2011 (3) TMI 565 - AT - Income Tax

Arms Length Price - The argument of the assessee that the services rendered by the assessee are only basic services to its holding company and therefore the prices declared by the assessee are to be treated as reasonable - Held that - the price declared by the assessee for its international transactions cannot be accepted as Arms Length Price for the reason that the assessee has not placed before us any cost model and market potential of the products so as to accept or reject the bench mark profit of 10 per cent. - Transfer Pricing Officer has worked out the operating profit at 20.68 per cent of the operating cost. We feel that a nominal modification is called for in this rate of operating profit accepting certain valid contentions of the learned representative regarding the competence level of its employees; the remuneration payable to them and the effect of the safe environment in which the assessee was functioning.

Summary

Issues:
1. Arms Length Price addition in foreign transactions with related parties.
2. Disallowance of claim under section 10A.

Issue 1: Arms Length Price addition in foreign transactions with related parties
The appeal was filed against the assessment order of the DCIT, Circle-11(1), Bangalore, for the assessment year 2006-07, based on the directions of the Disputes Resolution Panel (DRP) and the order of the Transfer Pricing Officer under section 92CA of the Income-tax Act, 1961. The primary contention raised by the assessee was against the Arms Length Price addition of Rs. 46,35,034 made by the assessing authority. The assessee argued that the Transfer Pricing Officer did not appreciate the services rendered by the company and that the comparison made by the TPO with non-comparable companies was incorrect due to differences in work nature and software development. The TPO calculated the ALP at Rs. 5,95,33,962, resulting in a shortfall adjustment of Rs. 46,35,034. The Tribunal found that the assessee failed to provide verifiable basis for the profit factor at 10%, and the argument that the services were basic and required value addition from the holding company was unsupported by evidence. Consequently, the Tribunal upheld the addition as justified, modifying the operating profit rate to 20% from 20.68% determined by the TPO.

Issue 2: Disallowance of claim under section 10A
The second issue raised by the assessee pertained to the disallowance of the claim under section 10A amounting to Rs. 1,52,58,201. The assessee relied on previous ITAT decisions in their favor for assessment years 2004-05 and 2005-06. The Tribunal noted the precedent set by earlier decisions and ruled in favor of the assessee, directing the assessing authority to provide consequential benefits. As a result, the appeal was partly allowed, overturning the disallowance under section 10A.