2021 (2) TMI 357 - AT - Income Tax

TP Adjustment - re-computing the Arm s Length price (ALP) of Salary payments made to related parties - comparable cases selected by the TPO for the purposes of determining the arm s length price of the transactions entered into by the assessee company in terms of payment of remuneration to the related persons while applying the CUP method - HELD THAT - Both the related persons as well as comparable cases selected by the TPO are holding non-teaching faculty role, and are holding and discharging administrative functions in terms of supervising and managerial role in their respective administrative fields - besides the requisite educational qualification which each of them possesses, what is more relevant is the experience and period of service of such personnel discharging their respective functions which would provide a better and rationale basis for benchmarking analysis. In the instant case, we find that each of the related persons have rendered services of three years as on 1.04.2014 and thus carry the desired experience and skill set developed over such period of three years with the assessee company of supervising and managerial activities in their respective administrative fields whereas in cases of comparable cases selected by the TPO, we find that in these cases, the employees have rendered service ranging from seven months to five years which provide a wide variance and thus, for comparability purposes, it would be appropriate to consider comparable cases who have rendered services for minimum three years and exclude other cases who have rendered services for a lesser period. Case of Shri Prashant Varma who has rendered service of 4 years and that of Shri Yashwant Sharma who has rendered service of 5 years would be taken as comparable cases and rest all cases shall be excluded for the purposes of comparability analysis. The average salary of these two comparable cases comes to ₹ 618,500/- which shall be taken as ALP of salary paid to related persons as against current salary of ₹ 696,600/- resulting in transfer pricing adjustment of ₹ 546,700/- in hands of the assessee company. The AO/TPO is accordingly directed to restrict the TP adjustment to ₹ 546,700/- and the ground of appeal is thus partly allowed.

Summary

Issues Involved:
1. Re-computation of Arm’s Length Price (ALP) for salary payments to related parties.
2. Disallowance of Director’s Travelling expenses.

Detailed Analysis:

Issue 1: Re-computation of Arm’s Length Price (ALP) for salary payments to related parties

The assessee challenged the Assessing Officer's (AO) re-computation of the ALP of salary payments to related parties (wives of directors) at ?31,12,178/- against the actual salary paid of ?48,76,200/-, resulting in an addition of ?17,63,722/- to the total income. The AO and the Dispute Resolution Panel (DRP) upheld the Transfer Pricing Officer's (TPO) determination, which was based on internal comparables within the organization.

The assessee argued that the TPO ignored the educational qualifications, job profiles, and duration of service of the related parties compared to the comparables. The related parties were employed in supervisory and managerial roles and had objectives beyond monetary rewards, ensuring higher productivity. The TPO compared their salaries with those of other employees with different qualifications and job profiles.

The DRP observed that the assessee failed to provide comparable cases to justify the payments and noted discrepancies in the service duration and salary increase data provided by the assessee. The DRP upheld the TPO's adjustment, emphasizing that the unrelated persons had better educational qualifications relevant to the business, unlike the related parties.

The Tribunal found that the related parties had rendered services for three years as of 01.04.2014, while the comparables selected by the TPO had varying service durations. For comparability, the Tribunal considered only those with a minimum of three years of service. Consequently, the Tribunal selected Prashant Varma (4 years) and Yashwant Sharma (5 years) as comparables, resulting in an average salary of ?618,500/-. The Tribunal directed the AO/TPO to restrict the TP adjustment to ?546,700/-, partly allowing the appeal.

Issue 2: Disallowance of Director’s Travelling expenses

The assessee contested the disallowance of ?16,100/- out of Director’s Travelling expenses. However, this ground was not pressed during the hearing, leading to its dismissal as not pressed.

Conclusion:

The appeal was partly allowed, with the Tribunal directing a reduced TP adjustment for salary payments to related parties and dismissing the ground related to Director’s Travelling expenses.