2021 (2) TMI 456 - AT - Income Tax

TP Adjustment - Most Appropriate Method (MAM) of determining Arm's Length Price (ALP) in respect of international transaction of import of finished goods for trading purposes by the Assessee from its Associate Enterprise - assessee adopted Resale Price Method (RPM) as the Most Appropriate Method (MAM) for determining ALP - DRP excluded certain comparables selected by the TPO under the TNMM method against which the Revenue has filed appeal before the Tribunal - whether RPM should have been adopted as MAM? - HELD THAT - We are of the view that the approach of the Revenue authorities in rejecting the RPM as the MAM and the reasons given by them for doing so cannot be sustained. It would be appropriate to set aside the order of DRP on the issue of ALP and remand the question of determination of ALP to the TPO/AO for consideration afresh adopting RPM as the MAM. As pointed in the decision cited by learned DR in the case of Kohler India Corporation Pvt. Ltd. 2016 (3) TMI 826 - ITAT BANGALORE , the assessee is directed to furnish all the required information necessary for determination of ALP in the set aside proceedings. In view of the decision and the MAM, we are of the view that the grounds raised by the Revenue in its appeal viz., grounds 1 to 4 on the exclusion of comparable companies by the DRP under the TNMM does not require any adjudication. Addition made u/s. 40A(7) - assessee company had incorporated certain changes for which no approval from the CIT was acquired and the contribution to fund is only a provision not an actual expense under the purview of section 37(1) - HELD THAT - Gratuity fund had been approved by the CIT vide approval dated 12.02.1993. The assessee was previously known as Krone Communications Ltd. Since the name of the assessee at the time of assessment had been changed to M/s. ADC India Communications Ltd., the AO took the view that the approval on which the assessee sought to place reliance was not valid and accordingly he disallowed the claim for deduction of the aforesaid sum by relying on the provisions of section 40A(7) of the Act. On objections by the assessee, the DRP deleted the addition made by the AO by following the decision of the IT AT, Hyderabad Bench in the case of Capital IQ Information Systems (India) Pvt. Ltd., Vs. ACIT 2014 (9) TMI 125 - ITAT HYDERABAD wherein it was held that even if the payment is made to an unapproved gratuity fund, the same has to be allowed as a deduction under section 37(1). We are also of the view that the approval in the erstwhile name of the assessee will hold good and the action of the AO in this regard cannot be sustained. Accordingly, ground No. 5 raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Determination of the Most Appropriate Method (MAM) for Arm's Length Price (ALP) in international transactions.
2. Deduction under section 40A(7) for contributions to a recognized gratuity fund.

Detailed Analysis:

1. Determination of the Most Appropriate Method (MAM) for Arm's Length Price (ALP) in international transactions:

The primary issue in the appeal by the Assessee is the determination of the Most Appropriate Method (MAM) for Arm's Length Price (ALP) concerning the import of finished goods for trading purposes from its Associate Enterprise (AE). The Assessee adopted the Resale Price Method (RPM) as the MAM, justifying it based on Rule 10B(1)(B) of the Income Tax Rules, 1962, and OECD Guidelines. The Assessee argued that RPM is suitable for a distributor of tangible products who adds little or no value to the products before resale. The Transfer Pricing Officer (TPO), however, rejected RPM, citing the use of multiple-year data by the Assessee and the incurrence of high expenses below the gross profit level, which resulted in losses at the net margin level. The TPO proposed the Transactional Net Margin Method (TNMM) as the MAM, identifying 14 comparable companies with an average arithmetic mean profit margin of 6.79% and determining an ALP adjustment of ?5,53,87,902.

The Assessee contested this, arguing that RPM should be the MAM as it operates as a routine trader of telecommunication equipment, adding no substantial value to the products. The Dispute Resolution Panel (DRP) upheld the TPO's decision, stating that the Assessee incurred significant expenses below the gross profit level, which a routine trader would not, and thus, TNMM was more appropriate.

The Tribunal, however, considered various judicial precedents, including the cases of Mattel Toys (I) Pvt. Ltd. and Nokia India Pvt. Ltd., which supported the use of RPM for distributors who do not add substantial value to the products. The Tribunal concluded that the rejection of RPM by the Revenue authorities was not justified and remanded the issue of ALP determination to the TPO/AO for fresh consideration, adopting RPM as the MAM. The Assessee was directed to furnish all necessary information for this purpose.

2. Deduction under section 40A(7) for contributions to a recognized gratuity fund:

The second issue pertains to the disallowance of a deduction under section 40A(7) for contributions to a recognized gratuity fund. The Assessee contributed ?13,23,232 to a recognized gratuity fund, which had been approved by the CIT. However, the AO disallowed the deduction, arguing that the approval was in the Assessee's erstwhile name, Krone Communications Ltd., and not in its current name, ADC India Communications Ltd.

The DRP deleted the addition, relying on the decision of the ITAT, Hyderabad Bench, in the case of Capital IQ Information Systems (India) Pvt. Ltd., which held that payments to an unapproved gratuity fund should still be allowed as a deduction under section 37(1) of the Act. The Tribunal upheld the DRP's decision, stating that the approval in the erstwhile name of the Assessee holds good and the AO's action was not sustainable.

Conclusion:

The appeal by the Revenue was dismissed, and the appeal by the Assessee was partly allowed for statistical purposes. The Tribunal directed the TPO/AO to reconsider the determination of ALP using RPM as the MAM and upheld the deletion of the addition under section 40A(7) for contributions to the recognized gratuity fund.