Provident fund disallowance upheld under section 43B, transfer pricing adjustment remanded for fresh evaluation

ITAT Ahmedabad decided against the assessee on provident fund disallowance under section 43B, following SC precedent in Checkmate Services case. For section 35D disallowance, matter was remanded to CIT(A) for proper adjudication as alternative plea wasn't considered. Regarding transfer pricing adjustment, ITAT found TPO and CIT(A) failed to properly evaluate assessee's manufacturing activities and export nature (98% export unit). TPO incorrectly rejected CUP method despite accepting it for similar transactions in previous years. Matter remanded to TPO for fresh adjudication considering appropriate method and risk factors. Appeal partly allowed for statistical purposes.

---

---

Issues involved:
The issues involved in this judgment include disallowance u/s. 35D, disallowance of employees' contribution to provident fund u/s. 43B, addition made by TPO u/s. 92CA(3), rejection of CUP method for benchmarking purchase transaction, rejection of CPM for benchmarking sale transaction, adoption of TNMM as MAM for transactions, and deduction u/s. 10B after adjustments.

Disallowance u/s. 35D:
The assessee appealed against the disallowance u/s. 35D of Rs. 59,38,487. The contention was that out of total expenses of Rs. 2,96,92,435, Rs. 16,55,644 is eligible u/s. 35D(2) and should have been allowed as capitalization for the balance amount of Rs. 2,14,14,000. The CIT(A) did not consider the alternative plea of the assessee and the issue was remanded back for proper adjudication.

Disallowance u/s. 43B:
The CIT(A) confirmed the disallowance of employees' contribution to provident fund of Rs. 14,448 u/s. 43B. The assessee contested this, but the ground was dismissed.

Addition u/s. 92CA(3) by TPO:
The TPO made an upward adjustment of Rs. 2,42,26,184 under u/s. 92CA(3), which was affirmed by the CIT(A). The assessee argued that the rejection of CUP method for benchmarking purchase transactions was unjustified as the TPO had accepted CUP as the most appropriate method in preceding years. The issue was remanded back for proper adjudication.

Rejection of CPM and Adoption of TNMM:
The CIT(A) upheld the rejection of CPM for benchmarking sale transactions and adoption of TNMM as MAM for transactions. The assessee contended that the TPO should have accepted CPM based on consistency and that TNMM should be applied at the entity level. The matter was partly allowed for statistical purposes.

Deduction u/s. 10B:
The lower authorities were urged to allow deduction u/s. 10B after adjustments, as per CBDT Circular No.37 of 2016. The issue was addressed in the appeal for future consideration.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with various issues being remanded back for proper adjudication and consideration of alternative pleas. The judgment highlighted discrepancies in the application of transfer pricing methods and the need for consistency in decision-making.

---