P.N.GADGIL JEWELLERS PVT.LTD,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 4,, PUNE

आयकर अपीलीय अिधकरण “lh” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI S. S. VISWANETHRA RAVI, JM आयकर अपील सं. / ITA No.1960/PUN/2019 िनधा�रण वष� / Assessment Year : 2015-16 P. N. Gadgil Jewellers Pvt. Ltd., PNG House, 694, Narayan Peth, Laxmi Road, Pune-411030. .......अपीलाथ� / Appellant PAN : AAHCP4162E बनाम / V/s. ACIT, Circle-4, ……��यथ� / Respondent Pune. Assessee by : Shri M. P. Lohia Revenue by : Shri T. Vijaya Bhaskar Reddy सुनवाई क� तारीख / Date of Hearing : 01.01.2020 घोषणा क� तारीख / Date of Pronouncement : 15.01.2020 आदेश / ORDER PER D. KARUNAKARA RAO, AM: This appeal is filed by the assessee against the order of the Assessing Officer/DRP/TPO. 2. Briefly stated the relevant facts include that the Assessing Officer referred the matter to the TPO for benchmarking the international transactions on 02.11.2017. The TPO made the order u/s 92CA(3) of the Act vide its order dated 31.10.2018. Incorporating the same, the Assessing Officer made a draft assessment order on 20.12.2018. The assessee approached the DRP and the DRP passed the direction on 09.09.2019. Incorporating the same, the Assessing Officer made final assessment order on 04.10.2019.

2 ITA No.1960/PUN/2019 3. Regarding the grounds raised before us, ld. Counsel for the assessee mentioned that the ground nos.1, 6 and 7 should be dismissed as general. Accordingly, we dismiss the said grounds. Ground no.2 is not pressed. Accordingly, the same is dismissed. Rest of grounds which requires the specific adjudication are extracted as under :- “3. Transfer Pricing Adjustment of INR 4,73,65,411/- on account of Specified Domestic Transaction of Directors Remuneration. 3.1. Erred in making a transfer pricing adjustment of INR 4,73,65,411/- on account of payment of directors remuneration by considering the same as excessive. 3.2. Erred in considering the said transaction as a separate transaction for benchmarking without considering the fact that the same is subsumed in the aggregated approach while applying TNMM for benchmarking of purchase and sale transactions which are held to be at arm’s length. 3.3. Erred in benchmarking director’s remuneration without adopting any of the prescribed methods. 3.4. Without prejudice to the aforesaid grounds, the learned TPO has erred in adopting the inappropriate comparable set of companies for benchmarking payment of directors remuneration. 4. Transfer Pricing Adjustment of INR 3,29,677/- on account of International Transaction of Corporate Guarantee. 4.1. Erred in making a transfer pricing adjustment of INR 3,29,677/- on account corporate guarantee commission on corporate guarantee given by PNG to ICICI Bank Limited, Dubai International Finance Centre Branch for loan taken by PNG Jewellers LLC, Dubai. 4.2. Erred in determining arm’s length price of international transaction of corporate guarantee though not being specifically referred to the learned TPO by the learned A.O.; thereby violating the provisions of section 92CA of the Act and Instruction No.3/2016 issued by the Central Board of Direct Taxes (dated 10 March 2016) and hence the same is liable to be quashed. 4.3. Without prejudice to the above grounds, erred in considering the corporate guarantee as an international transaction u/s 92B of the Act. 4.4. Without prejudice to the above grounds, erred in benchmarking corporate guarantee without adopting any of the prescribed methods. 4.5. Without prejudice to the above grounds, the arm’s length price ought to have been restricted to 0.50% as held by various Courts and Tribunals. 5. Deductibility of Education Cess and Secondary & Higher Education Cess u/s 37(1) of the Act. The Learned A.O./DRP ought to have allowed the deduction of education cess and higher education cess on income tax paid as a deduction under Section 37(1) of the Act while computing the profits and gains from business under total income.”

3 ITA No.1960/PUN/2019 4. Briefly stated the relevant facts include that the assessee is engaged in the business of Gems and Jewellery and reported the international transactions as well as Specified Domestic Transactions (SDTs). The details are given in para 4 of the TPO’s order. The Assessing Officer made a referral to the TPO for benchmarking the said transactions in relation to the “Specified Domestic Transactions” (SDT) and not the “International Transactions”. The assessee sold the goods to the AEs abroad. Assessee paid for purchase of gold involving specified domestic transactions. The assessee also paid director’s remuneration, the SDT. The TPO, while accepting other international transactions as well as specified domestic transactions, restricted the benchmarking exercise to the “specified domestic transaction” relating to the director’s remuneration. While benchmarking the said SDT, the TPO benchmarked the international transactions of Corporate Guarantee which was unreferred by the Assessing Officer and accepted other international transactions. It is an admitted position that, with reference to the director’s remuneration, the TPO relied heavily on his own finding on the similar transactions for the assessment year 2014-15. The contents of para 11 of the order of the TPO are relevant in this regard. On account of benchmarking of the director’s remuneration, the Assessing Officer proposed the adjustments of Rs.4,73,65,441/-. In the process, the TPO rejected the assessee’s objection. 5. Before us, ld. Counsel for the assessee brought our attention to the said order of the Tribunal for assessment year 2014-15 on this issue of adjustments made by the TPO with reference to the specified domestic transactions of director’s remuneration. According to him, this issue is a covered one. Further, on the other adjustments relating to the international transactions of corporate guarantee, the TPO proposed a sum of

4 ITA No.1960/PUN/2019 Rs.3,29,677/-. The contents of para 8 of the order of the TPO are relevant in this regard. 6. Brief facts of these transactions include that the assessee has a sister concern named PNG Jewellers LLC, Dubai. The said concern obtained the loan of USD 24,00,000 from ICICI Bank Limited (DIFC Branch). For this loan, the assessee stood a guarantor. It is the case of the assessee that the said transaction was not referred to TPO for benchmarking. It is the case of the TPO that the said transaction was not benchmarked by the assessee although the same constitutes an international transaction. Mere disclosure is not enough when the same is not benchmarked. The TPO did not accept the same and held that the corporate guarantee is an international transaction u/s 92B of the Act w.e.f. 01.01.2002 since amended the section 92B of the Act. After issuing show-cause notice for benchmarking the same, the TPO applied the corporate guarantee fee @ 2% of the amount guaranteed while determining the ALP rate. The commission for the financial year 2014- 15 was quantified at Rs.3,29,677/-. The Assessing Officer made a draft assessment order on 20.12.2018 u/s 144C(1) r.w.s. 143(3) of the Act. The assessee filed objection before the DRP. The DRP rejected all the 7 objections raised by the assessee and approved the draft assessment order made by the Assessing Officer. The contents of para 9 of the DRP’s order are relevant. Giving effect to the said directions of the DRP, the Assessing Officer made final assessment order on 04.10.2019 determining the taxable income of Rs.72,47,19,120/- against the returned income of Rs.67,59,25,330/-. Thus, the Assessing Officer/TPO/DRP made the said couple of additions amounting to Rs.4,76,95,118/- on account of corporate guarantee and specified domestic transactions of directors remuneration.

5 ITA No.1960/PUN/2019 7. Aggrieved with the above adjustments, the asssesee filed the present appeal before the Tribunal with the grounds extracted above. 8. We shall now take up ground-wise adjudication in the following paragraphs. 9. Ground no.3 relates to the transfer pricing adjustment of Rs.4,73,65,411/- on account of Specified Domestic Transaction of Director’s Remuneration. On this issue, the case of the assessee is that the said adjustment determined by the TPO is excessive. Further, it is the case of the assessee that the Assessing Officer/TPO accepted the TNM Method as the most appropriate method at the entity level. While accepting the same at the entity level involving aggregated approach, an attempt of the TPO to isolate the specified domestic transactions of director’s remuneration for separate benchmarking is improper as the same is against the principle of subsuming. No particulars method is applied by the TPO/Assessing Officer for benchmarking the same and no sustainable comparables were chosen for benchmarking the said transactions. 10. Further, it is the case of the AR for the assessee before us that similar benchmarking exercise were undertaken with specified domestic transaction of director’s remuneration and the fate of the said adjustments decided in favour of the assessee by the Tribunal in assessee’s own case for the assessment year 2014-15 vide ITA No.1891/PUN/2018 order dated 04.09.2019. A copy of the same is placed at page 171 of the Paper Book – I. In this regard, ld. Counsel for the assessee brought our attention to the ground no.9 and read out the relevant paras relate to the granting of relief to the assessee considering the another order of the Tribunal in the case of

6 ITA No.1960/PUN/2019 Hindustan Unilever Limited vs. Addl.CIT in ITA No.7868/Mum/2010 for the assessment year 2006-07 dated 10.12.2012. 11. On hearing both the parties on this issue, we find, the Tribunal granted relief on similar transactions of specified domestic transactions of directors remuneration. For the sake of completeness, the ground no.9 as well as its related paras are extracted hereunder :- “Ground : 9. Inappropriately not aggregating the specified domestic transaction pertaining to payment of director's remuneration while applying TNMM. Erred on the facts and in circumstances of the case and in law by not aggregating the specified domestic transaction pertaining to payment of director's remuneration while applying TNMM. Related paras extracted showing the decision of the Tribunal in favour of the assessee: 9. Coming to second issue vide ground of appeal No.9, the learned Authorized Representative for the assessee stated that once entity level results are taken up, then the margins are higher and the Directors remuneration would get subsumed in the same and no separate adjustment in this regard is to be made. For this, he placed reliance on the decision of Mumbai Bench of Tribunal in the case of Hindustan Unilever Limited Vs. Addl.CIT in ITA No.7868/Mum/2010, relating to assessment year 2006-07, order dated 10.12.2012. The learned Authorized Representative for the assessee pointed out that in case grounds of appeal No.7 and 9 are decided in favour of assessee, then the issue of proportionate adjustment raised vide ground of appeal No.8 would become academic. 10. The learned Departmental Representative for the Revenue on the other hand, strongly placed reliance on the orders of authorities below with special reference to the order of DRP. …….. 15. Now, coming to the linked issue of payment of Directors remuneration, in case entity level results are taken and where the margins were within arm's length price, then no separate adjustment merits to be made on account of Directors remuneration, as the said expenditure subsumed. In this regard, we find that Mumbai Bench of Tribunal in the case of Hindustan Unilever Limited Vs. Addl.CIT (supra) had deliberated on the issue and held that if benchmarking was being done at the entity level either for the AE transactions or for the entire transactions, then there was no requirement for further adjustment as all the adjustments made by Assessing Officer / TPO would get automatically subsumed including those adjustments also relating to royalty, etc. as done by the TPO. Applying the said principle, we hold that no separate adjustment is to be made on account of Directors remuneration in the hands of assessee. In view thereof, we allow grounds of appeal No.7 and 9 raised by assessee and ground of appeal No.8 becomes academic and the same is dismissed.”

7 ITA No.1960/PUN/2019 12. From the above, it is evident that the benchmarking of the specified domestic transactions of director’s remuneration while accepting the aggregated results, is not sustainable. The decision of the Mumbai Bench of the Tribunal in the case of Hindustan Unilever Limited (supra) helps the assessee. Therefore, ground no.3 should be allowed in favour of the assessee as a covered case. Accordingly, we order. Thus, the ground no.3 is allowed. 13. Ground no.4 relates to the transfer pricing adjustments of Rs.3,29,677/- on account of international transaction of corporate guarantee. In this regard, the case of the assessee is that the benchmarking of such international transaction of corporate guarantee is not valid as the referral made by the Assessing Officer to the TPO does not make a reference to such international transaction. As per the assessee, the referral to TPO is merely in respect of the specified domestic transaction of director’s remuneration. It is a jurisdictional issue and the assessee relies heavily on the express provisions of section 92CA of the Act read with Instruction No.3/2016 of CBDT dated 10.03.2016. The assessee desires the said adjustments should be deleted on the ground of jurisdiction itself. Without prejudice, it is prayer of the assessee that 2% flat rate adopted by the TPO/Assessing Officer is inappropriate and prayed for restricting the adjustment to 0.5% of the loan amount of the year as approved by the various Courts and the Tribunals. 14. Referring to the jurisdictional issue, ld. Counsel for the assessee brought our attention to the order of the TPO and read out first para of the order dated 31.10.2018 and mentioned the referral is only for “computation of ALP in relation to the specified domestic transactions”. It is the case of the assessee that the TPO cannot go into the transactions which were not

8 ITA No.1960/PUN/2019 referred by the Assessing Officer. Referring to the express language of the provisions of section 92CA of the Act, ld. Counsel for the assessee submitted that the specified domestic transaction was incorporated by the amendments by the Finance Act, 2012 w.e.f. 1.4.2013. Referring to the provisions of sub- sections 92A and 92B of the same section, ld. Counsel mentioned that these two sub-sections were brought into Statute by the Finance Act, 2011 w.e.f. 1.6.2011. Referring to these two sub-sections, ld. Counsel mentioned that these two sub-sections made a reference to the “international transactions” only and the TPO has power to go into the other international transactions which comes to his notice during the benchmarking exercise. The absence of such power to the “specified domestic transactions” was highlighted by the ld. Counsel for the assessee. Further, ld. Counsel submitted that the specified domestic transactions were excluded while giving power to the TPO to go into the other international transactions which are not referred by the Assessing Officer to the TPO. Arguing that the specified domestic transaction of directors remuneration alone are referred by the Assessing Officer to the TPO for benchmarking, ld. Counsel mentioned that, in such case, the TPO cannot increase the jurisdiction and proceed to benchmark the questionable international transactions of corporate guarantee transactions. 15. Referring many decisions, ld. Counsel mentioned that such jurisdiction of the TPO was not appreciated by the higher judicial. Referring to the Jurisdictional High Court’s judgement in the case of Times Global Broadcasting Company Limited Vs. Union of India vide Writ Petition No.3386 of 2018 dated 15.03.2019, ld. Counsel for the assessee mentioned that it is a case where, unlike case of the assessee, the Assessing Officer made a reference to the TPO for benchmarking an international transactions. During the proceedings, the TPO extended the scope of jurisdiction to specified

9 ITA No.1960/PUN/2019 domestic transactions also. Thus, before us, the question of validity of the jurisdiction of the TPO was raised. At the end of the proceedings, the Hon’ble High Court held in favour of the assessee and disapproved the jurisdiction of the TPO on such referred specified domestic transactions. The relevant paras are recited by the ld. Counsel for the assessee. 16. On hearing both the sides, we find it relevant to extract the contents of para 5, 14 and 17 of the said judgement (supra) and the same are extracted as under :- “5. In this background, we may first advert to the transfer pricing adjustment in relation to the payment of creditors in demerger process. We may recall, admitted position is that the petitioner, holding a belief that this transaction was not a specified domestic transaction, had not reported the same in the form 3CEB. The reference made by the Assessing Officer to the TPO was confined to those specified domestic transactions reported by the petitioner. Consequently, undisputed fact that emerges from the record is that this transaction was not part of the reference made by the Assessing Officer. In this context, the question arises whether the TPO could have on his own, suo motu examined the transaction and made transfer pricing adjustment in his order. …….. 14. In plain terms, in absence of sub-sections (2A) and (2B) of Section 92CA, the TPO would get jurisdiction to examine a transaction whether it is international or specified domestic transaction, only upon reference being made by the Assessing Officer under sub-section (1) of Section 92CA of the Act. Sub- section (2) of Section 92CA provides that where a reference is made under sub- section (1), the TPO would serve a notice to the assessee requiring him to furnish details in relation to international transaction or specified domestic transaction referred to in sub-section (1). Thus, the jurisdiction of the TPO to issue a notice to the assessee would be in relation to international transaction or specified domestic transaction for which reference is made by the Assessing Officer under sub-section (1). It is precisely for this reason that sub-sections (2A) and (2B) provide a deeming fiction where they provide that in case of an international transaction not referred to the TPO or an international transaction not reported by the assessee, which comes to his notice during the proceedings, the provision of the Chapter would apply as if such international transaction was one referred to in sub-section (1). In absence of this deeming fiction, it would not be open for the TPO to exercise the powers under the said chapter in relation to the transaction not referred to him. The reference to be made by the Assessing Officer is not an empty formality. Said reference has to be made only on approval of the Principal Commissioner or Commissioner. Legislature, requires the Assessing Officer to obtain an approval from senior Revenue Authority before a reference is made. Such requirement cannot be jettisoned by the TPO exercising sue motu jurisdiction over the transaction not reported to him. ………

10 ITA No.1960/PUN/2019 17. Inescapable conclusion that we have reached is that in relation to a specified domestic transaction, the TPO can under take transfer pricing study only in relation to those transactions which are referred to him under sub- section (1) of Section 92C of the Act. Sub-section (2A) and (2B) of Section 92C are confined to international transactions and with the aid of any interpretive process, the said provision cannot be applied to empower the TPO to examine any specified domestic transaction not referred to him by the Assessing Officer under sub-section (1). Any other view would be doing violence to the plain language of the statute.” 17. From the above extracted portions of the judgement, it is evident that the Hon’ble High Court dealt with the sub-sections 92A and 92B of the Act incorporated by the Statute by the Finance Act, 2011 and held that the TPO is barred from the benchmarking the specified domestic transactions when the Assessing Officer made a reference to the TPO for benchmarking the international transactions. The provision of these two sub-sections in the field of international transactions only was referred by this judgment (supra). In fact, it is evident from the contents of para 17 of the said judgement (supra) in relation to the specified domestic transactions, the TPO cannot undertook transfer pricing study only in relation to those transactions which are referred to him under sub-section (1) of section 92CA of the Act. Considering the categorical finding of the Jurisdictional High Court, the jurisdictional issue raised by the assessee has to be allowed in favour of the assessee. Accordingly, the core legal issue raised by the assessee is allowed without going into the merits of the benchmarking exercise or quantification of the adjustments. Accordingly, ground no.4 is allowed. 18. Considering the relief granted to the assessee on the core issue, we are of the opinion that the adjudication of other grounds raised without prejudice, becomes an academic exercise only. Accordingly, they are dismissed as academic.

11 ITA No.1960/PUN/2019 19. Ground no.5 relates to the deductibility of education cess and secondary & higher education cess u/s 37(1) of the Act. At the outset, both the ld. Counsels mentioned that this issue is now covered by the judgement of the Hon’ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd. vide Income Tax Appeal No.52/2018 dated 31st July, 2018. Brining our attention to the said judgement (supra), ld. Counsel for the assessee read out the relevant paras 12 and 13. Further, mentioning that the said ratio was incorporated for deciding the issue in favour of the assessee by the Co-ordinate Bench of the Tribunal in the case of DCIT vs. M/s. Bajaj Allianz General Insurance Company Ltd. vide ITA Nos. 1111 & 1112/PUN/2017 for the assessment years 2013-14 and 2014-15 dated 25.07.2019, ld. Counsel for the assessee read out the contents of para 12 and 13 where similar issue is adjudicated in favour of the assessee. For the sake of completeness, the said para 12 and 13 of the order of the Tribunal in the case of M/s. Bajaj Allianz General Insurance Company Ltd. (supra) are extracted hereunder :- “12. Referring to Ground No.4, the Ld. Counsel submitted that this ground relates to the allowability of deduction in respect of the educational cess paid by the assessee. The Ld. Counsel further submitted that this issue is covered in nature by virtue of the decision of the Hon‟ble High Court of Judicature for Rajasthan Bench at Jaipur in the case of Chambal Fertilisers and Chemicals Ltd. Vs. JCIT, Range -2, Kota. 13. On hearing both the parties on this issue, we find that this issue is covered one by the decision of the Hon‟ble High Court of Judicature for Rajasthan Bench at Jaipur in the case of Chambal Fertilisers and Chemicals Ltd. Vs. JCIT, Range -2, Kota wherein substantial question of law No.3 is relevant in this regard (Para 3) and the same was adjudicated by the Hon‟ble High Court at Para 12 of the judgment. The Hon‟ble High Court on this issue held the said question No.3 is answered in favour of the assessee. For the sake of completeness, the said Paragraph is extracted as under: “12. We have heard counsel for the parties. On the third issue in appeal no.52/2018, in view of the circular of CBDT where word “Cess” is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no.3 is

12 ITA No.1960/PUN/2019 required to be reversed and the said issue is answered in favour of the assessee.” From the above, it is evident that education Cess, which is not disallowable item, on its payment, the cess is an allowable expenditure as per provision of section 40(a)(ii) of the Act. Considering the settled nature of the issue as per the ratio laid down in the above referred case by the Hon‟ble High Court of Judicature for Rajasthan Bench at Jaipur, ground of Cross objection No.4 is allowed.” 20. Considering the above settled legal issue in favour of the assessee, in our view, the ground no.5 should be allowed in favour of the assessee as covered issue. 21. In the result, the appeal of the assessee is partly allowed. Order pronounced on this 15th day of January, 2020. Sd/- Sd/- (S. S. VISWANETHRA RAVI) (D. KARUNAKARA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 15th January, 2020. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The DRP-3, Mumbai. 4. The CIT(IT/TP), Pune.. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “lh” ब�च, 5. पुणे / DR, ITAT, “C” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.