TMI Blog2017 (8) TMI 1674X X X X Extracts X X X X X X X X Extracts X X X X ..... the each anniversary 20% of the total stock option granted would be treated as the expenses incurred on account of perquisite / cost of employee and the value of the said perquisite will be difference between the market price of the units on the date of vesting and the price at which the shares were granted. Prior to the date of vesting neither the assessee has incurred any liability to issue the shares nor the employee is entitled to exercise such option. Therefore only on the date of vesting this liability accrued/incurred and the assessee becomes liable to issue the shares at the time of exercise of option. Though the definite value of the shares can be quantified only at the time of exercise of option by the employee however, market price at the time of vesting can be considered for working out the amount of discount which is being perquisite during the vesting period. Thus an appropriate adjustment on account of difference in the market price at the time of vesting the right and at the time of exercise of option can be made in the accounts. In the case on hand the assessee has accounted the value of the RSU on the basis of market price at the time of grant whereas the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short DRP ) dt.7.12.2015 for the Assessment Year 2011-12. 2. The assessee has raised the following grounds : 1. On the facts and circumstances of the case, the final assessment order passed by the learned Assessing Officer ( learned AO ) / learned Transfer Pricing Officer ( learned TPO ) under the directions of the Hon ble Dispute Resolution Panel ( Hon ble DRP ) are bad in law. 2. The learned AO / TPO has erred in law and on facts in rejecting the Transfer Pricing ( TP ) Study Report of the Appellant on the basis of various presumptions and surmises. 3. The learned AO / TPO has erred in law and on facts in making an addition on account of transfer pricing adjustment of Rs. 126,360,387 to the total income of the Appellant towards reimbursement in respect of the Restricted Stock Units ( RSU ) given to Mr. Bharat Khanna, and interest on outstanding balances and advances receivable from its Associated Enterprises (AE s). 4. Transfer Pricing Adjustment made w.r.t RSU paid to Mr. Bharat Khanna: 4.1 The learned AO/DRP/TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. In view of this notional interest on outstanding receivables cannot be imposed on the Appellant. 5.6 Without prejudice to ground of objection 5.2, the learned AO/DRP/TPO erred in laws and on facts by not selecting LIBOR plus rate to determine the notional interest applicable for outstanding dues from the AEs. 6. The Appellant humbly prays for application of plus-minus 5% variation while computing arm s length price under section 92C. 3. Ground Nos.1 2 are general in nature and does not require any specific adjudication. 4. Ground Nos.3 4 are regarding Transfer Pricing Adjustment on account of Restricted Stock Units (RSU) given to Mr. Bharat Khanna which was reimbursed by the Associated Enterprise (AE). The Transfer Pricing Officer (TPO) noted that the assessee has made payment to only one employee namely Mr. Bharat Khanna in the entire year comprising of the salary of Rs.5,45,66,484 and RSU of Rs.6,94,57,483. The assessee has also disclosed an equivalent amount of RSU of Rs.6,94,57,483 received from OZ Management LLP, USA (AE). The TPO examined employment contract of Mr. Bharat Khanna and noted that the number of RSU granted to Mr. Bharat Khanna depends o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of employee is Rs.15,93,80,905 however the assessee has accounted this amount as it was recorded in the books of accounts on the date of grant and accordingly amortised proportionately over the year. He has referred to the entries in the books and submitted that the assessee has debited the same amount in the profit and loss account. This has been shown as reimbursed by the AE. He has further submitted that every year 20% of the total of USD 3.5 Millions has tobe vested to the employee and therefore the unit of shares are to be calculated by considering the 700,000 USD divided by the market price. This merely a cross charge by the assessee as an equal amount has been debited to the profit and loss account which has beenshown as reimbursed by the AE. Thus the learned Authorised Representative has submitted that what is allotted to the employee are the units and the value of the said units cannot be taken differently for the purpose of cost in the hand of the assessee and reimbursement of the same by the AE. Thus the learned Authorised Representative has submitted that when the assessee has not received anything from the AE but these are the entries recording stock option granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares in the hand of the employee is accepted by the assessee at Rs.15.93 Crores and the assessee has paid to the AE only a sum of Rs.6,94,57,483 and accordingly the differential amount of Rs.8,99,23,422 is the income of the assessee. He has relied upon the orders of the authorities below. 7. We have considered the rival submissions as well as the relevant material on record. As per the employment contract dt.8.9.2008 Mr. Bharat Khanna was employed by the assessee with the condition that he was entitled for stock option / RSU worth of USD 3.5 Millions shares of AE of the assessee listed on NYSE. These stock options were to be vested to Mr. Bharat Khanna over the period of five years in equal instalments of 20% each anniversary on 8th September. There is no quarrel about the number of units vested to Mr. Bharat Khanna during the FY 2009-10 and 2010-11. The dispute is regarding the value of these stocks granted to the employee as charged by the AE to the assessee at Rs.6,94,57,483 whereas the assessee has valued the stock granted and vested to Mr. Bharat Khanna at Rs.15,93,80,905 being perquisite for the purpose of deduction of tax at source. Thus the assessee has not disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise of option by the employee however, market price at the time of vesting can be considered for working out the amount of discount which is being perquisite during the vesting period. Thus an appropriate adjustment on account of difference in the market price at the time of vesting the right and at the time of exercise of option can be made in the accounts. 9. In the case on hand the assessee has accounted the value of the RSU on the basis of market price at the time of grant whereas the perquisite in the hand of the employee is valued on the basis of the market price at the time of vesting date and exercise of option. Therefore in case if the action of the TPO/A.O. is accepted that the assessee has received benefit from its AE of Rs.15,93,80,905 instead of Rs.6,94,57,483 then the said amount of Rs.15,93,80,905 is required to be charged to the profit and loss account being perquisite to the employee so that there will be resultant benefit being income of the assessee. But the TPO has considered only one side of the transaction and overlook another side being expenditure charged to the profit and loss account. Hence we direct the Assessing Officer / TPO to verify the fact whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Delhi Bench of the Tribunal in the case of Bentley Systems India Pvt. Ltd. Vs. ACIT 182 TTJ (Del) 26 as well as the decision dt.27.3.2015 of Hon'ble Delhi High Court in the case of CIT Vs. M/s. Cotton Naturals (India) Pvt. Ltd. in ITA No.233/2014. We further note that an identical issue has been considered by the co-ordinate bench of this Tribunal vide order dt.19.08.2016 in the case of Tally Solutions Pvt. Ltd. Vs.ACIT in IT(TP)A No.1364/Bang/2011 in para 5 as under : 5. As regards the alternative plea, we find that an identical issue has been considered by this Tribunal in a series of decisions. In the case of M/s. Goldstar Jewellery Ltd. Vs. JCIT (supra), Mumbai Bench of the Tribunal while dealing with an identical issue has held in para 8 as under : 8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm s length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. In the case in hand the credit period extended to the AE is a direct result of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the ITAT upheld the order of CIT (Appeals). While, upholding the order of CIT (Appeals), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and non-Associated Enterprises debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realized belatedly cannot be faulted. Following the earlier orders of this Tribunal, we hold that extending credit period for realization of sales to the AE is a closely linked transaction with the transaction of providing services to the AE and therefore cannot be treated as an individual and separate transaction of advance or loan. Accordingly, we direct the A.O/TPO to redo the exercise of determination of ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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