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2022 (1) TMI 413 - AT - Income TaxTP Adjustment - MAM Selection - RPM OR TNMM - adoption of the Most Appropriate Method (MAM) for determination of Arm's Length Price (ALP) in respect of an international transaction of sale of reagents by the Assessee to its Associated Enterprise (AE) - TPO concluded that the Assessee is not a mere distributor and rejected the usage of RPM which the Assessee had considered as the Most Appropriate Method (MAM) and instead chose Transactional Net Margin Method (TNMM) as the MAM - HELD THAT - It is undisputed before us that identical issue had come up for consideration before the ITAT Mumbai Bench in Assessee's own case in AY 2010-11 2019 (6) TMI 601 - ITAT MUMBAI held that RPM was the MAM and directed the TPO to determine ALP applying RPM as the MAM. Following the aforesaid decision of the tribunal we hold that RPM is the MAM for determining ALP and the AO/TPO is directed to compute the ALP as directed by the Tribunal after affording Assessee opportunity of being heard. Addition u/s.43B towards Bonus and Leave encashment as amount was not paid within the due date of filing the return - assessee argued amount reversed in the subsequent periods and which are already considered in the income of AY 2016-17 upon such reversal - HELD THAT - Since as per the provisions of Sec. 43B(f) of the Act, provision on account of bonus or leave encashment is not allowable as deduction except on the basis of actual payment irrespective of the method of accounting followed by an Assessee, the disallowance u/s. 43B of the Act for AY 2015-16 is proper. However, since the same amount was offered to tax in AY 2016-17 and taxed in that year, there would be double addition and therefore the proper course would be to direct that the income offered in subsequent year 2016-17 and taxed to that extent should not be taxed. The AO will give necessary consequential relief to the Assessee. Appeal by the Assessee is partly allowed for statistical purpose.
Issues Involved
1. Adoption of the Most Appropriate Method (MAM) for determination of Arm's Length Price (ALP) in respect of an international transaction. 2. Addition under Section 43B of the Income Tax Act towards Bonus and Leave encashment. Issue-Wise Detailed Analysis 1. Adoption of the Most Appropriate Method (MAM) for determination of Arm's Length Price (ALP) Background: The Assessee, an Indian subsidiary of Randox Laboratories Ltd., UK, engaged in the business of selling reagents and analyzers, contested the method used for determining the ALP of transactions with its Associated Enterprise (AE). The Assessee preferred the Resale Price Method (RPM), while the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) adopted the Transaction Net Margin Method (TNMM). Assessee's Argument: The Assessee argued that it merely resells the reagents and analyzers imported from its AE without any value addition. It also highlighted that the placement of analyzers at customers' premises under the 'Reagent Rental Contract (RRC)' was a strategy to boost reagent sales, and not a manufacturing activity. The Assessee emphasized that the gross margin of 31.16% was consistent with that of a distributor and that the additional activities were part of its marketing strategy. TPO and DRP's Standpoint: The TPO rejected RPM, asserting that the Assessee engaged in activities beyond mere distribution, as evidenced by the significant depreciation costs and the placement of analyzers. The DRP upheld this view, stating that the Assessee's business model was unique and not that of a simple distributor. Tribunal's Analysis: The Tribunal referred to previous decisions in the Assessee's own case for AY 2010-11 and AY 2011-12 where RPM was accepted as the MAM. The Tribunal reiterated that the Assessee's activities did not constitute manufacturing but were limited to trading and marketing, making RPM the appropriate method. The Tribunal directed the TPO to determine the ALP using RPM, consistent with past rulings. Conclusion: The Tribunal held that RPM is the MAM for determining the ALP for the Assessee's international transactions, rejecting the TPO's and DRP's reliance on TNMM. 2. Addition under Section 43B of the Income Tax Act towards Bonus and Leave encashment Background: The AO added ?519,776 under Section 43B for unpaid Bonus and Leave encashment, which was confirmed by the DRP. The Assessee contended that the excess provision was reversed and considered as income in the subsequent year, thus leading to double taxation. Assessee's Argument: The Assessee argued that the provision for Bonus and Leave encashment was reversed in the subsequent year and already included in the income for AY 2016-17, hence should not be added again for AY 2015-16 to avoid double taxation. Tribunal's Analysis: The Tribunal acknowledged that under Section 43B, provision for bonus or leave encashment is deductible only on actual payment. However, since the amount was offered to tax in the subsequent year, the Tribunal directed the AO to provide necessary relief to avoid double taxation. Conclusion: The Tribunal upheld the disallowance under Section 43B for AY 2015-16 but directed the AO to ensure that the income offered in AY 2016-17 is not taxed again, thus providing relief to the Assessee. Final Judgment The appeal by the Assessee was partly allowed for statistical purposes, with directions to adopt RPM as the MAM for ALP determination and to provide relief to avoid double taxation under Section 43B.
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