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TMI Blog2023 (12) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... ional & Specific domestic transactions with Associated Enterprises (AE's) and therefore made a reference u/s 92CA(1) of the Act to the TPO for determination of the Arm's Length Price (ALP). It is noted that the TPO had proposed transfer pricing adjustment in relation to (i) international transaction with AEs of Rs. 4,19,928/- (ii) specified domestic transaction involving payment of commission to directors u/s 40A(2)(b) of the Act of Rs. 7,50,81,060/-. The assessee has challenged the legal validity as well as merits of the transfer pricing adjustment made in relation to specified domestic transaction. The Ld. AR for the assessee submitted that there is no provision which provides for determination of ALP covered u/s 40A(2) of the Act now as clause (i) of Section 92BA has since been omitted by the Finance Act 2017 without any savings clause. The crux of the argument was that the Finance Act 2012 with effect from 1/4/2013 had made the provisions of sections 92, 92C, 92D and 92E applicable to certain specified domestic transactions vide introduction of Section 92BA in the Act. One of the specified domestic transaction mentioned in section 92BA(i) was with respect to any expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance of tax. The Ld. AR argued that the provisions of Section 40(A)(2) can be invoked only if a transaction with related party is used as a tax avoidance mechanism to siphon off profits to evade tax. Likewise, the provisions of Chapter X are also meant to check shifting of profits between entities to avoid payment of taxes or pay taxes at lesser rates. The Ld. AR submitted that, in the given facts of the present case, since both the appellant as well as the shareholders were taxed at normal rates, there was purported tax avoidance which would invite the rigors of Section 40A(2) read with 92BA of the Act. For this, he relied on the decision of the Hon'ble Bombay High Court in CIT v. V.S. Dempo & Co. (P.) Ltd. (336 ITR 209). The Ld. AR thus pleaded that, viewed from any angle, the impugned TP adjustment ought to be deleted. 5. Per contra, the Ld. DR also explained the background of the insertion and subsequent omission of section 92BA(i) of the Act. He submitted that, this omission has been made by the Finance Act 2017 with effect 01.04.2017 and therefore it had prospective application. According to him, the plea of the assessee that the 'omission' of clause (i) to Section 92BA wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ously the word 'repeal' in both section 6 and section 24 would, therefore, include repeals by express omission. The absence of any reference to section 6A, therefore, again undoes the binding effect of these two judgments on an application of the 'per incuriam' principle''. The Ld. DR thus submitted that the ratio decidendi laid down in Texport Overseas (P.) Ltd.(supra) which has been followed by the coordinate Benches of this Tribunal was not the correct position of law. On merits, the Ld. DR supported the order of the lower authorities. 6. We have carefully considered the rival contention and perused the orders of the lower authorities. From the facts on record, it is noted that the appellant had paid director's salary and commission to its two directors, which was aggregated for benchmarking purposes under the TNMM Method. The appellant had identified six (6) comparables from the same industry. The ratio of aggregate remuneration (salary & commission) to the profit before tax of the appellant was 4.39% in comparison to 6.37% of the comparables which was well within the permitted range of +/- 3% as well as the 35th & 65th percentile to the set of six comparables. Accordingly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant that the salary & commission paid to the directors are closely related and forms part of the overall remuneration package and therefore it has to be aggregated and benchmarked as a single transaction. 8. In light of the above findings, it is noted that applying the aggregate approach, the ratio of aggregate salary & commission i.e. director's remuneration to the profit before tax of the appellant works out to 4.36% which is well within the permitted range of the six (6) comparables. Hence, the transfer pricing adjustment made by the TPO in relation to director's commission is held to be unjustified and the TPO is directed to delete the same. 9. Since we have deleted the impugned transfer pricing adjustment on its merits, the alternative legal plea raised by the assessee has become academic and is therefore not being adjudicated upon. Accordingly Ground No. 1 stands allowed. 10. Ground no. 2 is against the action of the AO in rejecting the claim of the assessee that Industrial Promotion Subsidy (IPS) received amounting to Rs. 47,32,73,937/- is capital in nature on the ground that IPS is refund of VAT/CST, Octroi/LBT and waiver of electricity duty and hence is revenue in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's own case for AYs 2010-11 to 2012-13 in ITA Nos. 7261/Mum/2014, 5840/Mum/2019 and 2006/Mum/2017 dated 04.01.2022 has held the IPS subsidy received from the State of Maharashtra for setting up new unit to be in the nature of capital receipt not liable to tax, by holding as under: - "2.4 Ground of appeal No. 4 with respect to addition of the subsidy amount received amounting to Rs. 33,90,28,500/- treating the same as Revenue in nature:- During the course of assessment proceedings, the A.O noticed that the Govt of Maharashtra has granted subsidy to the assessee company in terms of Package Scheme of Investment 2001 to set up project in the notified industrially backward districts of the state. The A.O stated that there was no nexus between the subsidy granted and the capital cost of the project therefore the subsidy amount was added to the total income of the assessee by treating the same as of the nature of revenue receipt. 2.5 Aggrieved, assessee has filed appeal before the Ld. CIT(A). The CIT(A) has rejected the appeal of the assessee, holding that nowhere in the scheme, it was mentioned that subsidy was pertained to the capital cost of the project. 2.6 During the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we gone through the decision of Hon'ble Bombay High Court in the case of Kirloskar Oil Engines Ltd, (supra), wherein it is held as under: "Section 4 of the IT Act, 1961 income Chargeable as assessment year 1997-98 special capital incentive given to assessee by state government to enable assessee to set up a new unit in state would be capital receipt." In the case of Chapalkar Brothers, Pune (supra) the Hon'ble Supreme Court held that since the object of incentive scheme was to encourage and development of multiple theatre complexes incentives would be capital in nature and not revenue receipt. In the case of LG Electronics India (supra) the Special Bench of ITAT Delhi held that the assessee's receipts from State Govt. to the extent of subsidy under package scheme of incentive, 2001 for accelerating flow of investments in industries in state, i.e for expansion of industries and also to create employment opportunities was not form of exemption from payment of taxes on increased turnover and from payment of electricity duty such subsidy receipts assumed character of capital receipt irrespective of forum in which it was disbursed. 2.9 In the light of the above facts and finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal object for grant of subsidy is to promote industry or to enable the assessee to set up or expand the existing unit or capital base, then such subsidy is capital in nature. The view is noted to have endorsed by the Hon'ble Supreme Court in its latter decision in the case of CIT vs. Chapalkar Brothers (400 ITR 279). In the decided case, the Hon'ble Apex Court explained the principle that the subsidy granted by the Government to achieve the object of acceleration of industrial development shall be capital in nature. 14. Having regard to the above principle as laid down by Hon'ble Supreme Court (supra), it is noted that this Tribunal in assessee's own case for AYs 2010-11 & 2012-13 (supra) had held the IPS subsidy received by the assessee from the Government of Maharashtra was towards setting up of the new unit at Jalgaon and therefore capital in nature. 15. With regard to the IPS subsidy received in relation to the Madhya Pradesh, it is noted that the Industrial Policy 2010 of Government of Madhya Pradesh (in terms of which the assessee also received the impugned IPS subsidy) was examined by the coordinate bench of this Tribunal at Indore in the case of Agya Auto Ltd in IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el Ltd. [2019] 103 taxmann.com 436 (Bombay) 5. Johnson Matthey India (P.) Ltd. vs. DCIT [2018] 91 taxmann.com 200 (Delhi - Trib.) 6. Universal Cables Ltd. vs. DCIT [2015] 57 taxmann.com 95 (Kolkata - Trib.) .... 16. We, therefore, respectfully following the decisions of the coordinate Benches referred hereinabove and the settled judicial proposition and having examined the facts of the instant case, are of the considered view that the purpose of subsidy received by the assessee during the year is towards meeting out the capital investment made to set up the Unit-II project in a backward area and the subsidy so received at Rs. 2,57,07,188/- during the year is capital subsidy. Thus, no interference is called for in the finding of the Ld. CIT(A)." 16. Similarly, it is noted that Industrial Policy of Assam in terms of which the assessee received IPS subsidy in relation to its Assam Unit, was examined by the coordinate bench of this Tribunal at Guwahati in the case of DCIT Vs Century Plyboards (I) Ltd in ITA No. 2149/Gau/2019 dated 04.11.2020 and the subsidies received under this Industrial Scheme for setting up unit in Assam was held to be capital in nature, by observing as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidies granted under the State Industrial Schemes formulated with the object to accelerate industrial development and generate employment, is capital in nature and therefore not liable to income-tax. 43. We have considered the rival submissions of both the parties. From the facts as already discussed in the foregoing, it can be safely inferred that the subsidies were granted to the assessee for setting up new units in the States of West Bengal and State of Assam. The Hon'ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (supra) has held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment is capital in nature... 44. The above decision of the Hon'ble Supreme Court has been followed by the Hon'ble Calcutta High Court in the case of Pr. CIT Vs Shyam Steel Industries Limited (303 CTR 628) wherein the Court held that, where the incentive under the Industrial Schemes are given only to new units and units which have undergone an expansion, then the real purpose of such incentive has to be seen as a capital subsidy and therefore should be regarded as a capital receipt and not a revenue receipt. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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