Transfer Pricing: Arms’ length royalty allowable even in respect of unpaid sales

CIT vs. CA Computer Associates India Pvt. Ltd (Bombay High Court)

The assessee entered into a Software Distribution Agreement with CA Management Inc (“CAMI”) pursuant to which it was appointed as a distributor of CAMI’s products in India. The assessee was required to pay an annual royalty of 30% on sales. The TPO accepted that the rate of royalty was at arms’ length price but held that royalty ought not to have been paid on sales where there was complaints on quality or which had turned into bad debts. The CIT (A) upheld the TPO’s stand though the Tribunal reversed it. On appeal by the department to the High Court, HELD dismissing the appeal: