INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Reimbursement of testing charges to AE as regards goods exported to third party - TPO alleging no business expediency behind such payment

Assesse engaged in manufacturing and sale of fractional Horse Power electric motors, made payment on account of reimbursement of expenses related to testing/ firewall charges on a cost-to-cost basis. Assessee exported Motors and these motors were tested by third party in destination of export. Testing was done by third party.Third party was paid by AE and assessee reimbursed that payment to its AE. According to TPO once sale had been affected the responsibility rested with buyer and there was no case for bearing this charge by seller i.e. assessee. Therefore, ALP of such charges should be Nil. Assessee explained that when finished goods were shipped to its AEs from Indian ports there was time lag before products reached to destination port. At times, motors captured moisture during transit period, which could adversely impact its performance. Therefore, on request of assessee, AEs engaged a third party for testing of motors to ensure desired quality standards of US Market. TPO rejected contentions of assessee and concluded that such payments were not at arm's length. Held: It was under jurisdiction of AO as to whether particular expenditure was incurred wholly and exclusively for the purpose of business and not in the domain of TPO to hold that in view of warranty etc., assessee was not required to incur expenditure on firewall charges. Assessee's contention was plausible that motors were required to be checked for content of moisture acquired in transport from India to USA, i.e., the destination point and it was responsibility of assessee to provide defect free motors to end customers. Accordingly, TP adjustment could not be sustained.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2010-11

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