Tribunal grants relief on transfer pricing adjustments for directors' remuneration

The Tribunal partially allowed the assessee's appeal, granting relief on transfer pricing adjustments for directors' remuneration and corporate guarantee, as well as the deductibility of education cess under Section 37(1) of the Income Tax Act. The decision was based on the principle of subsuming directors' remuneration within entity-level results and the jurisdictional limitation on benchmarking transactions not referred by the Assessing Officer. The order was issued on January 15, 2020.

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Issues Involved:
1. Transfer Pricing Adjustment on account of Specified Domestic Transaction of Directors' Remuneration.
2. Transfer Pricing Adjustment on account of International Transaction of Corporate Guarantee.
3. Deductibility of Education Cess and Secondary & Higher Education Cess under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment on account of Specified Domestic Transaction of Directors' Remuneration:
The assessee contested the transfer pricing adjustment of Rs. 4,73,65,411/- made by the TPO on account of directors' remuneration, arguing that it was excessive and improperly benchmarked. The assessee maintained that the TNMM (Transactional Net Margin Method) was accepted as the most appropriate method at the entity level, and isolating the directors' remuneration for separate benchmarking was against the principle of subsuming. The Tribunal found that similar adjustments had been decided in favor of the assessee in previous years, specifically citing the case of Hindustan Unilever Limited vs. Addl. CIT. It was concluded that no separate adjustment should be made for directors' remuneration when entity-level results are taken, as it gets subsumed. Consequently, the Tribunal allowed ground No. 3 in favor of the assessee.

2. Transfer Pricing Adjustment on account of International Transaction of Corporate Guarantee:
The assessee challenged the adjustment of Rs. 3,29,677/- for the corporate guarantee provided to ICICI Bank Limited, Dubai, arguing that the referral to the TPO did not include this transaction, making the adjustment jurisdictionally invalid. The Tribunal referred to the jurisdictional issue and cited the judgment in the case of Times Global Broadcasting Company Limited vs. Union of India, which held that the TPO could not benchmark transactions not referred by the Assessing Officer. The Tribunal concluded that the TPO exceeded his jurisdiction by benchmarking the corporate guarantee transaction and allowed ground No. 4 in favor of the assessee without delving into the merits of the benchmarking exercise.

3. Deductibility of Education Cess and Secondary & Higher Education Cess under Section 37(1) of the Income Tax Act:
The assessee argued for the deductibility of education cess and higher education cess as a business expenditure under Section 37(1). Both parties acknowledged that this issue was covered by the judgment of the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd. vs. JCIT, which held that education cess is an allowable expenditure. The Tribunal, following this precedent, allowed ground No. 5 in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, granting relief on the issues of transfer pricing adjustments for directors' remuneration and corporate guarantee, as well as the deductibility of education cess. The order was pronounced on January 15, 2020.

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