2011 (3) TMI 974 - AT - Income Tax

Addition - Arms Length Price - There is no verifiable basis for determining the profit factor at 10 per cent of the cost as embodied in the agreement entered by the assessee and its associate concern - It is the case of the assessee that the real impact of the services rendered by the assessee would be known only after considering the value additions/contributions made by assessee s holding company. But it is to be seen that the assessee has not furnished any details of such value addition contributed by its holding company. Therefore, an effective evaluation of the market price of the final product and the share of the contribution of the assessee in that market price cannot be computed for want of details, for which the assessee alone is responsible. Therefore, the addition is called for and it is justified - Therefore, as a fair measure of price difference, we modify the Arms Length Price adjustment factor to 20 per cent of the operating cost in place of 20.68 per cent of the operating cost adopted by the lower authorities - With this nominal modification, the issue of Transfer Pricing is disposed of.

Summary

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

Analysis:

Issue 1: Arms Length Price addition in foreign transactions with related parties
The appeal concerns the Arms Length Price addition of Rs.46,35,034 made by the assessing authority based on the Transfer Pricing Officer's order regarding income from foreign transactions with related parties. The assessee argued that the services provided were basic and did not necessitate an addition to the arms length price. The Transfer Pricing Officer's comparison of companies was deemed incorrect due to differences in nature of work and software developed. The TPO calculated the ALP at Rs.5,95,33,962, resulting in a shortfall adjustment of Rs.46,35,034. The tribunal found no verifiable basis for the 10% profit factor agreed upon by the assessee and its associate. The tribunal noted the lack of details on value additions by the holding company, making it impossible to evaluate the market price of the final product. Consequently, the tribunal upheld the addition as justified, modifying the ALP adjustment to 20% of the operating cost.

Issue 2: Disallowance of claim under section 10A
The second issue pertains to the disallowance of the assessee's claim of Rs.1,52,58,201 under section 10A. The assessee cited previous favorable decisions by ITAT in similar cases for assessment years 2004-05 and 2005-06. Relying on precedent, the tribunal ruled in favor of the assessee, deleting the disallowance and directing the assessing authority to provide consequential benefits. As a result, the appeal was partly allowed.

In conclusion, the tribunal addressed the issues of Arms Length Price addition and disallowance of claim under section 10A, ruling in favor of the assessee in the latter and partly allowing the appeal.