2022 (3) TMI 346 - AT - Income Tax

Tribunal directs Resale Price Method, excludes bonus in book profits under Income Tax Act

The Tribunal partly allowed the appeal, directing the AO/TPO to adopt the Resale Price Method as the Most Appropriate Method for determining the Arm's ... TP Adjustment - selection of MAM - TPO has rejected RPM for the reason that the details and information necessary for computing margins of comparable companies was not available - HELD THAT:- The absence of details and information can be no ground to reject RPM as the MAM, as the TPO has powers to call for the necessary details from the comparable companies to ascertain the Gross Profit margin that has to be compared under RPM. Accordingly, we are of the view that RPM is the most appropriate method in the facts and circumstances of the case. Accordingly, we direct the AO/TPO to adopt Resale Price Method as most appropriate method and determine the ALP of the transactions accordingly. We are of the view that the facts and circumstances, we set aside the order of the CIT(A) and direct the AO/TPO to adopt RPM as the MAM and determine the ALP of the transactions accordingly after affording assessee opportunity of being heard. Adding back the provision for bonus by treating the same as unascertained liability, while computing the 'book profits' under section 115JB - HELD THAT:- We are of the view that the provision for bonus as well as provision for long term service are both ascertained liability and cannot be added to book profit under section 115JB of the Act. We hold and direct accordingly. Issues Involved:1. Correctness of the determination of Arm's Length Price (ALP) in respect of an international transaction of material handling equipment distribution service.2. Addition of provision for bonus and long service award while computing 'book profits' under section 115JB of the Income Tax Act.Issue-wise Detailed Analysis:1. Determination of Arm's Length Price (ALP):The first issue pertains to the correctness of the orders of the Revenue authorities regarding the determination of ALP for the distribution service of material handling equipment provided by the assessee to its Associate Enterprise (AE). The assessee applied the Resale Price Method (RPM) and computed its margin at 15.39% and the comparables' margin at 18%. However, the Transfer Pricing Officer (TPO) rejected RPM, citing the lack of public domain information on comparables' functionality, and instead applied the Transaction Net Margin Method (TNMM), resulting in an upward adjustment of Rs. 225,70,105/-.The Tribunal considered the submissions and noted that the assessee performs sales, marketing, and distribution functions without any value addition to the imported equipment. The Tribunal referenced previous decisions, including those in the cases of Element 14 India Pvt. Ltd. and Acer India Pvt. Ltd., where RPM was held as the Most Appropriate Method (MAM) for distributors not adding value to products. The Tribunal concluded that RPM is the MAM for determining ALP in the present case and directed the AO/TPO to adopt RPM and determine the ALP accordingly.2. Addition of Provision for Bonus and Long Service Award under Section 115JB:The second issue involves the addition of provision for bonus and long service award while computing 'book profits' under section 115JB of the Income Tax Act. The assessee contended that these provisions are ascertained liabilities and should not be added back. The AO treated these provisions as unascertained liabilities and added them back while computing book profits, which was upheld by the CIT(A).The Tribunal examined the nature of these provisions. For the provision for bonus, it was determined that it is created based on the Payment of Bonus Act, 1965, and is thus an ascertained liability. Judicial pronouncements, such as those in the cases of Stanley Black & Decker India Limited and L & T Valdel Engineering P Ltd, supported this view. Similarly, the provision for long service award, computed based on actuarial valuation, was also considered an ascertained liability. The Tribunal referenced several judicial decisions, including those in the cases of Eicher Motors Ltd and Pragati Glass Works P Ltd, to support this conclusion.The Tribunal held that both provisions are ascertained liabilities and should not be added to book profits under section 115JB. The appeal was partly allowed, with the Tribunal directing the AO/TPO to exclude these provisions from the computation of book profits.Conclusion:The appeal by the assessee was partly allowed. The Tribunal directed the AO/TPO to adopt the Resale Price Method as the MAM for determining the ALP of the international transactions and to exclude the provisions for bonus and long service award from the computation of book profits under section 115JB of the Act.