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2017 (3) TMI 86 - AT - Income TaxTransfer pricing adjustment - ALP determination - contract termination fee inclusion - Held that:- assessee has entered into a contract for rendering software development services to its group companies and one of the group company has terminated the contract and has paid the contract termination fee as per the agreement. The nature of the said contract termination fee is, in our opinion, operating revenue. On execution of a contract, the assessee is receiving the consideration on a cost plus margin basis. The contract termination fee is also being paid on similar lines but proportionately. It is only that the contract is being terminated prematurely. Had the contract been executed completely, the assessee would have received the full consideration at cost plus method for the entire period of the contract and it would form part of operating income. The contract termination fee is in effect compensating the assessee for the expenses incurred by it for executing the contract partially. Therefore, we are of the opinion that the contract termination fee also partakes the character of the contract receipt and is to be treated as operating revenue of the international transactions more particularly since the expenses incurred by the assessee on such contract has been taken as operating cost. In view of the same, we direct the AO/TPO to consider the contract termination fee also as a part of the operational income for computing the ALP of the international transactions.
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