2023 (12) TMI 398 - AT - Income Tax

TP adjustment - specified domestic transaction covered u/s 40A(2)(b) - AO had noted that the assessee had entered into both International Specific domestic transactions with Associated Enterprises (AE s) and therefore made a reference u/s 92CA(1) to the TPO for determination of the Arm s Length Price (ALP) - As argued presumption ought to be that expenditure covered u/s 40A(2)(b) was never a specified domestic transaction and therefore by virtue of this amendment, the impugned transfer pricing adjustment made u/s 92BA of the Act be deleted on this score alone - also AR submitted that the TPO had erred in holding that the director s commission paid by the company was excessive and thereby making transfer pricing adjustment by applying TNMM Method - whether the director s remuneration was required to be benchmarked on aggregate basis or the salary commission was to be benchmarked separately and independent of each other? HELD THAT - AR has rightly pointed out that the remuneration policies of companies in same industry may differ i.e. fixed variable pay may vary depending on each case but the overall remuneration policy shall be in accordance with the provisions of Companies Act, 2013. It is noted that Section 197 of the Companies Act 2013 sets the limits for payment of overall director s remuneration, by whatever name i.e. salary, fee or commission. Hence, we note that there is no distinction between salary or sitting fees or commission carved out in the Companies Act, 2013. This is indeed relevant in the present context as the said provision sets out the parameters for payment of overall remuneration to Directors in unison. We also note that Section 17(1) of the Act which defines salary , includes any commission paid in addition to salary and therefore the commission is noted to form part of the salary income of the employee / director. For the aforesaid reasons, we find merit in the plea of the appellant that the salary commission paid to the directors are closely related and forms part of the overall remuneration package and therefore it has to be aggregated and benchmarked as a single transaction. It is noted that applying the aggregate approach, the ratio of aggregate salary commission i.e. director s remuneration to the profit before tax of the appellant works out to 4.36% which is well within the permitted range of the six (6) comparables. Hence, the transfer pricing adjustment made by the TPO in relation to director s commission is held to be unjustified and the TPO is directed to delete the same. Since we have deleted the impugned transfer pricing adjustment on its merits, the alternative legal plea raised by the assessee has become academic and is therefore not being adjudicated upon. Accordingly Ground No. 1 stands allowed. Characterisation of receipt - industrial Promotion Subsidy (IPS) received - Capital or revenue receipt - HELD THAT - Having regard to the principle as laid down Ponni Sugar Chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT it is noted that this Tribunal in assessee s own case for AYs 2010-11 2012-13 2022 (1) TMI 412 - ITAT MUMBAI had held the IPS subsidy received by the assessee from the Government of Maharashtra was towards setting up of the new unit at Jalgaon and therefore capital in nature. Similarly, it is noted that Industrial Policy of Assam in terms of which the assessee received IPS subsidy in relation to its Assam Unit, was examined by the coordinate bench of this Tribunal at Guwahati in the case of DCIT Vs Century Plyboards (I) Ltd in 2020 (12) TMI 55 - ITAT KOLKATA and the subsidies received under this Industrial Scheme for setting up unit in Assam was held to be capital in nature - Thus we hold that the lower authorities had erred in holding the IPS subsidy received by the assessee under the State Industrial Schemes of Maharashtra, Madhya Pradesh Assam was revenue in nature. Thus the assessee recognizes subsidy on mercantile basis of accounting basis the terms of the initial sanction received from the State Government. The final approval or disbursement comes at a later date and there are instances of excess/ shortfall, which is appropriately accounted for by the assessee. It is noted that that the subsidy was short recognized by the assessee in earlier years and therefore the excess amount i.e. difference between amount recognized and amount finally disbursed was credited in P L A/c during the year. As rightly pointed out by the Ld. AR, the nature of the subsidy which was short recognized in earlier year/s remains the same i.e. capital in nature. Assessee appeal allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment under Section 92CA(3) of the Income Tax Act.
2. Nature of Industrial Promotion Subsidy (IPS) received by the assessee.

Summary:

Issue 1: Transfer Pricing Adjustment

The primary issue in this appeal is the transfer pricing adjustment of Rs. 7,50,81,060/- made under Section 92CA(3) of the Income Tax Act. The assessee challenged the validity of the Transfer Pricing Officer's (TPO) action regarding the specified domestic transaction under Section 40A(2)(b) of the Act and opposed the adjustment on merits.

Legal Validity:
The assessee argued that the omission of clause (i) of Section 92BA by the Finance Act 2017 should imply that the expenditure under Section 40A(2)(b) was never a specified domestic transaction, thus invalidating the adjustment. The assessee cited decisions from the Tribunal in similar cases to support this argument.

Merits:
On merits, the assessee contended that the director's commission was approved by the Nomination & Remuneration Committee and shareholders, thus at arm's length. The TPO's method of benchmarking salary and commission separately was disputed, with the assessee arguing for an aggregate approach. The assessee demonstrated that the total remuneration was within the permissible range when compared to six industry comparables, and there was no tax avoidance.

Revenue's Argument:
The Revenue argued that the omission of Section 92BA(i) had prospective application and relied on Section 6A of the General Clauses Act to support the TPO's action. They cited the Supreme Court's decision in M/s Fibre Boards to argue that the omission was prospective.

Tribunal's Decision:
The Tribunal held that the director's salary and commission should be aggregated for benchmarking purposes. The method of benchmarking, comparables, and Profit Level Indicator (PLI) used by the assessee were accepted. The Tribunal found that the aggregate remuneration was within the permissible range, thus the transfer pricing adjustment was unjustified and directed its deletion. The legal plea raised by the assessee became academic and was not adjudicated.

Issue 2: Nature of Industrial Promotion Subsidy (IPS)

The second issue pertains to the nature of the Industrial Promotion Subsidy (IPS) amounting to Rs. 47,32,73,937/-, which the AO treated as revenue in nature.

Assessee's Argument:
The assessee claimed that the IPS subsidy was a capital receipt, not liable to tax, as it was received for setting up units in backward areas of Maharashtra, Madhya Pradesh, and Assam. The assessee cited decisions from the Tribunal and higher courts, which held similar subsidies as capital receipts.

Revenue's Argument:
The Revenue argued that the IPS was a refund of VAT/CST, Octroi/LBT, and electricity duty, thus revenue in nature. The AO noted that the subsidy was consistently credited to the Profit & Loss account and used for dividend payments, with no nexus to capital cost.

Tribunal's Decision:
The Tribunal held that the IPS subsidy was capital in nature, following the precedent set in the assessee's own case for earlier years and other judicial decisions. The Tribunal found that the subsidy was intended to promote industrial development and employment in backward areas, thus a capital receipt. The Tribunal also addressed reconciliation deficiencies, noting that the subsidy was recognized on a mercantile basis and any shortfall or excess was appropriately accounted for.

Conclusion:
The appeal was partly allowed, with the transfer pricing adjustment deleted and the IPS subsidy held as capital in nature. The order was pronounced on 03/10/2023.