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In the absence of any agreement to the contrary, a foreign collaborator would be justified in demanding and getting royalty on the entire sales no matter the payer of royalty has got the money from his own clients/customers back home for the sales made to them or not.
The Bombay High Court in Commissioner of Income Tax v. CA Computer Associates India Pvt. Ltd rejected the contention of the department that to the extent there were bad debts and non-payment due to poor quality, the sales should be considered non-existent and therefore there was no question of paying royalty.
The High Court said the department was mixing up issues. Bad debts were a separate issue, independent of royalty, unless it was expressly agreed between the parties that royalty would be paid only on the realised sales.
In the absence of such a clause in the agreement, it could not be said that there was over-payment of royalty violating the arm’s length pricing principle.
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