2022 (12) TMI 378 - AT - Income Tax

Tribunal Allows Assessee's Appeal on Transfer Pricing Method & Deductions

The Tribunal partly allowed the assessee's appeal, directing acceptance of Internal TNMM as the Most Appropriate Method for international transactions ... TP Adjustment - rejecting the Internal Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) - only reason for rejection of Internal TNMM by the ld. DRP is non-availability of date-wise analysis of comparison of AE transactions vis a vis non-AE transactions - main objections raised by the assessee before the ld. DRP was that Internal TNMM should be the most appropriate method in the instant case which was rejected by the ld. TPO - HELD THAT:- The date wise analysis for comparison of AE and non-AE transactions would be relevant only when CUP is adopted as MAM. They are certainly not relevant when TNMM is adopted as MAM. Moreover, with regard to the FAR analysis between AE and non-AE, we find that there is absolutely no difference with Functions performed or Assets employed. With regard to the Risks assumed, the ld. DRP itself admits that in respect of transactions with AE, the assessee is having very minimal and low risk. The turnover with non-AE is much greater than turnover with AE which is evident from the workings available - Hence, the entire FAR is also duly complied with by the assessee in the instant case. Even with lower risk that AE segment as accepted by the ld DRP is having, as evident from the segmental workings available we find that assessee had made higher margins with AE as compared to non-AE transactions. Hence, certainly, the assessee’s international transaction with AE using Internal TNMM as the MAM is at arm’s length, which has to be accepted in the instant case. We hold accordingly. Hence, the ground Nos. 2-6 raised by the assessee are allowed. Inclusion of five comparables chosen by the assessee by adopting external TNMM as the Most Appropriate Method -External TNMM method adopted by the ld. TPO - As going by the broad functional comparability we hold that even the five comparable companies which were rejected by the ld. DRP ought to be included in the final list of comparables. By this process, effectively all the 12 comparables chosen by the assessee, on without prejudice basis, for applying External TNMM gets approved. Hence, there is no scope for making any adjustment to arm’s length price even if External TNMM is adopted in the instant case. Accordingly, the ld. TPO is hereby directed to delete the entire transfer pricing adjustment made in the instant case. Hence, the ground No. 7 & 8 raised by the assessee are also allowed. Deduction in respect of employee’s contribution to provident fund and ESI - Contribution remitted beyond the due dates but before the due date of filing of the income tax returns u/s.139(1) - HELD THAT:- This issue is no longer res integra in view of the decision of CIT vs. Ghatge Patil Transport Ltd.[2014 (10) TMI 402 - BOMBAY HIGH COURT] wherein the employee’s contribution to PF even if remitted before the due date of filing of return becomes an allowable deduction u/s.43B of the Act. Respectfully following the same, the ground No.9 raised by the assessee is allowed. Levy of interest u/s.234A - HELD THAT:- As the return of income has been filed on 28/11/2015 which is well before the due date prescribed u/s.139(1) in respect of transfer pricing cases. Hence, there is no delay at all. Accordingly, there cannot be any chargeability of interest u/s.234A. MAT credit u/s.115JAA - AO is hereby directed to grant MAT credit u/s.115JAA of the Act in accordance with law. Issues Involved:1. Rejection of Internal Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM).2. Inclusion of five comparables chosen by the assessee using External TNMM.3. Allowability of deduction for employee's contribution to provident fund and ESI.4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.5. Levy of interest under section 234A of the Income Tax Act.6. Chargeability of interest under section 234B of the Income Tax Act.7. Granting of MAT credit under section 115JAA of the Income Tax Act.8. Granting of consequential refund and interest under section 244A of the Income Tax Act.Detailed Analysis:1. Rejection of Internal Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM):The assessee challenged the rejection of Internal TNMM by the lower authorities. The assessee had benchmarked its international transactions using Internal TNMM, showing a higher profit margin in transactions with Associated Enterprises (AEs) compared to non-AEs. The Transfer Pricing Officer (TPO) rejected this method, preferring External TNMM and selecting only three of the twelve comparables provided by the assessee. The Dispute Resolution Panel (DRP) upheld the rejection of Internal TNMM, citing non-compliance with date-wise analysis. However, the Tribunal found that date-wise analysis is relevant only under Comparable Uncontrolled Price (CUP) method, not TNMM. The Tribunal concluded that the Internal TNMM should be accepted as the MAM since the assessee's international transactions with AEs were at arm's length.2. Inclusion of Five Comparables Chosen by the Assessee Using External TNMM:The DRP accepted seven out of twelve comparables chosen by the assessee, rejecting five due to lack of segmental break-up between flexible and normal packaging. The Tribunal held that under TNMM, broad functional comparability suffices, and regular packaging industry is broadly comparable to flexible packaging industry. Citing precedents, the Tribunal included all twelve comparables chosen by the assessee, directing the TPO to delete the entire transfer pricing adjustment.3. Allowability of Deduction for Employee's Contribution to Provident Fund and ESI:The assessee contested the disallowance of employee's contribution to provident fund and ESI, which was remitted beyond the due dates under respective acts but before the due date of filing income tax returns. The Tribunal referenced the Jurisdictional High Court's decision in CIT vs. Ghatge Patil Transport Ltd., allowing such contributions if remitted before the filing due date. Thus, the deduction was allowed.4. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The assessee challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal deemed this issue premature for adjudication at this stage and dismissed it.5. Levy of Interest under Section 234A of the Income Tax Act:The assessee contested the levy of interest under section 234A, arguing that the return was filed before the due date. The Tribunal found that the return was indeed filed timely and ruled that no interest under section 234A was chargeable.6. Chargeability of Interest under Section 234B of the Income Tax Act:The issue of chargeability of interest under section 234B was deemed consequential in nature by the Tribunal.7. Granting of MAT Credit under Section 115JAA of the Income Tax Act:The assessee challenged the non-granting of MAT credit under section 115JAA. The Tribunal directed the Assessing Officer to verify and grant MAT credit in accordance with the law.8. Granting of Consequential Refund and Interest under Section 244A of the Income Tax Act:The assessee contested the non-granting of consequential refund and interest under section 244A. The Tribunal directed factual verification and determination of the actual refund, ensuring interest under section 244A is granted till the date of refund.Conclusion:The appeal of the assessee was partly allowed, with the Tribunal providing specific directions on each issue, ensuring compliance with legal standards and precedents. The order was pronounced on 23/06/2022.