, selling and importing of computer software. Assessee is entitled to sub-licence the software developed by Oracle Corporation, USA to its local clients. Assessee imports master copies of the software from Oracle Corporation, USA. These are then duplicated on blank discs, packed and sold in the market along with the relevant brochures and information by way of a sub-license. Assessee pays a lump sum amount to Oracle Corporation, USA for the import of the master copy and in addition thereto it also pays royalty at 30% of the list price of the licensed products. For the year under consideration, assessee filed its return on 31-12-1999 declaring income at Rs. 12,27,40,360. The said return was processed under section 143(1) on 14-9-2000. The case was selected for scrutiny and notice under section 143(2) was issued. While framing the assessment order, assessing officer disallowed certain expenditure and made certain additions. It is not necessary to deal with other items except the one on which the question of law has arisen. It was further noticed by assessing officer that during the year, assessee had claimed to have paid an amount of Rs. 35,00,88,000 to M/s. Orade Corporation on account of royalty for duplicating and sub-licensing of software to its customers. It may be mentioned here that the assessee-company is 100% subsidiary of M/s. Orcade Corporation, USA. It was explained by the assessee that royalty was being paid at maximum of 30% of the Indian published price of the Oracle Software for sub-licensing. However, assessing officer noted that the total revenue earned by assessee at Delhi unit involved in sub-licensing of software was to the extent of Rs. 98,16,72,000. Considering that the receipts disclosed on account of software sub-licensing on which assessee is paying royalty for sub-licensing is only at Rs. 59,68,78,000, assessee was required to explain as to why provision of section 92 should not be invoked since even if the royalty is paid at 30% of the sale consideration, the amount payable was only to the extent of Rs. 17.90 crores. Being dissatisfied by the explanation furnished by assessee in this regard and for the reasons recorded in the order of assessment the disallowance of Rs. 17,10,24,600 was made by assessing officer under section 92 read with section 37(1) on account of payment of royalty beyond 30% of the sub-licensing fee earned by assessee. The assessment was, however, framed by determining total taxable income at Rs. 38,36,55,851. Feeling aggrieved by the assessment order, assessee preferred the appeal before Commissioner (Appeals), which was allowed partly by Commissioner (Appeals). Insofar as the issue of royalty is concerned, Commissioner (Appeals), however, upheld the disallowance made by the assessing officer on the ground that a significant amount of profit had been siphoned off to M/s. Oracle Corporation, USA by paying royalty by ignoring the saleable price of the product. As regards the applicability of provisions of section 92, Commissioner (Appeals) after examining the facts of the case and also the relevant rules in this regard held that the provisions of section 92 coupled with Rules 10 and 11 were squarely applicable to the case of the assessee. Consequentially, the disallowances of royalty of Rs. 17,10,24,600 was sustained for the specific reasons recorded in the order. The order of Commissioner (Appeals) was not accepted by assessee on this issue and by the revenue on other issues which led to filing appeals by both the parties before the Tribunal. The appeals filed by assessee had been allowed on the aforesaid issue and the appeals of revenue had been dismissed in terms of impugned consolidated order. Held: It is, thus, clear that what is to be seen is that the expenditure was incurred by assessee in the course of business and had nexus with the business of assessee. It could not be disputed that the payment of royalty is a business expenditure, which was expended wholly and exclusively for the purpose of business of assessee. The nature of the expenses is also not such which would fall in any of the exceptions carved out under sections 30 and 36. Once these conditions are satisfied, the expense is to be allowed in toto as business expenditure, and the Revenue cannot sit in the arm's chair of assessee and decide as to how affairs of the business are to be run and wasteful or excessive expenditure is to be curtailed. The question of commercial expediency is to be judged by assessee and not by assessing officer. The Tribunal was, therefore, justified in law in allowing the deduction disallowed by assessing officer, being royalty paid by assessee to its holding company,.