Tribunal orders Transfer Pricing Officer to reconsider methods, remands warranty expenses, allows PF & ESI deductions.

The Tribunal directed the Transfer Pricing Officer to reconsider the determination of the Arm's Length Price using either the Comparable Uncontrolled Price or Resale Price Method, criticizing the adoption of Transactional Net Margin Method. It remanded the disallowed provision for warranty expenses back to the Assessing Officer for further examination based on historical data. The Tribunal also instructed the Assessing Officer to allow deductions for employees' contributions to PF & ESI made before the due date for filing the return, in accordance with legal amendments.

---

---

Issues Involved:
1. Determination of the most appropriate method for benchmarking international transactions.
2. Disallowance of provision for warranty expenses.
3. Disallowance of employees' contribution to PF & ESI.

Issue-wise Detailed Analysis:

1. Determination of the Most Appropriate Method for Benchmarking International Transactions:

The primary issue pertains to the selection of the most appropriate method for determining the Arm's Length Price (ALP) for international transactions between the assessee and its Associated Enterprises (AEs). The assessee initially adopted the Comparable Uncontrolled Price (CUP) method but later suggested the Resale Price Method (RPM) as an alternative. The Transfer Pricing Officer (TPO) rejected both methods and adopted the Transactional Net Margin Method (TNMM) with Berry Ratio as the Profit Level Indicator (PLI).

The Tribunal analyzed the reasons for the TPO's rejection of the CUP method and found that the TPO had summarily dismissed it without providing substantial reasons. The Tribunal noted that the assessee had compared its transactions with third-party importers using data obtained from Chennai Customs authorities, which should have been considered. The Tribunal also discussed the applicability of the RPM, stating that it is suitable for traders/distributors like the assessee, whose primary business is trading in UPS and accessories. The TPO's rejection of RPM was deemed unsubstantiated.

Regarding the TNMM with Berry Ratio, the Tribunal highlighted that this method is appropriate where operating expenses are the main determinant of profitability, which was not the case here, as the major expense was the purchase of UPS from AEs. The Tribunal concluded that the TPO erred in adopting TNMM with Berry Ratio and directed the TPO to reconsider the case, applying either CUP or RPM.

2. Disallowance of Provision for Warranty Expenses:

The assessee claimed a provision for warranty expenses based on historical trends and past experience, referencing the Supreme Court's decision in M/s. Rotork Controls India (P) Ltd. vs. CIT. The Assessing Officer disallowed the provision, arguing that the assessee did not provide a basis for the computation.

The Tribunal acknowledged the Supreme Court's ruling, which allows provisions for warranty if based on a scientific method and historical data. The Tribunal found conflicting claims between the assessee and the Assessing Officer regarding the basis for the provision. Therefore, the Tribunal remanded the issue back to the Assessing Officer for further examination in light of the Supreme Court's decision, directing the Assessing Officer to verify the basis and allow the provision if justified.

3. Disallowance of Employees' Contribution to PF & ESI:

The issue involved the disallowance of employees' contributions to PF & ESI under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act. The Tribunal referred to the decision in M/s. Adyar Ananda Bhavan Sweets India Ltd., which held that the amendment to Section 36(1)(va) by the Finance Act, 2021, is prospective and applicable from the assessment year 2020-21 onwards. Consequently, contributions paid after the due date under respective Acts but before the due date for filing the return of income under Section 139(1) should be allowed as a deduction.

The Tribunal directed the Assessing Officer to verify the remittance dates and delete the disallowance if the contributions were made before the due date for filing the return.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, directing the TPO and Assessing Officer to reconsider the issues based on the detailed discussions and applicable legal precedents. The order was pronounced on 7th September 2022.

---