INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Computation of ALP - Adjustment of functional differences -

Assessee was engaged in manufacturing of drugs. It carried out certain international transactions with its Associated Enterprises. TPO while benchmarking the said international transaction, rejected the adjustment made pertaining to functional differences claimed by the assessee on the ground that there was no mention in the agreement that product license and lab test expenses were to be borne by the associated enterprise and reduction in profitability of associated enterprise would not be relevant for determining ALP. CIT(A), however, noted that these adjustments were found to be part of contract between the assessee and associated enterprise and thus. allowed the adjustment claimed. Held: It was noted that these adjustments were found to be part of contract between assessee and associated enterprise. It was found that product license maintenance cost and lab analysis were borne by associate enterprise which in case of sales to non-associated enterprise was borne by the assessee. The assessee's function in case of sales to associated enterprise was restricted to manufacturing only. The assessee performs the function of contract manufacturer. The product licenses were held by the associated enterprise who was also responsible for maintenance of the product licenses. The manufacturing was done in strict adherence to Product License and the labeling on products was of assessee's associated enterprise. The same was evident from technical agreement between the assessee and associated enterprise. In case of non-associated enterprise sales, these expenses were to be borne by the assessee, which fact remains undisputeds. Therefore, the adjustment of this component had rightly been allowed by CIT(A).

REFERRED :

FAVOUR : ????

A.Y. : 2010-11 & 2011-12

INCOME TAX ACT, 1961

Section 92C

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