Tribunal Reduces Transfer Pricing Adjustment for Related Party Salary Payments

The Tribunal partly allowed the appeal, directing a reduced Transfer Pricing adjustment for salary payments to related parties. The Tribunal considered the service duration of related parties and selected comparables with similar experience, resulting in a lower adjustment amount. The ground related to the disallowance of Director's Traveling expenses was dismissed as not pressed during the hearing.

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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 Rs. 31,12,178/- against the actual salary paid of Rs. 48,76,200/-, resulting in an addition of Rs. 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 Rs. 618,500/-. The Tribunal directed the AO/TPO to restrict the TP adjustment to Rs. 546,700/-, partly allowing the appeal.

Issue 2: Disallowance of Director’s Travelling expenses

The assessee contested the disallowance of Rs. 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.

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