TMI Blog2022 (3) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... s unascertained liability, while computing the 'book profits' under section 115JB - HELD THAT:- We are of the view that the provision for bonus as well as provision for long term service are both ascertained liability and cannot be added to book profit under section 115JB of the Act. We hold and direct accordingly. - IT(TP)A No.197/Bang/2015 - - - Dated:- 28-2-2022 - Shri N. V. Vasudevan, Vice President And Shri B. R. Baskaran, Accountant Member For the Assessee : Shri. Ajit Tolani, CA For the Revenue : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru ORDER PER N V VASUDEVAN, VICE PRESIDENT This is an appeal by the assessee against Order dated 19.12.2014, passed by CIT(A)-4, Bengaluru, in relation to Assessment Year 2009-10. 2. The first issue that requires adjudication in this appeal is with regard to correctness of the orders of the Revenue authorities in so far as it relates to determination of Arm s Length Price (ALP) in respect of an international transaction of material handling equipment distribution service rendered by the assessee to its Associate Enterprise (AE). 3. The assessee imports Material Handling Equipment (MHE) from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licated product so that their identity is lost of transformed . iii. UN Guidelines - .... The resale price method measures the value of functions performed, and is ordinary used in cases involving the purchase and resale of tangible property in which the reseller has not added substantial value to the tangible goods by physically altering the goods before resale... iv. ICAI Guidance Note - The resale price method is to be adopted only when goods purchased from an associated enterprises are resold to unrelated parties . Further there are various judicial pronouncements which holds that RPM is the best method in the distribution segment. Learned Counsel for the assessee placed reliance on the decision of the ITAT, Bengaluru Bench, rendered in the case of Element 14 India Pvt. Ltd., Vs. DCIT in IT(TP)A No.351/Bang/2016 for Assessment Year 2011-12, order dated 16.09.2020. wherein all the decisions on the issue have been discussed. It was a case of a pure distributor who does not carry out any value addition for products carried out by it. The Tribunal had to consider the appropriateness of adopting RPM as the most appropriate method for determining ALP. The Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Heating P Ltd (supra):- 14. Now the assessee is before us with the submission that it is an accepted principle that the computation of ALP based on a direct method like RPM, which tests the results at gross level unlike the TNMM which tests the results at net level, extinguishes the requirement o making adjustment in relation to the difference in operating expenses, which could be different from enterprise to enterprise. It was further contended that as provided in Rule l0B, under RPM price of international transaction needs to be computed on the basis of gross profit margin earned in uncontrolled Bangalore transactions, while under TNMM price of international transaction is computed on the basis of net profit margin of uncontrolled transactions. As per Rule 100(1), the most appropriate method for determining the ALP depends upon the facts and circumstances of each case. Similarly, the operating expenses incurred by the assessee is different from the operating expenses incurred by comparable companies. The learned counsel for the assessee has highlighted that incurs certain expenses which does not affect sale/purchase price of the goods sold. Therefore, in a situation where i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filters from AO Smith China and sells them in India. AO Smith India is, according to the TP document, a distributor of AOS Water Heaters in India. The Tribunal has examined the most appropriate method in the case of distributor to determine the ALP for the international transactions. In the case of Horiba India Pvt. Ltd. (supra), the Tribunal has held that in the case of a distributor where the goods are purchased from the AE and resold to other independent entities without any value addition, then the resale price method should be reckoned as most appropriate method. One of the main reason given by the TPO as well as the DRP is that the assessee is full fledged/full risk distributor and performing host of functions, therefore RPM should not be taken as the most appropriate method, because all these functions require huge cost which may not represent the gross profit margin. This contention of the revenue was rejected by the Tribunal and it was held that in comparable controlled transaction scenario, a normal distributor will undertake all kinds of functions which are related to sales of the product. The things like market research, sales marketing, warehousing, controlled qualit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in selecting the most appropriate method as specified in sub-rule (1). These factors, inter olio, include , the availability coverage and reliability of data necessary application of the method'; and (d) the degree of comparability existing between the international transaction and the uncontrolled transaction...........' 8.2 An overview of the factors prescribed for choosing the most appropriate method indicates that firstly, the data necessary for application of the given method should be available and secondly, the uncontrolled transactions should be functionally similar, if not identical. A company, in order to be ranked as comparable under the RPM, should preferably be engaged in doing similar activity as that of the assessee or at least of the some genus of the activity, with a different product. The Ld. TPO himself has categorized the corn parables chosen by the assessee as traders akin to computer industry or engaged in trading of instruments. As the basic requirements under rule 10(c)(1) are fulfilled by these corn parables and that the Ld. TPO has not brought on record any evidence to prove material difference between the assessee and the corn parables so selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd., is also placed on record to demonstrate as to under what circumstances the RPM was considered to be most appropriate method. Similarly, in the case of Mettal Toys India Pvt. Ltd., v. DCIT (supra), the Tribunal again reaffirmed its view that in the case of distributor, the RPM is the most appropriate method by holding that ultimate aim of the transfer pricing is to examine whether price of the margin arising from the international transactions with a related party is at ALP or not. The determination of the approximate ALP is a key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than choosing earlier, the most appropriate ALP can be determined, the assessing authorities as well as the appellate authorities should take into consideration such a plea raised 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. The Tribunal accordingly rejected the contention of the Revenue and directed the TPO to adopt RPM instead of TNMM for computing the ALP. 20. Turning to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opportunity of being heard. 7. The other grounds that was pressed for adjudication is with regard to ground Nos.7 and 8 which reads as follows: 7. The Learned CIT(A) erred in upholding the action of the Learned AO in adding back the provision for bonus of ₹ 3,474,345 by treating the same as unascertained liability, while computing the 'book profits' under section 115JB of the Act. 8. The Learned CIT(A) erred in disregarding the submissions made by the appellant and not adjudicating on the ground raised by the Appellant on the action of the Learned AO in adding back the provision for long service award of ₹ 335,464 by treating the same as unascertained liability, while computing the 'book profits' under section 115JB of the Act. 8. Section 115JB of the Act provides that notwithstanding anything contained in any other provision of the Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,2007, is less than ten per cent of its book profit, such book profit shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account for arrive at book profit u/s.115JB of the Act. 10. The aforesaid amounts admittedly were credited in the profit and loss account. According to the AO, the aforesaid sum had to be included as part of the book profits u/s 115JB of the Act as it is not one of the item of income which has to be excluded from the net profit as per profit and loss account, set out in the explanation below Sec.115JB(2) of the Act. The CIT(A) confirmed the action of the AO. 11. As far as Provision for wages is concerned, the provision is created on the basis of payment of Bonus Act, 1965 and there is certainty in incurring the said liability. The said provision is being estimated with reasonable certainty thereby making it ascertained and not unascertained. The provision is being determined based on consistent policy followed by the company. The assessee has obtained a certificate from the Chartered Accountant that computation of allocable surplus is as per the provisions of payment of Bonus Act, 1965. The said provision is being estimated with reasonable certainty thereby making it ascertained and not unascertained: The following judicial pronouncements support the plea of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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