2020 (1) TMI 1543 - AT - Income Tax

Tribunal grants relief on transfer pricing adjustments for directors' remuneration

P.N. Gadgil Jewellers Pvt. Ltd. Versus ACIT, Circle-4

The Tribunal partially allowed the assessee's appeal, granting relief on transfer pricing adjustments for directors' remuneration and corporate guarantee, ... TP adjustment on account of Specified Domestic Transaction of Director's Remuneration - it is the case of the assessee that the AO/TPO accepted the TNM Method as the most appropriate method at the entity level - HELD THAT:- Benchmarking of the specified domestic transactions of director's remuneration while accepting the aggregated results, is not sustainable. The decision of the Mumbai Bench of the Tribunal in the case of Hindustan Unilever Limited [2012 (12) TMI 458 - ITAT MUMBAI] helps the assessee. Therefore, ground No. 3 should be allowed in favour of the assessee as a covered case. Transfer pricing adjustments on account of international transaction of corporate guarantee - case of the assessee is that the benchmarking of such international transaction of corporate guarantee is not valid as the referral made by the Assessing Officer to the TPO does not make a reference to such international transaction - HELD THAT:- From the above extracted portions of the judgment Times Global Broadcasting Company Limited [2019 (3) TMI 1309 - BOMBAY HIGH COURT] Hon'ble High Court dealt with the sub-sections 92A and 92B of the Act incorporated by the Statute by the Finance Act, 2011 and held that the TPO is barred from the benchmarking the specified domestic transactions when the Assessing Officer made a reference to the TPO for benchmarking the international transactions. The provision of these two sub-sections in the field of international transactions only was referred by this judgment (supra). In fact, it is evident from the contents in relation to the specified domestic transactions, the TPO cannot undertook transfer pricing study only in relation to those transactions which are referred to him under sub-section (1) of section 92CA of the Act. Considering the categorical finding of the Jurisdictional High Court, the jurisdictional issue raised by the assessee has to be allowed in favour of the assessee. Accordingly, the core legal issue raised by the assessee is allowed without going into the merits of the benchmarking exercise or quantification of the adjustments. Accordingly, ground No. 4 is allowed. Deductibility of education cess and secondary & higher education cess u/s. 37(1) - This issue is now covered by the judgment of the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd. [2018 (10) TMI 589 - RAJASTHAN HIGH COURT] education Cess, which is not disallowable item, on its payment, the cess is an allowable expenditure as per provision of section 40(a)(ii) - Decided n the favour of assessee. 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.