ITAT decision: Arm's Length Price for royalty, ESI contribution, dividend tax refund, MAT credit

The ITAT set aside the assessment order on the determination of Arm's Length Price for royalty payments, confirming the royalty payment at 3% of net sales as being at Arm's Length. It allowed the employee's contribution to ESI, considering the delay of one day as not inordinate. The ITAT directed the AO to verify and process the refund of dividend distribution tax as directed by the DRP and allowed the MAT credit carried forward from previous years. The appeal was partly allowed, with specific directions given to the AO.

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Issues Involved:
1. Determination of Arm’s Length Price (ALP) for royalty payments.
2. Disallowance of employee’s contribution to ESI under Section 36(1)(va).
3. Credit of dividend distribution tax.
4. Credit of MAT carried forward from previous years.

Issue-wise Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for Royalty Payments:
The assessee, engaged in manufacturing ceramic vitrified tiles and sanitary wares, filed its return for A.Y 2012-13. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining the ALP for international transactions, notably the payment of royalty to its Associated Enterprise (AE). The TPO reduced the ALP of the royalty from 3% to 2% of net sales, questioning the benefit derived and rejecting the Comparable Uncontrolled Price (CUP) method used by the assessee. The Dispute Resolution Panel (DRP) upheld the TPO’s decision. The ITAT, referencing its own decision for A.Y 2010-11 and the jurisdictional High Court’s confirmation, found the TPO's reduction of royalty rate to 2% arbitrary and unsupported by comparables or statutory methods. The ITAT reiterated that the TPO’s approach violated transfer pricing provisions and the benefit test was improperly applied. Consequently, the ITAT set aside the assessment order on this issue, confirming the royalty payment at 3% of net sales as being at Arm’s Length.

2. Disallowance of Employee’s Contribution to ESI under Section 36(1)(va):
The AO disallowed Rs. 1,53,432 of employee’s contribution to ESI, citing delays in payment beyond the due date prescribed under Section 36(1)(va). The assessee argued that except for Rs. 1,24,057, which was delayed by one day, all other payments were timely. The ITAT noted the Supreme Court’s decision in CIT vs. Alom Extrusions Ltd, which supports the allowance of such contributions if paid before the due date under Section 43B. Despite reliance on contrary judgments by the Revenue, the ITAT considered the delay of one day as not inordinate and deleted the disallowance, allowing the ground in favor of the assessee.

3. Credit of Dividend Distribution Tax:
The DRP directed the AO to verify the assessee’s claim regarding the dividend distribution tax of Rs. 2,08,89,625 and refund the tax of Rs. 4,85,806. However, the AO failed to give this credit while implementing the DRP’s order. The ITAT directed the AO to verify the claim and process the refund accordingly, ensuring compliance with the DRP’s directive.

4. Credit of MAT Carried Forward from Previous Years:
The assessee sought credit for Minimum Alternate Tax (MAT) carried forward from previous years. The ITAT directed the AO to verify the claim and allow the MAT credit in accordance with the law.

Conclusion:
The appeal was partly allowed for statistical purposes, with the ITAT providing specific directions to the AO to verify and allow claims related to dividend distribution tax and MAT credit, while upholding the assessee’s position on royalty payments and employee’s contribution to ESI. The ITAT’s order was pronounced in the Open Court on 29th November 2017.

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