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TMI Blog2023 (12) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame i.e. capital in nature. Assessee appeal allowed. - SHRI ABY T. VARKEY, JM AND SHRI S. RIFAUR RAHMAN, AM For the Appellant : Shri Nitesh Joshi Shri Harsh Shah For the Respondent : Shri Manoj Kumar (CIT- DR) ORDER PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Assistant Commissioner of Income-tax, LTU Circle 2, Mumbai [in short AO ] dated 31.10.2019 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter the Act ). 2. Ground No. 1 relates to the Ld. AO s action of making transfer pricing adjustment of Rs. 7,50,81,060/- u/s 92CA(3) of the Act. It is noted that the assessee has inter alia challenged the validity of the Ld. TPO s action for making transfer pricing adjustment in relation to specified domestic transaction covered u/s 40A(2)(b) of the Act. The assessee has alternatively also opposed the impugned transfer pricing adjustment on merits. 3. Briefly stated, the facts of the case are that, the 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) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at arm s length. The Ld. AR further submitted that the TPO had erred in benchmarking the salary paid to directors and the commission paid to them separately. He showed us that the total remuneration paid to directors comprised of both salary commission. He took us through the provisions of Section 197 of Companies Act, 2013 and demonstrated that the limits prescribed therein was towards the gross remuneration inclusive of salary and commission. The Ld. AR further submitted that even Section 17(1) of the Act which defined the term salary included fees commission and therefore according to him both salary commission paid to directors were closely related and linked and thus ought to have been aggregated for benchmarking purposes. The Ld. AR submitted that, on aggregate comparison with the six comparables identified by the TPO, the transaction was at arm s length. The Ld. AR further submitted that both the appellant and the directors were taxed at the same marginal rates and therefore there was no tax avoidance, which would suggest shifting of profits for avoidance of tax. The Ld. AR argued that the provisions of Section 40(A)(2) can be invoked only if a transaction with rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seas (P.) Ltd. (271 Taxman 170). Instead, he showed us that the Hon ble Karnataka High Court had relied upon the earlier judgment of the Hon ble Supreme Court Constitution Bench decision in the case of Kolhapur Cane Sugar Ltd. reported in [2008] 2 SCC 536/ AIR [2000] SC 811 wherein the Hon ble Supreme Court was concerned with applicability of sec.(6) of General Clauses Act, to the deletion of Rule 10 and 10A of the Central Excise Rules on 06.08.1977 and in that case, the Hon ble Supreme Court followed another Constitution Bench decision in the case of Rayala Corporation Pvt. Ltd., reported in [1969] 2 SCC 412 which judgment as well as that of General Finance Company anr. v. ACIT reported in [2002] 7 SCC 1 (cited by Karnataka High Court in Texport Overseas supra) has been discussed by the Hon ble Supreme Court in M/s. Fibre Boards Pvt. Ltd. (supra); and the Hon ble Supreme Court in M/s. Fibre Boards (supra) observed at Para No.29 a reading of this section (6A of General Clauses Act) would show that a repeal can be way of an express omission. This being the case, obviously the word repeal in both section 6 and section 24 would, therefore, include repeals by express omission. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion) component. Hence, both these items of remuneration are noted to be closely related. The Ld. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 47,32,73,937/- 10. It is noted that, following the reasoning set out in the assessment order passed by his predecessor in assessee s own case for AY 2010-11, the AO rejected the claim of the assessee and assessed the aforesaid subsidy as revenue in nature disallowed the same by holding as under:- (i) The amounts have been consistently credited to the Profit Loss account since the FY 2009-2010 and had also paid dividend out of the same. (ii) There is no nexus between subsidy granted and the capital cost of the project. In other words, subsidy is not granted with reference to the assets acquired and, hence, the contention that it was a capital receipt, cannot be accepted. (iii) The IPS was in the nature of refund of VAT/CST/Octroi/LBT/Excise/Electricity Duty and were, therefore, in the nature of revenue receipts liable to tax. On this reasoning, the claim of the assessee that the subsidy was a capital receipt was rejected and a sum of Rs. 47,32,73,937/- was added back to the total income. 11. The Ld. AR brought to our notice that, the IPS subsidy was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mann.com 178(SC). 3. LG Electronics India (P) Ltd, [2017], Delhi Trib 2.7 On the other hand, the LD DR has relied on the order of the lower authorities. 2.8 We heard both the parties and perused the material available on record. During the year under consideration, the assessee received subsidy from Government of Maharashtra which was claimed exempt on the ground that the same was capital in nature. The A.O was of the view that amount of subsidy was not granted with reference to the assets acquired and treated the subsidy amount as revenue receipt. During the course of assessment and appellate proceedings before the A.O and Ld. CIT(A) the assessee has specifically submitted that it has set up project in the notified backward area of Maharashtra in accordance with the package scheme of Govt of Maharashtra. In accordance with the scheme, the assessee has received subsidy from Govt of Maharashtra which was claimed exempt on the ground that the same was capital in nature. In the light of the facts and material placed on the record it is observed that purpose of the subsidy was to provide incentives for setting up projects in backward areas of Maharashtra and for generatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Panel in the computation of the quantum of subsidy regarding certain short provisions/adjustments. In his rebuttal, the Ld. AR took us particularly through Pages 129-130, 240 316 of the Paper Book to show that the reconciliations had been submitted before the Ld. DRP and no specific defect therein had been pointed out by the Panel. The Ld. AR explained that there is always a time lag between the end of the year to which subsidy pertains and final approval of the same. He showed us that the subsidy is accounted for on mercantile basis of accounting based on the initial sanction as received by the company. Thereafter, when the final sum is approved/ disbursed, there may be excess/ shortfall, which is accordingly adjusted for. On the given facts, the Ld. AR showed us that the subsidy was short recognized 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. He contended that, irrespective of the year to which such short provision pertains to, the nature of receipt remains the same i.e. capital in nature and thus not liable to tax. 13. We have considered the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the start of production or after the commencement of production or after effecting the sales. What is important is that for what purpose the subsidy is given. Special Bench of the Tribunal in the case of DCIT v. Reliance Industries Limited (88 ITD 273) has held that 'after incentive is given for setting up or expansion of industry in a backward area, it will be capital, irrespective of modality or source of funds through or from which it is given. 13. In the case of assessee maximum amount of assistances permissible is the total eligible investment stated in the sanctioned letter which is Rs. 1042.94 lakhs (10.43 cr.). Being attracted by the ITA No.540/Ind/2018 Agya Auto Ltd provision of this scheme of subsidy the assessee decided to take a tough path of setting up a unit in a backward area and for this made capital investment of Rs. 10.43 cr. (approx.). The scheme of subsidy is devised to give the benefit to the assessee by way of refund of the sales tax/MPCT/VAT CST deposited by the assessee on the sales effected by it in the Unit-II located in backward area. So the nexus of subsidy is linked to the capital investment made by the assessee for setting up a unit in bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries and generation of employment in the North Eastern States. In this regard relevant extracts of Notification No. 20/2007 is reproduced below:-- 5. The exemption, contained in this notification shall apply only to the following kind of units, namely; a) New Industrial units which commence commercial production on or after the 1 st day of April, 2007 but not later than 31 st day of March, 2017; b) Industrial Units existing before the 1 st day of April, 2007 but which have undertaken substantial expansion by way of increase by not less than 25% in the value of fixed capital investment in plant and machinery for the purposes of expansion of capacity/modernization and diversification and have commenced commercial production from such expanded capacity on or after the 1 st day of April, 2007 but not later than 31 st day of March, 2017. . 42. In view of the above facts, it was the plea of the ld. AR that the incentive in the form of excise duty exemption and sales tax subsidy, have been granted for setting up new units in the States of Assam West Bengal which lagged behind in industrial development for development of industries and generation of employment oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced in the Paper Book at Pages 129-130, 240 316. Perusal of the same reveals that, 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. Before us, the Ld. DR appearing for the Revenue was unable to point out any infirmity in the above reconciliation furnished by the assessee. 19. For the above reasons therefore, we hold that the IPS subsidies received by the assessee was capital in nature. Hence, Ground No. 2 stands allowed. 20. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on this 03/10/2023. - - Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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