2023 (12) TMI 398 - AT - Income Tax

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 ... Transfer pricing adjustment - specified domestic transaction - arm's length price - benchmarking of director's remuneration - aggregation of salary and commission - Transfer Pricing - TNMM - industrial promotion subsidy - capital versus revenue nature of subsidy - purpose test for subsidy characterisation - mercantile system of accountingTransfer pricing adjustment - specified domestic transaction - arm's length price - benchmarking of director's remuneration - aggregation of salary and commission - Transfer Pricing - TNMM - Director's remuneration (salary and commission) is to be aggregated and benchmarked as a single remuneration package for transfer pricing purposes; TP adjustment made by TPO in relation to director's commission deleted. - HELD THAT: - The Tribunal accepted that the method (TNMM), set of six comparables and the PLI (ratio of aggregate remuneration to profit before tax) were not in dispute. The directors' remuneration comprised closely related fixed and variable components approved by the Remuneration Committee and shareholders as a single package. The Companies Act, 2013 (Section 197) prescribes limits for overall director remuneration without carving out distinctions by nomenclature, and Income-tax Act's definition of 'salary' includes commission; accordingly salary and commission form part of the overall remuneration. Applying the aggregate approach, the ratio of aggregate remuneration to profit before tax fell within the permitted range and percentiles of the comparables, showing the transaction to be at arm's length. The TPO's exercise of benchmarking salary and commission separately was therefore unwarranted and the resultant adjustment was unjustified. The Tribunal deleted the impugned transfer pricing adjustment on merits and did not adjudicate the alternate legal plea regarding omission of clause (i) of section 92BA as it became academic. [Paras 6, 7, 8, 9]Transfer pricing adjustment in relation to director's commission upheld by TPO is deleted; aggregate benchmarking of salary and commission accepted and Ground No.1 allowed.Industrial promotion subsidy - capital versus revenue nature of subsidy - purpose test for subsidy characterisation - mercantile system of accounting - Industrial Promotion Subsidies received under State incentive schemes for setting up units were capital receipts and not taxable revenue receipts; reconciliation/quantification deficiencies did not alter character of subsidy. - HELD THAT: - Applying the settled Supreme Court principle that the character of a subsidy depends on the object and purpose for which it is granted, subsidies whose principal object is to promote industry, enable setting up or expansion of units or augment capital base are capital in nature. The Tribunal followed its prior decisions in the assessee's own appeals and coordinate Bench decisions considering the respective State schemes (Maharashtra, Madhya Pradesh and Assam) which held similar incentives given to induce establishment/expansion of units in backward areas to be capital receipts. The assessee's reconciliations showed that subsidy was recognised on a mercantile basis and any later adjustments related only to quantification; Revenue could not point to infirmity in reconciliation that would change the character of the receipts. On these bases the Tribunal held the subsidies to be capital in nature and allowed the ground. [Paras 15, 16, 17, 18, 19]IPS subsidies received under the State industrial schemes are capital receipts and Ground No.2 is allowed.Final Conclusion: The appeal is partly allowed: the transfer pricing adjustment in respect of director's commission is deleted after holding that salary and commission must be aggregated for benchmarking; the Industrial Promotion Subsidies from State incentive schemes are held to be capital receipts and not taxable, and the appeal is allowed on that ground as well. 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 AdjustmentThe 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.