TMI Blog2022 (1) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... dition u/s.43B towards Bonus and Leave encashment as amount was not paid within the due date of filing the return - assessee argued amount reversed in the subsequent periods and which are already considered in the income of AY 2016-17 upon such reversal - HELD THAT:- Since as per the provisions of Sec. 43B(f) of the Act, provision on account of bonus or leave encashment is not allowable as deduction except on the basis of actual payment irrespective of the method of accounting followed by an Assessee, the disallowance u/s. 43B of the Act for AY 2015-16 is proper. However, since the same amount was offered to tax in AY 2016-17 and taxed in that year, there would be double addition and therefore the proper course would be to direct that the income offered in subsequent year 2016-17 and taxed to that extent should not be taxed. The AO will give necessary consequential relief to the Assessee. Appeal by the Assessee is partly allowed for statistical purpose. - IT(TP)A No. 2576/Bang/2019 - - - Dated:- 4-1-2022 - N.V. Vasudevan, Vice President and B.R. Baskaran, Member (A) For the Appellant : S. Krishna Upadhyaya, CA For the Respondents : Sumeer Singh Meena, CIT (DR-OSD) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id transaction of purchase of reagents, as per provisions of Sec. 92CA of the Act. The main dispute between the Assessee and the Revenue is with regard to which is the most appropriate method (MAM) for determination of ALP, whether it is Transaction Net Margin Method (TNMM) as contended by the revenue or the Resale Price Method (RPM) as contended by the Assessee. 6. It was the plea of the Assessee that it purchases reagents, analyzers and spares from its Associated Enterprises (AEs) and sells them as it is in India. No further addition to these products are done once they are imported into India. From 2013, Assessee also started purchasing the reagents in bulk and packing them in smaller quantities for sale in India for certain non-standard quantities, which are purely based on customer requests in India. However, it does not carry out any manufacturing activity but for the purpose of excise duty, the activity of packing reagents in smaller quantities is considered as deemed manufacture. It does not carry out any further activities on the reagents that are purchased form its AEs and sells the same as it is in smaller quantities. 7. In order to facilitate the sale of its reage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reagents. For those customers who are interested in buying the machines, Assessee sells the same to them as well. 10. With regard to the accounting treatment, the Assessee pointed out that when Assessee places an analyzer in the place of its customer, the cost of such analyzer is capitalized in the books of the Assessee and depreciation is claimed on such analysers which is a business expenditure and charged to the Profit Loss account. This has been categorized under Plant Machinery in the Fixed Assets schedule in the audited financial statements. Majority of the assets in Plant and Machinery are the analyzers itself. If a company has to carry out its activities, it will require various fixed assets to aid its core business activities. In the case of a trading company like Assessee, assets that aid the sale of its products are its key assets. 11. It was contended that merely because a certain mode of selling/distribution has been adopted by the Assessee does not in any way mean that they don't remain a reseller of the product. The product remains the same with no value addition. It is only that the selling mode adopted has been made conducive to ensure that the sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning that has been provided for such a presumption nor any factual modification that has been done by the DRP in arriving at such conclusion. It has been the contention of the Assessee that the conclusions arrived by the TPO as confirmed by the DRP are only based on surmise and needs to be reversed. It is also the plea of the Assessee that the DRP failed to follow the rulings of Hon'ble Mumbai ITAT in the case of the Assessee in IT(TP)A No. 507/Mum/2015 and IT(TP)A No. 1568/Mum/2015 relating to AY 2010-11 and in IT(TP)A No. 433/Bang/2016 and IT(TP)A No. 800/Bang/2016 relating to AY 2011-12 wherein the business activity of the Assessee were the same. It has also been contended that the DRP erroneously gave a finding that the facts of the Assessee are different for AY 2010-11 and 2011-12 as against the facts for the relevant year being AY 2015-16. It has also been contended that the DRP has failed to understand the nature of manufacturing activity carried out by the Assessee. It was reiterated that from 2013, Assessee had started purchasing the reagents in bulk and packing them in smaller quantities for sale in India for certain non-standard quantities, which are purely based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sake of practical difficulties arising in the case of combined transactions, they should be analysed on the basis of pre-dominant nature. 18. The learned DR relied on the order of the DRP. 19. We have considered the rival submissions. As already stated, it is undisputed before us that identical issue had come up for consideration before the ITAT Mumbai Bench in Assessee's own case in AY 2010-11 in IT(TP)A No. 507/Mum/2015 and the Tribunal by its order dated 7.6.2019 held that RPM was the MAM and directed the TPO to determine ALP applying RPM as the MAM. The said decision has been followed by the ITAT Bangalore A Bench in Assessee's own case in IT(TP)A No. 433/Bang/2016 order dated 17.7.2019 for AY 2011-12. 20. The following were the relevant observations of the Tribunal on this issue in its order for AY 2010-11:- 7. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The core issue arising for consideration is, whether the international transaction relating to purchase of reagents, spares, consumables from the AE is a simple trading activity, hence, can be benchmarked under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marily on the following reasoning:- i) In the year under consideration, the assessee has made additions to the plant and machinery to the tune of ₹ 2.18 crore; ii) It has capitalized cost of product development to the tune of 1.07 crore; and iii) The notes to the fixed asset schedule shows that the company is setting up of a manufacturing unit. 9. On the aforesaid reasoning, the Transfer Pricing Officer has concluded that the assessee is not merely a trader but is also engaged in manufacturing and research activity. Learned DRP has simply endorsed the aforesaid view of the Transfer Pricing Officer without discussing much on the issue. However, while doing so, learned DRP has observed that in the transfer pricing analysis, the assessee has applied TNMM. Further, learned DRP while rejecting the contention of the assessee for adopting segmental results of the assessee and comparables, has observed that since the segmental accounting of the assessee is unaudited, it cannot be accepted. 10. Be that as it may, it is necessary to examine whether the finding of the Transfer Pricing Officer that the assessee is also involved in manufacturing activity is factua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veal that the assessee had purchased reagents and chemicals from its AE and sold to the third party customers without any value addition. Further, the analyzers, spares and consumables, though, were imported, however, they were not sold but were provided in the laboratories/diagnostics units of the third party customers for testing and research activity. Keeping in perspective the aforesaid factual position, it has to be examined which is the appropriate method to benchmark the arm's length price of the transaction. On going through the provisions of rule 10B and more particularly sub-rule-1(b) of the aforesaid rule, it is evident that RPM is applicable to a case where the price at which property purchased or service obtained by a enterprise from the AE is resold or provided to an unrelated enterprise. The gross profit margin of such a transaction is thereafter compared to the gross profit margin of similar comparable uncontrolled transactions after making necessary adjustment with regard to the expenditure incurred, functional and other differences, the arm's length price is determined. Thus, in the facts of the present case, since the assessee has resold the goods importe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the most appropriate method to bench mark the international transaction between the assessee and the A.Es. 11. At this stage, it would be appropriate to refer to certain provisions in the statue relating to transfer pricing adjustment. Section 92C of the Act, provides for computation of arm's length price of an international transaction between the assessee and its A.E. by following one of the methods prescribed therein. Rule 10C, defines most appropriate method to be one which is best suited to the facts and circumstances of each particular transaction and which provides the most reliable measure of arm's length price in relation to the international transaction. Sub-rule (2) of rule 10C, specifies the factors to be considered for selecting most appropriate method. Rule 10B provides the mode and manner of determination of arm's length price under different methods. As per rule 10B(1)(b), determination of arm's length price under RPM is applicable to a case where the price at which property purchased or service obtained by the enterprise from the A.E. is resold or is provided to an unrelated enterprise. The gross profit margin in respect of such a transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the TP is to examine whether the price or the margin raising from an international transaction with the related party is at ALP or not. The determination of approximate ALP is the key factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the Ld. DR and also the observations of the AO and the Ld. CIT(A) that the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom its AEs and sells to unrelated parties without any further processing. (iii) In the case of Danisco (India) Pvt. Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no. 5291/Del/2010), it is held as follows: 22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Danisco India is engaged in the business of manufacturing and trading of food additives. The manufacturing business in respect of food flavours and the trading business is for products for falling under the category of food ingredients. The main grievances of the assessee against the order of the Ld. TPO upheld by the Ld. DRP are regarding their approach in the manner in which transfer pricing adjustment has been made, the approach adopted by the Ld. TPO in granting 17 comparable companies denying the economic adjustment claim made by the assessee, regarding computation of margins of the assessee, non consideration of supplementary transaction and denial of adequate opportunity of being heard to the assessee by the authorities below as well as their failure to examine the contentions and arguments of the assessee in this regard. Considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method when a resale takes place without any value addition to a product. In the present case, the assessee buys products from the AE and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) would be squarely applicable to the facts of the assessee's case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO's order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing analysis of the assessee, a copy of which is placed in paper book, it is revealed that the assessee has selected RPM as the most appropriate method and has also explained why TNMM is not applicable to the subject transaction. In view of the aforesaid, we hold that RPM is the most appropriate method to benchmark the subject international taxation relating to purchase of reagents analyzers, etc. Since, neither the Transfer Pricing Officer nor learned DRP has pointed out any other defect in the transfer pricing analysis of the assessee except that the assessee is involved in manufacturing activity, we are of the view that the benchmarking done by the assessee under RPM has to be accepted. More so, when the Transfer Pricing Officer has accepted the comparables selected by the assessee. That being the case, only thing which requires verification is the gross margin of the assessee with that of the comparables. We direct the Assessing Officer/Transfer Pricing Officer to examine this aspect and decide the issue accordingly after due opportunity of being heard to the assessee. With the aforesaid observations, grounds are allowed. Since, we have allowed assessee's claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culars Provision as at 31st March 2015 Paid before 139(1) due date Reversed and considered as income in subsequent year before 139(1) due date Bonus 40,216 38,211 2,005 Leave encashment 517,771 - 517,771 Total 5,57,987 38,211 5,19,776 26. The learned Counsel for the Assessee therefore submitted that the addition made needs to be reversed since the income added by the AO u/s. 43B of the Act is already offered to tax once the provision has been reversed and hence there is no necessity to add the same again to the income u/s. 43B, which has been erroneously done by the Learned AO. 27. We have considered the rival submission. Since as per the provisions of Sec. 43B(f) of the Act, provision on account of bonus or leave encashment is not allowable as deduction except on the basis of actual payment irrespective of the method of accounting followed by an Assessee, the disallowance u/s. 43B of th ..... 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