2017 (12) TMI 191 - AT - Income Tax

Disallowance of employee s contribution to ESI after the due date prescribed in the statute u/s 36(1)(va) - Held that - The assessee has remitted the employee s contribution to the Govt. A/c within the prescribed due dates, except for one day delay, with respect to a sum of ₹ 1,24,657. Clause (va) of section 36(1), clearly lays down that the deduction of employees contribution received by the assessee shall be allowed only, if such sum is credited by the assessee to the employee s a/c in the relevant fund or funds on or before the due date, and for the purpose of this clause, due date means, the date by the assessee is required as an employer to credit an employee s contribution to the employee s account in the relevant fund. Therefore, in the strict sense, the sum which has not been credited to the employee s a/c in the relevant fund is to be disallowed. However, we find that the assessee has all along been remitting the amount before the due date except for the delay of one day with regard to the sum of ₹ 1,24,657. As the delay is not inordinate, we are inclined to delete the disallowance and the consequent addition made to the returned income of the assessee. Benefit of credit of tax so paid - Held that - DRP has directed the AO to verify the claim of the assessee with reference to the dividend distribution tax of ₹ 2,08,89,625 paid by the assessee as disclosed in the ROI and to refund the tax of ₹ 4,85,806 claimed by the assessee in accordance with law, but the AO, while giving effect to the order of the DRP, has failed to give the said credit. We, therefore, direct the AO to verify the claim of the assessee and allow the benefit of credit of tax so paid and process the refund accordingly.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for royalty payments.
2. Disallowance of employee’s contribution to ESI under Section 36(1)(va).
3. Credit of dividend distribution tax.
4. Credit of MAT carried forward from previous years.

Issue-wise Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for Royalty Payments:
The assessee, engaged in manufacturing ceramic vitrified tiles and sanitary wares, filed its return for A.Y 2012-13. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining the ALP for international transactions, notably the payment of royalty to its Associated Enterprise (AE). The TPO reduced the ALP of the royalty from 3% to 2% of net sales, questioning the benefit derived and rejecting the Comparable Uncontrolled Price (CUP) method used by the assessee. The Dispute Resolution Panel (DRP) upheld the TPO’s decision. The ITAT, referencing its own decision for A.Y 2010-11 and the jurisdictional High Court’s confirmation, found the TPO's reduction of royalty rate to 2% arbitrary and unsupported by comparables or statutory methods. The ITAT reiterated that the TPO’s approach violated transfer pricing provisions and the benefit test was improperly applied. Consequently, the ITAT set aside the assessment order on this issue, confirming the royalty payment at 3% of net sales as being at Arm’s Length.

2. Disallowance of Employee’s Contribution to ESI under Section 36(1)(va):
The AO disallowed ?1,53,432 of employee’s contribution to ESI, citing delays in payment beyond the due date prescribed under Section 36(1)(va). The assessee argued that except for ?1,24,057, which was delayed by one day, all other payments were timely. The ITAT noted the Supreme Court’s decision in CIT vs. Alom Extrusions Ltd, which supports the allowance of such contributions if paid before the due date under Section 43B. Despite reliance on contrary judgments by the Revenue, the ITAT considered the delay of one day as not inordinate and deleted the disallowance, allowing the ground in favor of the assessee.

3. Credit of Dividend Distribution Tax:
The DRP directed the AO to verify the assessee’s claim regarding the dividend distribution tax of ?2,08,89,625 and refund the tax of ?4,85,806. However, the AO failed to give this credit while implementing the DRP’s order. The ITAT directed the AO to verify the claim and process the refund accordingly, ensuring compliance with the DRP’s directive.

4. Credit of MAT Carried Forward from Previous Years:
The assessee sought credit for Minimum Alternate Tax (MAT) carried forward from previous years. The ITAT directed the AO to verify the claim and allow the MAT credit in accordance with the law.

Conclusion:
The appeal was partly allowed for statistical purposes, with the ITAT providing specific directions to the AO to verify and allow claims related to dividend distribution tax and MAT credit, while upholding the assessee’s position on royalty payments and employee’s contribution to ESI. The ITAT’s order was pronounced in the Open Court on 29th November 2017.