2024 (5) TMI 494 - AT - Income Tax

Disallowance of employees contribution to provident fund u/s. 43B - HELD THAT - Issue decided against assessee in the light of decision of Hon ble Apex Court in the case of Checkmate Services (P.) Ltd 2022 (10) TMI 617 - SUPREME COURT Disallowance u/s. 35D - AR submitted that the CIT(A) has not at all considered the alternative plea of the assessee while deciding the issue/ground and in fact has given his dismissal for which the Ld. AR requested that the matter may be remanded back to the file of the CIT(A) for proper adjudication of the issues - HELD THAT - It is pertinent to note that in fact while deciding this issue the CIT(A) has not given any independent finding and in fact has not considered or adjudicated the assessee s alternative plea. Therefore it is appropriate to remand back this entire issue to the file of the CIT(A) for proper adjudication of the same in consonance with the assessee s plea before the CIT(A) and the issue be decided as per the Income Tax Statute. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. Ground no.1 is partly allowed for statistical purpose. TP Adjustment - Selection of MAM - CIT(A) affirming TPO s action of rejecting most appropriate method (MAM) adopted by the assessee - AR submitted that the rejection of CUP method for benchmarking purchase transaction was not justified on the part of the TPO as the TPO himself has accepted CUP as most appropriate method for the same set of transactions carried with the Associated Enterprise (AE) in preceding years - HELD THAT - CIT(A) has totally failed to take into account profit margins as well as how the comparables which were selected by the TPO are not as per the filters given by the TPO himself. The product is manufactured by the assessee as per the specification and quality needed by the AE for which necessary technical assistance for setting up commissioning and running of plants and training of the Indian Technicians was provided by the AE. All the functions of manufacturing are performed by the assessee according to the needs of the AE and in case the AE is unable to purchase the product the AE will be liable to pay the entire amount equivalent to interest and instalment to the Bankers of the assessee. The risk factor was upon the AE and therefore the assessee while calculating the gross profit margin of the comparable has taken into consideration only the cost incurred in manufacturing process. All these aspects including that of adjustments and other comparables in respect of actual rate of cost along with capacity utilisation adjustment were much below to that of assessee s units. The TPO has not looked into these aspects along with the appropriate method taking into consideration the assessee s manufacturing activities and its sale transactions. The assessee is 100% export unit (98%). Thus the TPO as well as the CIT(A) both the Authorities have failed to take cognisance of the same and was not right in rejecting the contentions of the assessee. Therefore the TPO is directed to look into the same. Matter is remanded back to the file of the TPO for proper adjudication. Appeal of the assessee is partly allowed for statistical purpose.

Summary

Issues involved:
The issues involved in this judgment include disallowance u/s. 35D, disallowance of employees' contribution to provident fund u/s. 43B, addition made by TPO u/s. 92CA(3), rejection of CUP method for benchmarking purchase transaction, rejection of CPM for benchmarking sale transaction, adoption of TNMM as MAM for transactions, and deduction u/s. 10B after adjustments.

Disallowance u/s. 35D:
The assessee appealed against the disallowance u/s. 35D of Rs. 59,38,487. The contention was that out of total expenses of Rs. 2,96,92,435, Rs. 16,55,644 is eligible u/s. 35D(2) and should have been allowed as capitalization for the balance amount of Rs. 2,14,14,000. The CIT(A) did not consider the alternative plea of the assessee and the issue was remanded back for proper adjudication.

Disallowance u/s. 43B:
The CIT(A) confirmed the disallowance of employees' contribution to provident fund of Rs. 14,448 u/s. 43B. The assessee contested this, but the ground was dismissed.

Addition u/s. 92CA(3) by TPO:
The TPO made an upward adjustment of Rs. 2,42,26,184 under u/s. 92CA(3), which was affirmed by the CIT(A). The assessee argued that the rejection of CUP method for benchmarking purchase transactions was unjustified as the TPO had accepted CUP as the most appropriate method in preceding years. The issue was remanded back for proper adjudication.

Rejection of CPM and Adoption of TNMM:
The CIT(A) upheld the rejection of CPM for benchmarking sale transactions and adoption of TNMM as MAM for transactions. The assessee contended that the TPO should have accepted CPM based on consistency and that TNMM should be applied at the entity level. The matter was partly allowed for statistical purposes.

Deduction u/s. 10B:
The lower authorities were urged to allow deduction u/s. 10B after adjustments, as per CBDT Circular No.37 of 2016. The issue was addressed in the appeal for future consideration.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with various issues being remanded back for proper adjudication and consideration of alternative pleas. The judgment highlighted discrepancies in the application of transfer pricing methods and the need for consistency in decision-making.