Transfer pricing adjustments and employee contributions disallowed in tax appeal; remand for fresh examination

The case involved transfer pricing adjustments on royalty payments and disallowance of employee contributions towards Provident Fund and ESIC. The Tribunal remanded the transfer pricing issue back to the tax authorities for a fresh examination, emphasizing the need for an independent transfer pricing study despite FIPB approval. The disallowance of employee contributions was deleted as the payments were made within the financial year. The appeal was partly allowed, with the transfer pricing issue requiring further review and the disallowance of employee contributions being overturned.

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Issues Involved:
1. Transfer Pricing Adjustment on account of payment of Royalty.
2. Disallowance of employee contribution towards Provident Fund and ESIC.

Detailed Analysis:

1. Transfer Pricing Adjustment on account of payment of Royalty:
The primary contention revolves around the determination of the arm’s length price (ALP) for royalty payments made by the assessee to its Associated Enterprise (AE). The assessee had paid royalty at the rate of 3% on net sales to its AE, which was benchmarked using the Comparable Uncontrolled Price (CUP) method, supported by an approval from the Foreign Investment Promotion Board (FIPB). The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) rejected this approach, determining the ALP as nil due to the absence of comparable royalty agreements, leading to the disallowance of Rs. 1,91,03,040/-.

The Tribunal noted that in the previous assessment year (2011-12), the Tribunal had ruled in favor of the assessee, relying on the Bombay High Court’s decision in SGS India Private Limited, which accepted FIPB approval as a valid CUP for benchmarking purposes. However, the Tribunal also acknowledged the Press Note No. 8 (2009 series) issued by the Ministry of Commerce & Industry, which liberalized the policy on royalty payments, placing them under the automatic route without requiring specific government approval. This change necessitated a fresh transfer pricing study to determine the ALP independently, as automatic route approvals do not ipso-facto establish the ALP under transfer pricing regulations.

The Tribunal emphasized that while FIPB/RBI approvals carry persuasive value, they cannot conclusively determine ALP without a proper transfer pricing analysis. Consequently, the Tribunal remanded the matter back to the AO/TPO for a fresh examination, allowing the assessee to present additional evidence and carry out a new transfer pricing study to justify the royalty payments.

2. Disallowance of employee contribution towards Provident Fund and ESIC:
The AO disallowed the employee’s contribution towards Provident Fund and ESIC amounting to Rs. 12,03,002/- on the grounds of delayed payment. The assessee argued that the payments were made within the financial year and before the due date of filing the return, thus should be allowed as per the Supreme Court’s decision in CIT vs. Alom Extrusions Ltd.

The Tribunal referred to its previous decision in the assessee’s case for AY 2011-12, where it was held that contributions made before the due date of filing the return should be allowed, in line with the Supreme Court’s ruling. Since the AO acknowledged that the payments were made within the financial year, the Tribunal found the disallowance unsustainable and deleted it.

Conclusion:
The appeal was partly allowed. The issue of transfer pricing adjustment was remanded back to the AO/TPO for a fresh determination of ALP, while the disallowance of employee contributions towards Provident Fund and ESIC was deleted.

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