Transfer pricing adjustments deleted; PF/ESI payments before return due date allowed under sections 36(1)(va) and 43B

The ITAT upheld the CIT(A)'s deletion of TP adjustments where the TPO had determined the arm's length price of management and licence/royalty fees at nil. It accepted aggregation of these transactions under TNMM and found no infirmity in the CIT(A)'s reliance on the TPO's report confirming the margins. On the disallowance under sections 36(1)(va)/43B for delayed remittance of employees' PF/ESI contributions, the ITAT held that contributions paid before the due date of filing the return are allowable as deduction. As the assessee had remitted the employees' contribution before the return due date, the disallowance was deleted. The revenue's appeal was dismissed in entirety.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether transfer pricing adjustments in respect of payments of licence fee and management fee to associated enterprises could be sustained where the assessee had benchmarked all international transactions under the Transactional Net Margin Method (TNMM) on an aggregated basis and the margins at entity level exceeded those of comparables.

1.2 Whether disallowance under section 43B read with section 36(1)(va) was warranted in respect of delayed deposit of employees' contribution to provident fund/ESI where such contribution was deposited before the due date for filing the return of income under section 139(1).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Transfer pricing adjustment on licence fee and management fee

Legal framework (as discussed)

2.1 The Tribunal referred to earlier orders in the assessee's own case wherein it was held that: (a) The Transfer Pricing Officer (TPO) must determine arm's length price (ALP) by adopting one of the prescribed methods under the Act and Rules. (b) To adopt the Comparable Uncontrolled Price (CUP) method and determine ALP at "Nil", the TPO must demonstrate existence of comparable uncontrolled transactions where similar services are available at Nil consideration. (c) Closely linked international transactions are to be analysed on an aggregated basis. (d) TNMM, applied at entity level by aggregating closely linked transactions, is an acceptable method where properly substantiated.

Interpretation and reasoning

2.2 The Tribunal noted that in earlier assessment years the TPO had benchmarked licence fee and management fee separately and determined ALP at Nil, which approach had been rejected. The coordinate bench had held, inter alia, that: (i) Aggregation of transactions relating to licence fee, royalty and management fee with manufacturing activity is permissible where the transactions are closely linked to the main business; (ii) The TPO could not determine the ALP of licence fee or management fee at Nil without bringing on record any comparable uncontrolled instance of similar parties or joint ventures manufacturing identical products without charging such fees; (iii) Transfer pricing adjustment must be made only under one of the prescribed methods, and determination of ALP at Nil without adopting such a method is not permissible; (iv) Revenue authorities cannot decide commercial necessity of services; the requirement of services must be viewed from the standpoint of the taxpayer as a businessman; (v) The assessee had furnished documentary evidence of services for management fee and technical know-how for licence fee; the TPO's allegations of duplication or non-rendering of services were not supported by concrete evidence.

2.3 In the earlier years, the Tribunal had remanded the matter to the Commissioner (Appeals) for the limited purpose of examining, on remand report from the TPO, the correctness of the assessee's TNMM-based benchmarking by aggregating the international transactions at entity level.

2.4 In pursuance of such directions in prior years, the Commissioner (Appeals), after calling for remand reports, recorded that: (a) The assessee's operating margins at entity level, after aggregating licence fee, royalty and management fee, were significantly higher than margins of comparable companies (e.g., 25.49% and 19.42% against comparables' 9.05% and 8.57%, respectively, in earlier financial years); (b) The TPO, in remand report for a prior year, had accepted that the taxpayer's margin of 29.70% was higher than the comparables' margin of 18.05%, thereby implying no requirement for adjustment.

2.5 For the years under consideration, the Commissioner (Appeals) adopted the same approach, called for fresh remand reports from the TPO and found that: (a) The TPO reported that the taxpayer's margins at entity level were higher than the margins of comparable companies under TNMM; (b) Consequently, no transfer pricing adjustment was suggested by the TPO in remand proceedings.

2.6 The Tribunal observed that the Commissioner (Appeals) deleted the transfer pricing additions by: (i) Following binding coordinate bench decisions in the assessee's own case for earlier years; (ii) Accepting aggregation of transactions of licence fee and management fee with manufacturing activities under TNMM; (iii) Relying on the TPO's remand reports which confirmed that the assessee's margins exceeded those of comparables at entity level.

Conclusions

2.7 The Tribunal held that: (a) On the facts and following its own earlier decisions, the payments of licence fee and management fee had to be considered in an aggregated manner with other closely linked international transactions under TNMM at entity level; (b) As the assessee's margins were higher than those of the comparable companies, no transfer pricing adjustment was warranted; (c) The Commissioner (Appeals) had correctly deleted the adjustments after obtaining and relying upon the TPO's remand reports; no infirmity was found in the orders of the Commissioner (Appeals) for either year.

Issue 2: Disallowance under section 43B / section 36(1)(va) - delayed remittance of employees' contribution to PF/ESI

Legal framework (as discussed)

2.8 The Commissioner (Appeals) relied on the law as laid down by the jurisdictional High Court, inter alia, in: (a) Essae Teraoka (P) Ltd. v. DCIT, holding that section 43B grants an extension to the employer to make payment of contribution to provident fund or other funds up to the due date for filing the return of income under section 139(1), and that this provision operates notwithstanding anything contained in other provisions of the Act; (b) The principle that the consequences under PF/ESI enactments for late deposit are distinct from the allowability of deduction under the Income-tax Act.

Interpretation and reasoning

2.9 The Commissioner (Appeals) recorded that: (a) The assessee remitted employees' contribution to provident fund amounting to the disputed sum after the due date prescribed under the relevant PF/ESI laws but before the due date for furnishing the return of income under section 139(1); (b) In light of the binding jurisdictional High Court decision in Essae Teraoka and other precedents, such payment, if made before the due date for filing the return, is allowable and does not attract disallowance under section 36(1)(va) or section 43B.

2.10 The Tribunal noted that the Commissioner (Appeals) had followed the binding decision of the jurisdictional High Court and treated the contribution as allowable since it had been remitted prior to the due date for filing the return.

Conclusions

2.11 The Tribunal upheld the deletion of disallowance in respect of delayed remittance of employees' PF/ESI contribution, holding that: (a) Payment made before the due date for filing the return of income under section 139(1) is deductible, in line with the binding High Court decision; (b) There was no ground to interfere with the order of the Commissioner (Appeals) on this issue.

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