2021 (2) TMI 168 - AT - Income Tax

Upward adjustment to the arm s length price of international transactions - Non giving any finding in respect of the action of TPO in exclusion/inclusion of comparables - HELD THAT - Having accepted TNMM and aggregation of the nature of transactions involving manufacturing segment the only contention remains for our consideration whether contention to consider the exclusion and inclusion of comparables in determining the ALP of the international transactions in manufacturing segment. DR, Shri Shivraj Morey also submitted that neither AO/TPO/CIT(A) could not give any finding in respect of inclusion or exclusion of comparables. Therefore, as observed above, we deem it proper to remand the matter to the file of TPO for determining the ALP of international transactions in manufacturing segment. The assessee is liberty to file evidences, if any, in support of its contentions. The TPO shall afford reasonable opportunity for the assessee and decide the issue of manufacturing segment as indicated above. Thus, ground No. 1 raised by the assessee is allowed for statistical purpose. Addition u/s 43B - Disallowance of provision for management incentive performance reward - CIT(A) held the said bonus is payable to the higher management employees in relation to the services rendered by them and it is covered u/s. 36(1)(ii) of the Act r.w.s. 43B - HELD THAT - Similar issue on same identical facts in assessee s own case this Tribunal for A.Y. 2009-10 by placing reliance on the decision in the case of Shriram Piston and Rings Ltd. 2008 (4) TMI 273 - DELHI HIGH COURT held the payment under the good work reward does not constitute bonus within the meaning of section 36(1)(ii) of the Act and it is allowable as normal business expenditure u/s. 37 - the order of CIT(A) in confirming the disallowance u/s. 43B of the Act made by the AO is required to be deleted. Thus, ground No. 2 raised by the assessee is allowed.

Summary

Issues:
1. Upward adjustment to the arm's length price of international transactions without consideration of comparables.
2. Disallowance of provision for management incentive performance reward.

Issue 1: Upward Adjustment to Arm's Length Price

The appeal was against the Commissioner of Income Tax (Appeals) confirming the upward adjustment to the arm's length price of international transactions without addressing the exclusion/inclusion of comparables by the Transfer Pricing Officer (TPO). The company involved in the case was engaged in manufacturing automobile ancillaries and had undertaken various international transactions. The TPO proposed an upward adjustment to the Transfer Pricing (TP) based on the Operating Profit/Operating Cost ratio. The CIT(A) upheld the TPO's view, leading to the appeal. The contention raised was that no findings were given regarding the rejection or acceptance of comparables by the authorities. The Tribunal remanded the matter to the TPO to determine the arm's length price of international transactions in the manufacturing segment, allowing the assessee to provide additional evidence if necessary.

Issue 2: Disallowance of Management Incentive Performance Reward

The second ground of appeal was against the disallowance of a provision for management incentive performance reward. The Assessing Officer (AO) disallowed the claimed amount under Section 43B of the Act, stating that the performance evaluation period should cover the entire year. The CIT(A) upheld the disallowance, considering it as a bonus covered under Section 36(1)(ii) of the Act. However, the Tribunal referred to a similar case for the assessment year 2009-10 where it was held that such payments do not constitute bonus but are normal business expenditures under Section 37 of the Act. Relying on this precedent, the Tribunal allowed the assessee's appeal against the disallowance under Section 43B of the Act.

In conclusion, the Tribunal allowed the appeal of the assessee, remanding the issue of determining the arm's length price of international transactions in the manufacturing segment and overturning the disallowance of the management incentive performance reward provision based on established legal precedents.