TMI Blog2015 (4) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... s paid to the shareholder directors and they have shown the receipt of bonus in their respective returns. Here,we would also like to refer the decision of Shahzada Nand and Sons [1977 (4) TMI 4 - SUPREME Court] wherein the Hon’ble Apex Court has laid down some principles with regard to payment of commission.In our opinion same principles are applicable to payment of bonus also. In this case supreme court held that it is not necessary, for commission paid to an employee to be allowable under section 36(1)(ii), that it should be paid under a contractual obligation and it is now well-settled that the mere fact that the commission is paid ex gratia would not necessarily mean that it is unreasonable. In the case under consideration condition of payment of bonus was part of the employment agreement and it was a performance based payment. Considering the above discussion and the peculiar facts and circumstances of the case,we are deciding first effective ground of appeal in favour of the assessee. Transfer pricing adjustment in relation to international transactions - It is found that the assessee is engaged in providing nonbinding research,advisory and other ancillary support serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees amounting to ₹ 1,93,03,138 under section 36(1)(ii) of the Act. The Appellant prays that the aforesaid addition be deleted. The Appellant prays that the Ld. AO be directed to levy in accordance with law. The Appellant craves leave to add to, alter, amend or withdraw all or any of the above grounds of appeal. Assessee-company is engaged in the business of providing research advisory and other ancillary support services to two of its associate enterprises(AE) namely New Silk Route Advisors L.P., Cayman Islands (NSRI) and M/s NSR New Silk Route Mauritius Advisors LLC,(NSRM). It had filed its return of income on 30.09.2009,declaring a total income of ₹ 5,74,52,88/-.The AO completed the assessment on 24.01.2014,determining the income of the assessee at ₹ 11,74,20, 580/-. 2.First effective ground of appeal is about disallowance made u/s. 36(1)(ii) of the Act.During the course of assessment proceedings, from the details of expenses in respect of salary allowances, filed by the assessee,the AO found that an amount of ₹ 5,94,07,087/-had been paid to following employees who were also beneficial owner of the shares in the company: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een that even after payment of interim dividend the assessee company had accumulated profit of ₹ 1,93,03,138/- which could have been utilised for payment of dividend to the above four shareholders,that the assesseecompany made payment to above shareholders in the guise of bonus so as to avoid overall tax liability and also to evade payment of dividend distribution tax.Relying upon the case of McDowell and Co.Ltd.(154 ITR 148), the AO held that payment of dividend was a colourable device. 3.Aggrieved by the order of the order of the AO,the assessee made representation before the Dispute Resolution Panel(DRP).After considering the submissions of the assessee with regard to the payment of bonus,the DRP held that the four Director employees were holding 48.8% of the share holdings which constituted almost 50% of the share capital, that AO had held that other employees had been paid bonus at the rate of 55% of their salary, that in the case of the four shareholder-employees the bonus paid was 172% of their salary,that the bonus paid to the shareholder employees was disproportionate as to ratio of their salary,that the AO had asked the assessee to prove the nature of services re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the FAA. He relied upon the decision of Dalal Broacha Stock Broking (P.)Ltd.(131ITD36). 5.We have heard the rival submissions and perused the material before us.We find that DRP had held that the assessee had not produced enough evidence to justify the payment of bonus to shareholder employees,that no evidence was placed on record as to what adequate services were rendered by the shareholders warranting the payment of heavy bonus.AO and the FAA were of the opinion that it was a device to evade tax. After deliberation upon the facts of the case we find that payment of bonus to shareholder-employees had resulted in payment of more taxes in comparison to tax payable had the same amount been paid as dividend to shareholders.We have gone through the chart giving details of tax paid the assessee-company and the shareholders with respect to the bonus payment.So,it cannot be held that it was a device to evade taxes.Not only this,it is found that the shareholders were professionally highly qualified.Payment of bonus is a business decision and till it is not proved that same was not paid actually,it cannot be disallowed.The assessee had claimed that it was based on performance evaluation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees. It is not necessary, for commission paid to an employee to be allowable under section 36(1)(ii), that it should be paid under a contractual obligation. It is now well-settled that the mere fact that the commission is paid ex gratia would not necessarily mean that it is unreasonable. We find that the facts of the case relied upon by the AO are different from the facts of the present case.As against that matter in the case under consideration condition of payment of bonus was part of the employment agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble jurisdictional high court had confirmed the order of the CIAIPL(ITA No.1286 of 2012). He also referred to the another appeal of ICSL(ITA/7367/ Mum/2012)along with the matter of General Altantic Pvt.Ltd. (GAPLITA/ 8914/Mum/2010),that operating margins of ICSL were very volatile, that ICSL was earning high margins in AY.2008-09,that comparable should be rejected on that count.He relied upon the cases of Adobe System India Private Limited(148TTJ122).Sonata Software Ltd.(ITA/3514/ Mum/2010)E Gain communication Pvt.Ltd.(118TTJ354).He finally argued that if the ICSL comparable was not considered then arithmetic mean of remaining two of the three comparables would be 24.24%(KIACL-27.82 +FCIAL-20.67),that the arithmetic mean OP/TC of comparable companies,after considering the above set,worked out @24.24 and it was within 5% range and allowable as per the proviso to section 92C(2)of the Act. 8.We have heard the rival submissions and perused the material before us.We find that the main functions carried out by the assessee consisted of providing general and specific information NSRCI and NSRM by carrying out research relating to particular economic/ industry sectors, investment opport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on abnormal or super normal profits while deciding the issues of TPA.We find that in the cases relied upon by the AR-Adobe System India Private Limited(supra)Sonata Software Ltd.(supra)E Gain communication Pvt.Ltd.(supra)-various benches of the Tribunal has upheld the said principle. Now coming to the facts of the case it is found that the assessee is engaged in providing nonbinding research,advisory and other ancillary support services whereas ICSL is providing advisory and consulting services in the specialised area of M A,TRAS,that activities of ICSL are in the nature of Investment banking,that the assessee is not representing any company in India,but ICSL represents the Indian Companies.We have noticed that the assessee-company is not involved in business plan with lenders, restructure, implementation, M A.Thus the activities carried out by the assessee and the comparable i.e. ICSL are not similar-there is functionally substantive difference in their job profile.In our opinion activities of ICSL are akin to the job of a merchant banker.We find that the Ho ble Court has,in the case of CIAIPL(supra),held that merchant banking and investment banking services were functionally d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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