TP – Integral tests for a Cost Contribution Arrangement to be considered at ALP

Dresser Rand India Pvt. Ltd. Vs ACIT (ITAT Mumbai)– The integral tests for a Cost Contribution Arrangement to be considered at arm’s length are: that the services were availed, the costs have been allocated in a reasonable and an impartial manner and there is documentation to demonstrate the receipt of services. It is the prerogative of the assessee to decide how he conducts the business and not for the tax authorities to question such commercial decisions. Exclusive method of accounting does not impact the profit and loss account thereby the adjustment under section 145A on account of un utilized CENVAT credit to the closing stock is unwarranted.

ITA No. 8753/Mum/2010

Assessment year: 2006- 07

Date of hearing   :               June 14, 2011

Date of pronouncement :  September 7, 2011

O R D E R

Per Pramod Kumar 

1. By way of this appeal, the assessee appellant has challenged correctness of order dated 28^th October 2010, passed by the Assessing Officer under section 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961, for the assessment year 2 006-07.

2. Ground Nos. 2 and 3, which are main issues requiring our adjudication in this appeal, are as follows:

Ground No.2-additions under section 92CA(3) of the Act in respect of payments to Parent Company: Dresser Rand, US aggregating to Rs. 10,59,70,009 (Rs.10,55,00,000 towards cost contributions and  Rs. 4,70,009 towards field supervision).

2.1 On the facts and in the circumstances of the case and in law, the Transfer Pricing Officer 9TOP) and the AO erred, and the DRP further erred in confirming the additions on cost contribution (Rs.10,55,00,000) and field supervision charges (Rs.4,70,009) under section 92CA(3) of the Act by disregarding the documentation maintained under section 92D of the Act read with Rule 10D of the Income tax Rules, 1962(the rules) and not appreciating the factual details, submissions and various documentary evidences demonstrating benefits to the appellant under the cost contribution agreement.

2.2 The appellant submits that the TOP, the AO and the DRP failed to appreciate the computation of arm’s length price in accordance with the Transactional Net Margin Method prescribed under section 92C(1) of the Act read with Rule 10B(1)(e) of the Rules.