Director's remuneration including salary and commission must be benchmarked as single aggregated transaction, not separately

ITAT Mumbai held that director's remuneration including salary and commission must be benchmarked as a single aggregated transaction rather than separately. The aggregate remuneration-to-profit ratio of 4.36% fell within the acceptable range of comparables, making the TPO's transfer pricing adjustment unjustified. Additionally, Industrial Promotion Subsidies received from state governments for setting up new units were held to be capital in nature, not revenue, following established precedents. The tribunal directed deletion of transfer pricing adjustments and allowed the assessee's appeal on both grounds.

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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.

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