2016 (5) TMI 1519 - AT - Income Tax

Liability towards gratuity and payable to employees - represented an unascertained liability so as to enhance the book profit in terms of provisions of Clause (c ) of Explanation to Section 115JA(1) - HELD THAT - The issue relating to provision for gratuity is restored back to the file of the AO to be adjudicated in the same manner as has been directed, for AY 2002-03. However, the provision for leave encashment is to be considered ascertained liability and, therefore, not required to be added back for computing book profits u/s 115JB.

Summary

Issues Involved:

1. Ad-hoc disallowance of upfront fees.
2. Adjustment of provisions for gratuity and leave encashment while computing book profits under section 115JB.
3. Adjustment made by the Transfer Pricing Officer (TPO) to the value of international transactions.
4. Determination of arm’s length price by the TPO.
5. Denial of the (+/-)5% benefit under proviso to Section 92C(2).

Detailed Analysis:

1. Ad-hoc Disallowance of Upfront Fees:

The assessee did not press ground no. 1 regarding the ad-hoc disallowance of ?1,00,00,000 out of the total upfront fees paid to various merchant establishments amounting to ?1,80,00,000. Accordingly, this ground was dismissed as not pressed.

2. Adjustment of Provisions for Gratuity and Leave Encashment:

The assessee created provisions for gratuity (?34,910,315) and leave encashment (?17,969,702) based on actuarial valuation. These provisions were added back while computing income under normal provisions but not under section 115JB. The AO added back these provisions for computing book profits, considering them unascertained liabilities. The CIT(A) upheld this action following the Tribunal's order for AY 2001-02.

The Tribunal, in its order for AY 2002-03, set aside the issue of provision for gratuity to the AO and considered the provision for leave encashment as an ascertained liability. The Tribunal directed the AO to re-adjudicate the provision for gratuity and accepted the provision for leave encashment as an ascertained liability, not required to be added back for computing book profits under section 115JB. This ground was partly allowed for statistical purposes.

3. Adjustment by TPO to the Value of International Transactions:

The TPO determined the arm’s length price for services provided by the assessee to Pepsico Trading USA at ?5,40,589, which was added to the assessee’s income as it was not shown in Form 3CEB. The CIT(A) upheld this addition.

The Tribunal, in the assessee’s case for AY 2002-03, observed that the loss incurred was due to foreign exchange fluctuation and the transactions were not undertaken for profit. The Tribunal deleted the addition, stating that the international transactions met the arm’s length standard. Respectfully following this decision, the Tribunal deleted the addition for the current year as well. This ground was allowed.

4. Determination of Arm’s Length Price by TPO:

The assessee contested the determination of the arm’s length price by the TPO, arguing that none of the conditions laid down under section 92C(3) were satisfied. The CIT(A) upheld the TPO’s action of denying the (+/-)5% benefit under the proviso to Section 92C(2).

The Tribunal found that the assessee sold commodities to its AE at the same rate as purchased from the local market, and the loss was only due to foreign exchange fluctuation. The Tribunal concluded that the structure of the transaction was such that the assessee could not make any profit or incur any loss. Therefore, the addition made by the AO and sustained by the CIT(A) on account of arm’s length price was not justified. This ground was allowed.

5. Denial of the (+/-)5% Benefit under Proviso to Section 92C(2):

The assessee argued that the CIT(A) erred in denying the (+/-)5% benefit envisaged under the proviso to Section 92C(2). The Tribunal, following its decision for AY 2002-03, deleted the addition made by the AO and sustained by the CIT(A), as the international transactions met the arm’s length standard. This ground was allowed.

Conclusion:

The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal directing the AO to re-adjudicate the provision for gratuity and deleting the additions made on account of arm’s length price and foreign exchange fluctuation. The Tribunal upheld the provision for leave encashment as an ascertained liability and allowed the grounds related to the determination of arm’s length price and denial of the (+/-)5% benefit.