2013 (10) TMI 555 - AT - Income Tax

Disallowance of contribution to superannuation fund - Employer s contribution to PF and ESIC u/s 43B - Some payment were within grace period and some were made before due date - CIT allowed payment made which were within grace period however upheld disallowance of other payments - Held that - it is not in dispute that all the payments which have been referred to by the Assessing Officer relate to employer s and employees contribution to PF & ECIS, and employees superannuation funds which have been paid before the due date of filing of the return of income - the payments toward employer s and employees contribution to PF & ECIS, made after the grace period but prior to filing of the return of income, constitute admissible deduction within the ambit of section 43B - Following decision of CIT v/s Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT - Decided in favour of assessee. Disallowance of depreciation - Depreciation on plant and machinery, moulds, etc. - Held that - The assessee is a going concern and any plant and machinery which are used for other than manufacturing activities, the same has to be allowed - Depreciation cannot be denied on plant and machinery which were used for other than manufacturing purpose - Therefore, matter is restored back - Decided in favour of assessee. Adjustment of Arm s Length Price - Import of finished goods from the Associate Enterprise - Held that - The assessee had initially adopted TNMM as most appropriate method for bench marking its ALP and for this purpose it has chosen six comparables which has been accepted by the TPO. The assessee s operating margin in relation to the transactions of import of finished goods from the A.E. and resale in the domestic market was at 51.22% and the majority of the operating cost was on account of administrative and advertisement costs. In the transfer pricing report, the assessee had submitted that if the adjustment on account of advertisement is made on the average operating profit margin of the six comparables, the operating margin will come down to 17.41%. What should be the most appropriate method of determining arm s length price - Held that - According to the provisions of sections 92C r/w 10B, the ALP in relation to an international transactions has to be determined by following any of the most appropriate method viz. (i) Comparable Uncontrolled Price method (CUP); (ii) Resale Price Method (RPM); (iii) Cost Plus Method (CPM); (iv) Profits Split Method (PSM) and (v) Transactional Net Margin Method (TNMM). In CUP method, the focus is directly on the price of the product sold or transferred requiring both functional and product comparability. The RPM and CPM operate at gross profit margin level requiring functional rather than product comparability. The PSM and TNMM operate on operating profit margin level used for a complex and integrated enterprise. These methods are based on price or profit. The centre point of these methods is comparability analysis with the comparables and the method which provides most reliable way of arriving at the ALP, is considered as most appropriate method. A comparability analysis is done for the comparison of controlled transaction(s) with an uncontrolled transaction(s) and controlled and uncontrolled transactions are comparable if none of the differences between the transactions can materially affect the factor being examined by adopting any of the methodologies as mentioned in section 92C or if any reasonable accurate adjustment can be made to eliminate the material affects of any such difference - ssessee is a distributor of Mattel toys and gets the finished goods from its A.E. and resells the same to independent parties without any value addition. In such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP. If assessee itself has chosen TNMM as most appropriate method in TPR, then can it resort to change its method at an assessment or appellate stage - Held that - if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it is not precluded from raising the contentions / objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case - Decided in favour of assessee. Disallowance of professional fees - CIT deleted addition - Held that - the bills pertaining to the professional services rendered was received in this year and after the receipt of such bill, the payment has been made. In case of professional fees, it is very difficult to project as to what would be the fee that would be charged by the professional for the services rendered. It is when the bill is received, the liability get crystallised for making the payment. As regards the Assessing Officer s observation that one of the directors of the assessee company is a partner in the professional firm, the Assessing Officer has not examine as to what could have been the proper fees having regard to the value of services rendered. In the absence of such a finding, this observation and finding of the Assessing Officer is not tenable. In fact, he has proceeded to disallow the entire payment of fees instead of any excess payment.. Moreover, the Commissioner (Appeals) has recorded a categorical findings that out of ₹ 18,66,369, professional expenses of ₹ 6,24,949, was rendered in the current assessment year only - Decided in favour of assessee. In case of toys, which has been purchased from the A.E. cannot be sold in the domestic market due to negative market trend, therefore, in order to recover the cost, these unsold products are sold at a best available price either by way of exporting back to the A.E. or by exporting to the third party. It has also been stated that the assessee has suffered a greater loss while making sale in the case of a third party in comparison to the sale made to the A.E. Hence, there was an internal comparable available to judge the ALP. Since this internal comparability has not been examined by the TPO and the learned Commissioner (Appeals) has given a finding without examining the segmental details of transactions with the A.E. and third party and the internal comparability, therefore, under these circumstances, this margin of export sale to the third party i.e., internal comparable should be compared to the export sale made to the A.E. - In such a situation, the applicability of internal CUP can also be applied to evaluate the ALP in this segment - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 43B for contributions to superannuation fund, PF, and ESIC.
2. Disallowance of depreciation on plant and machinery.
3. Upward adjustment of Arm's Length Price (ALP) for import of finished goods from Associate Enterprise (A.E.) and sale in the domestic market.
4. Deduction of professional fees.
5. ALP adjustment for import of finished goods from A.E. and export to other A.E.

Detailed Analysis:

1. Disallowance under Section 43B for Contributions to Superannuation Fund, PF, and ESIC:
The assessee challenged the disallowance of Rs. 25,12,877 for superannuation fund and Rs. 5,52,581 for PF and ESIC contributions under Section 43B. The Assessing Officer (A.O.) noted that some payments were made after the due date, leading to a total disallowance of Rs. 38,56,526. The Commissioner (Appeals) upheld the disallowance for payments made beyond the due date but within the grace period. However, the Tribunal, referencing the Supreme Court's judgment in Alom Extrusions Ltd., allowed the deductions for payments made before the return filing date, thus treating the ground as allowed.

2. Disallowance of Depreciation on Plant and Machinery:
The A.O. disallowed depreciation of Rs. 24,58,028 on plant and machinery not used during the relevant year. The Commissioner (Appeals) upheld this disallowance. The Tribunal noted that the manufacturing activities ceased, and the machinery was not used or intended for future use. However, it agreed with the alternative plea that depreciation should be allowed on machinery used for non-manufacturing purposes. The issue was remanded to the A.O. for verification, treating the ground as partly allowed for statistical purposes.

3. Upward Adjustment of ALP for Import of Finished Goods from A.E. and Sale in Domestic Market:
The assessee, a subsidiary of Mattel Inc., challenged the TPO's adjustment of Rs. 3,35,07,547 to the ALP. The TPO used TNMM, but the assessee argued for RPM due to high administrative costs. The Commissioner (Appeals) upheld the TPO's method. The Tribunal, however, found RPM more appropriate for the distribution activities and remanded the issue to the TPO for fresh comparables and adjudication, treating the ground as partly allowed for statistical purposes.

4. Deduction of Professional Fees:
The A.O. disallowed Rs. 18,66,369 paid to a firm where a director was a partner, arguing services were rendered in the previous year. The Commissioner (Appeals) allowed the deduction, noting the liability crystallized upon receiving the invoice in the current year. The Tribunal upheld this decision, dismissing the Revenue's ground.

5. ALP Adjustment for Import of Finished Goods from A.E. and Export to Other A.E.:
The TPO made an adjustment of Rs. 2,02,42,317 for transactions with A.E. The Commissioner (Appeals) deleted this adjustment, noting it was a return of obsolete stock. The Tribunal remanded the issue to the TPO to verify internal comparability between sales to A.E. and third parties, treating the ground as partly allowed for statistical purposes.

Conclusion:
The Tribunal allowed the assessee's appeal partly, remanding certain issues for further verification and adjudication, while dismissing the Revenue's appeal on professional fees and remanding the ALP adjustment issue for further analysis.