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The assessee was a wholly-owned subsidiary of Oracle Corporation, US which was a leading supplier for information management software products. It had been set up in India for distributing Oracle licensed products and for providing contract software development to its associated enterprise (AE).
In regard to functions relating to sales and distribution, the assessee had entered into a software duplication and distribution license agreement (Distribution agreement) with Oracle USA under which the assessee had been granted a non-exclusive, non-assignable right to duplicate and sub-license Oracle products in India.
For this purpose, the assessee imported master copies of software from Oracle USA, and the same were duplicated in India and sub-licensed to third parties and users (‘customers’) directly or through local sub-distributors or partners.
In lieu of duplication and distribution rights granted by Oracle USA under the Distribution Agreement, the assessee paid royalty to Oracle USA subject to 56 percent of a license, updates, and product support revenue realized by the assessee from sub-licensing of Oracle products in India.
The Transfer Pricing Officer (TPO) observed that the department had been considering 30 percent on actual sales as the proper royalty payout and, therefore, 56 percent of actual sales paid by the assessee was very high which had no linkage with the functions performed by the assessee and therefore, restricted the payment of royalty at the rate of 30 percent of actual sales and held that there was excess payment in respect of royalty.
The decision of the Tribunal
The Appellate Tribunal while dismissing the Revenue’s appeal held that the new Exchange Control Policy had removed the limits of the royalty payment for duplication and sub-licensing activity.
Once the liberalized policy did away with the requirement of computing the royalty payable with reference to the list price, the assessee moved from royalty payment as the percentage of list price to actual license and support review.
The main object was to determine the royalty payment having regard to market forces. Thus, the assessee had clearly pointed out the reason for shifting the basis from list price to actual sales which were not found to be wrong in any manner.
Further, the assessee had clearly demonstrated that the effective rate of royalty being incurred by the assessee in prior years, as compared to the current year, was more.
It was further held that once the assessee clearly demonstrates that the effective royalty payout was less than earlier years then there was no reason to make any adjustment in the royalty payout.
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