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2015 (4) TMI 795 - AT - Income TaxTransfer pricing adjustment in relation to international transactions - Adjustment on account of provision of non binding investment advisory and related services - Rejection of comparables - Dis-allowance of expenses incurred related to bonus u/s 36(1)(ii) of Income Tax Act, 1961 - Bonus was part of employee agreement & based on performance - Held that - We find that payment of bonus to shareholder-employees had resulted in payment of more taxes in comparison to tax payable had the same amount been paid as dividend to shareholders.We have gone through the chart giving details of tax paid the assessee-company and the shareholders with respect to the bonus payment.So,it cannot be held that it was a device to evade taxes.Not only this,it is found that the shareholders were professionally highly qualified.Payment of bonus is a business decision and till it is not proved that same was not paid actually,it cannot be disallowed.The assessee had claimed that it was based on performance evaluation and the AO had not contravened the fact.The assessee had deducted tax at source on the bonus paid to the shareholder directors and they have shown the receipt of bonus in their respective returns. Here,we would also like to refer the decision of Shahzada Nand and Sons 1977 (4) TMI 4 - SUPREME Court wherein the Hon ble Apex Court has laid down some principles with regard to payment of commission.In our opinion same principles are applicable to payment of bonus also. In this case supreme court held that it is not necessary, for commission paid to an employee to be allowable under section 36(1)(ii), that it should be paid under a contractual obligation and it is now well-settled that the mere fact that the commission is paid ex gratia would not necessarily mean that it is unreasonable. In the case under consideration condition of payment of bonus was part of the employment agreement and it was a performance based payment. Considering the above discussion and the peculiar facts and circumstances of the case,we are deciding first effective ground of appeal in favour of the assessee. Transfer pricing adjustment in relation to international transactions - It is found that the assessee is engaged in providing nonbinding research,advisory and other ancillary support services whereas ICSL is providing advisory and consulting services in the specialised area of M&A,TRAS,that activities of ICSL are in the nature of Investment banking,that the assessee is not representing any company in India,but ICSL represents the Indian Companies.We have noticed that the assessee-company is not involved in business plan with lenders, restructure, implementation, M&A.Thus the activities carried out by the assessee and the comparable i.e. ICSL are not similar-there is functionally substantive difference in their job profile.In our opinion activities of ICSL are akin to the job of a merchant banker.We find that the Ho ble Court has,in the case of CIAIPL 2013 (4) TMI 486 - BOMBAY HIGH COURT ,held that merchant banking and investment banking services were functionally different from investment advisory services.Therefore,we are of the opinion that ICSL has to be excluded for TPA for the year under consideration.Once ICSL is excluded from the TP comparision,the arithmetic mean OP/TC of comparables would be 24.24% as against the mean of 20.73 shown by the assessee.As it is within the 5% range available to the assessee and it meets the arm s length standard,so,we decide second ground of appeal in favour of the assessee. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of bonus paid to shareholder employees under Section 36(1)(ii) of the Income Tax Act. 2. Transfer Pricing Adjustments (TPA) for the provision of non-binding investment advisory and related services to associated enterprises. Detailed Analysis: 1. Disallowance of Bonus Paid to Shareholder Employees: The first issue concerns the disallowance of part of the bonus expenses paid to shareholder employees under Section 36(1)(ii) of the Income Tax Act. The Assessing Officer (AO) found that the bonus paid to four director-shareholders was disproportionately higher compared to other employees, suggesting that the bonus was a means to avoid tax liabilities. The AO concluded that the bonus payments were a colorable device to avoid dividend distribution tax, relying on the case of McDowell and Co. Ltd. (154 ITR 148). The Dispute Resolution Panel (DRP) upheld the AO's view, noting the lack of evidence to justify the high bonus payments to shareholder employees. The DRP emphasized that the bonus paid to these employees was 172% of their salary, whereas other employees received bonuses amounting to 55% of their salary. Before the Tribunal, the assessee argued that the bonus payments were based on performance evaluations and were a commercial decision. The assessee also highlighted that the bonus payments resulted in higher tax payments compared to dividends and that the payments were part of the employment agreement. The Tribunal, after reviewing the evidence, found that the bonus payments led to higher taxes for the shareholders and were justified based on performance evaluations. The Tribunal referred to the principles laid down by the Hon'ble Apex Court in Shahzada Nand and Sons (108 ITR 358), emphasizing that the reasonableness of the bonus should be judged from the point of view of commercial expediency. The Tribunal concluded that the bonus payments were legitimate business expenses and allowed the appeal in favor of the assessee. 2. Transfer Pricing Adjustments (TPA): The second issue pertains to the Transfer Pricing Adjustments (TPA) made by the AO based on the Transfer Pricing Officer's (TPO) recommendations. The TPO initially proposed an adjustment of Rs. 8.71 crores, which was later revised to Rs. 4.06 crores following the directions of the DRP. The assessee contested the inclusion of Integrated Capital Services Limited (ICSL) as a comparable entity, arguing that ICSL's business profile was not similar to its own. The assessee provided non-binding research, advisory, and ancillary support services, whereas ICSL was engaged in Mergers and Acquisitions (M&A) and Turnaround Restructuring Advisory Services (TRAS). The Tribunal reviewed the comparability of ICSL and found that ICSL's activities were more akin to investment banking and merchant banking services, which were functionally different from the assessee's investment advisory services. The Tribunal referred to the case of Carlyle India Advisors Investment Private Ltd. (CIAIPL-ITA/7901/Mum/2011), where it was held that merchant banking and investment banking services were different from investment advisory services. The Tribunal concluded that ICSL should be excluded from the comparables for TPA. With ICSL excluded, the arithmetic mean of the remaining comparables was within the permissible range, thus meeting the arm's length standard. Consequently, the Tribunal decided the second ground of appeal in favor of the assessee. Conclusion: The Tribunal allowed the appeal filed by the assessee on both grounds, concluding that the bonus payments to shareholder employees were legitimate business expenses and that ICSL should be excluded from the comparables for TPA. The order was pronounced in the open court on February 20, 2015.
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