TMI Blog2016 (8) TMI 821X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. In view of the above discussion, we are of the considered opinion that the TPO is right in making a mark up of managerial services post incorporation of the A.E. Thus we hold that: (a) There can be no mark-up on reimbursement of expenses incurred by the assessee prior to incorporation of NDTV Network Plc UK. (b) The action of the A.O. in charging a mark-up on reimbursement of expenses incurred by the assessee on management services after incorporation is upheld. Though the Ld.Counsel for the assessee raised arguments on percentage of mark-up, in view of the percentage of mark-up adopted by the assessee in the subsequent years, we do not see any reason to interfere with the rate of mark-up adopted by the Ld.Transfer Pricing Officer. - Decided partly in favour of assessee Expenses incurred on upgradation of accounting software - Held that:- CIT(A) has allowed this expenditure as revenue in nature. While doing so he observed that the assessee itself has characterised certain software purchase on its own as capital assets. He observed that certain software needs regular upgradation or change as per the requirement of fast changing broadcasting industry and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce any evidences in support of its claim vis a vis nature of services. 4. That on facts and in law the CIT(A)/TPO erred in not appreciating that appellant s activities of provision of Management Services of ₹ 65,01,612/- to its AE s were at Arm s Length Price (ALP). 5. That on facts and in law the CIT(A)/TPO erred in making/upholding the applicability of a markup of 18.18% to the costs incurred by the appellant on the alleged provision of Management services . 6. That on facts and in law the CIT(A) erred in upholding that for the purposes of benchmarking the international transactions the TPO was justified in using only the current year data. 7. That on facts and in law the CIT(A) erred in upholding a disallowance of ₹ 21,28,41,993/- on account of Employees Stock Option Plan (ESOP) expenses claimed by the appellant on a pro rata basis over the total vesting period. 7.1. That without prejudice on facts and in law the CIT(A) erred in not accepting the alternate claim of the appellant in allowing a deduction of ₹ 35,51,86,538/- for ESOP expenses on the basis of exercise of options by the employees. 7.2. That on facts and in law t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction appears to be consistent with the arm s length standard from an Indian transfer pricing perspective. 7.1. He further took us through the various findings in the transfer pricing reports, as regards the reimbursement expenditure, the FAR analysis etc. Thereafter he argued as follows. (a) The receipt of amount as reimbursement for share holder activity and reimbursement of expenses, were of identical character. The expenditure for share holder activity has been incurred by the assessee in order to conceptualise and give effect to an efficient NDTV group structure and that the expenditure has been incurred for dealing with tax, finance and other advisory and it was performed as a promoter share holder. (b) That there was no obligation on the part of the NDTV Net Work Plc (UK) to reimburse the expenditure incurred on share holder activity to the NDTV group. Only an amount of 1,73,88,214 towards management services is to be reimbursed. (c) That there is no risk involved in respect of reimbursement of expenditure or in respect of share holder activity and hence such reimbursement does not require any mark up. (d) TNMM is found to be the most a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y because the Transfer Pricing report shows share holder activity as an international transaction, it cannot be taken as one, when doing so is contrary to law. He submitted that the international transaction as defined in S.92B means a transaction having a bearing on profits, income, loss or assets and submitted that, share holder activity does not have a bearing on these items. (l) He relied on the decision of Hon ble Delhi High Court in the case of M/s Li Fung India Pvt.Ltd. vs. CIT (2014) 361 ITR 85 and submitted that, no intangible asset has been created. When the assessee s employees worked for the formation of the assessee s UK Subsidiary and the expenditure reimbursed was nothing but the cost of assessee s employees for the time worked in formation of the UK company. 7.2. On the issue of ESOPs, the second ground in the assessee s appeal, the Ld.Counsel submitted that in the assessee s own case for the A.Y. 2008- 09, the A.O. applied the propositions laid down by the Special Bench of the ITAT in the case of Biocon Ltd. 35 Taxman 335, wherein the assessee was an intervenor for the A.Y.2006-07 and 2007-08 and completed the assessments. He submitted that the issue be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of share holder activity was reimbursed, there is no requirement of charging a mark up on provision of management services and that such cross subsidisation is not permitted under Transfer Pricing provisions. He relied on the order of the TPO and submitted that no new fact was brought before the Ld.CIT(A). He pointed out that note no.2 to form no.3CEB, which is at page 82, what is recorded was, the opinion of the assessee and not the auditor. On the arguments of the assessee that it was acting as a father to promote the son, he submitted that both the entities are separate jurisdictional entities. He distinguished the decision of the Hon ble Delhi High Court in the case of M/s Li Fung India P.Ltd. vs. CIT 361 ITR 85 by submitting that it was a case relating to creation of intangible assets. Regarding Mumbai High Court decision in Vodafone, 368 ITR 1, it was submitted that this decision was rendered in the context of attribution of income and hence not relevant to the case on hand. 7.7. On the issue of disallowance of ESOPs he made elaborate oral and written submissions. On a query from the Bench he submitted that the issue has been considered by the Special Bench of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to create the corporate structure for the global media and non-news media related businesses of NDTV. 2.3 NDTV Networks Plc NDTV Networks Plc was incorporated in United Kingdom on 30 November 2006 under the laws of England and Wales . The company has been incorporated to create a presence for NDTV in the global media market and to develop new avenues of businesses around the world . NDTV Networks Plc has a total of four subsidiaries and two Joint Ventures, each focused on a different genre of media : Entertainment; Internet and Convergence ; Lifestyle channels; technology innovation and integration services; Media Process Outsourcing: and establishing news channels in other countries. The subsidiaries of NDTV Networks Plc are : NDTV Imagine Ltd - The company has been established w i th the aim of launching a Hindi general mass entertainment channel in the near future . In add i tion, NDTV Imagine Ltd will enter the movie business as well as several other areas in the field of entertainment . NDTV Lifestyle Ltd. :- The company is aimed at the media space that generates lifestyle programming and channels such as travel, fashion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial year 2006-07. 3.2.2 Risk Analysis There are no inherent external risks in respect of the above international transaction except for foreign exchange fluctuation risk, which is borne by NDTV as the loan was advanced in a currency which is different from the domestic currency of NDTV. 3.3 Receipt of Interest on Loan 3.3.1 Functions During the financial year 2006-07. NDTV has received interest amounting to Euros 6.514 on the loan advanced to NDTV Networks B.Y. as per the agreement entered between NDTV and NDTV Networks B.Y. 3.4 Receipt for Shareholder Activity 3.4.1 Functions During the financial year 2006-07, NDTV has performed functions to diversify into various domains of media. As part of this diversification and expansion process, NDTV has established a subsidiary NDTV Networks Plc in the United Kingdom. NDTV Networks Plc has further established subsidiaries to enable NDTV become a full-fledged media group, in order to conceptualise and give effect to an efficient NDTV group structure. the management of NDTV has performed activities prior to the incorporation of NDTV Networks Plc. The activities include making decisions rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of legal and consultancy, hotel, tour and travel 6,501,612 6,501,612 Refer Note 1 below 3. NDTV Networks Plc 90, High Holborn, London WC V 6XX Reimbursement of costs 62,180,644 62,180,644 Refer Note 2 below 4. NDTV Networks B.V. Martinus Nijhoflan 2,264 ES Delft, Amsterdam, The Neth erlands Subscription of shares 5,745,960 5,745,960 Refer Note 3 below 5. Emerging Markets 24x7 B.V. Martinus Nijhoflan 2,264 ES Delft, Amsterdam, The Neth erlands Subscription of shares 517,500 517,500 Refer Note 3 below 6. NDTV Networks B.V. Martinus Nijhoflan 2,264 ES Delft, Amsterdam, The Neth erlands Bank charges recoverable from NDTV Networks B.V. 5,922 5,922 Refer Note 4 below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members even though those group members do not need the activity ( and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies . It may be referred to as a shareholder activity , distinguishable from the broader term stewardship activity used in the 1979 report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group embers, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advise (trouble shooting), or in some cases assistance in day to day management. (Emphasis ours). 10.4. We would now examine the nature of activities that the assessee has undertaken. During the F.Y. 2006-07, the assessee has rendered management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40 12/31/2006 80005 Consultancy Professional fees, entertainment, tour travel, vehicle running maintenance, salary cost, transfer 22,340,600 12/31/2006 80006 Employee Compensation expenses 16,963,470 12/31/2006 84249 Salary Cost 99,682 12/31/2006 84249 Employee Compensation expenses (152,099) 12/31/2006 84249 Travel Cost 51,008 12/31/2006 84249 Mobile Phone Charges (55,310) Total : 45,295,590 10.7 . In our view the expenditure incurred prior to incorporation of the U.K. Company i.e. NDTV Network Plc UK can be classified as incurred for share holder activity. This subsidiary company has not come into existence on the date of incurring of this expenditure. The assessee company ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed in part. 12 . On the issue of ESOP, as already stated the Ld.D.R. has submitted his detailed arguments. 12.1. Ld.D.R. arguments are as follows. Legal perspective 1.1 The allowability of ESOP cost has been a matter of scrutiny by the tribunal and diverse views have been expressed by different benches. In the case of Ranbaxy Laboratories v DC1T [2009 TIOL 632 ITAT DEL], the tribunal has upheld the action of the AO of denial of allowability of the claim of ESOP cost in the profit and loss account and has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing option to the employees will be notional loss and not actual loss for which any liability is incurred. However, Hon ble Delhi High Court has admitted further appeal against the decision of Delhi Bench of the Tribunal in the above referred case, which is pending before the Hon ble Court for decision. It is pertinent to mention here that Hon ble Delhi High Court has admitted following questions of law:- (i) Whether on the facts and in the circumstances of the case, the tribunal erred in law in holding that the difference between the price at which stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yee, the provisional amount of discount availed as deduction during vesting period needs to be adjusted in the light of actual discount on the basis of market price of the shares at the time of exercise of option. It can be done by making suitable upward and downward adjustment of the provision at the time of exercise of option. 1.4 Whether guidelines of the SEBI on ESOP stipulate discounted premium on share as employee compensation and an allowable deduction u/s 37(1) of the Act? 1.4.1 Securities and Exchange Board of India (SEBI) has issued guidelines on employee stock option scheme (ESOP) which is known as Securities and Exchange Board of India Employee Stock Option Scheme and Employee Stock Purchase Scheme Guidelines 1999 up to dated September 3, 2009 (the SEBI Guidelines). The silent features of the guidelines are as under: 1.4.2 Employee compensation does not include ESOP. For the sake of clarity, definition of employee compensation as stipulated under the SEBI guidelines is extracted as under: (2) employee compensation means the total cost incurred by the company toward employee compensation including basic salary, dearness allowance, other allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, the accounting treatment shall be reversed by a credit to employee compensation expense equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion. (e) When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense. 1.4.4 Schedule 3 to the SEBI Guidelines provides methodology to determine fair market value of stock options. 1.4.5 The careful perusal of the SEBI guidelines on ESOP (relevant part of which have extracted above) has revealed that the conclusion of Special Bench of the Tribunal that the SEBI guidelines stipulate ESOP cost as employee compensation is contrary to clause (2) (a)(b) of the SEBI guidelines which clarifies that discounts at which share are issued to employee under ESOP is not employee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count to be called the share premium account ; and the provisions of this Act relating to the reduction of share capital of the company shall, except as provided in this section, apply as if the share premium account were paid up share capital of the company. For the sake of clarity provisions of section 78 of the Companies Act 1956 have been extracted below:- 78. Application of premiums received on issue of shares. (1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called the share premium account ; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the share premium account were paid- up share capital of the company. (2) The share premium account may, notwithstanding anything in subsection (I), be applied by the company (a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; fc) in writi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esulted in increase in paid up capital by equivalent amount, accordingly, discounted premium on share was capital in nature. It is also a settled proposition of law that any expenditure incurred for the expansion of the capital base of a company is to be treated as a capital expenditure as has been held by the Supreme Court in the cases of Punjab State Industrial Corporation Ltd v. C1T [1997] 225 ITR 792 (SC) and Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 (SC). Thus the expenditure and the receipts directly relating to the share capital of a company are of capital in nature and therefore, cannot be taxed under the Act save for certain exceptions. 1.5.3 Till assessment year 2012-13 share premium received by any company was not deemed as income. Even from AY 2013-14 share premium received by a listed company and some other specified companies is not deemed as income. Deeming provision as per Section56 (vii b) (inserted w.e.f. 01.04.2013) is applicable only in case of shares issued at price higher than fair market price by closely held companies (subject to some exceptions). And this is not applicable to a company which is listed on a recognized stock exchange and some oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is now repealed. Since provision of FBT were introduced for different intend and purchase the provisions of FBT cannot be used to interpret existing provisions of Section 37 (1) of the Act. The words and expressions defined in one statue as judicially interpreted do not afford a guide to the construction of the same words or expressions in another statue unless both the statues are pari materia legislations or it is specifically provided in one statue to give the same meaning to the words as defined in another statute. In view of above referred to settled legal position on the issue of interpretation of statute, it is respectfully stated that the tribunal has misdirected itself in relying on the provisions of the FBT while examining the nature of share premium u/s 37(1) of the Act. 1.5.5 Since the legislature considers discounted premium to the employees as Fringe Benefit accordingly discounted premium is an expenditure and cannot be treated as short capital receipt. v^.6 As discussed above, the FBT was in force w.e.f assessment year 2006- 07 to 2009-10 and the object of FBT was to ensure that fringe benefits given by the employer to employees disguised in expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other part of judgment of special bench has been discussed in succeeding paragraphs. 1.8 Whether discounted premium on share issued under ESOP is expenditure u/s 37(1) of the Act. 1.8.1 The term Expenditure has been judicially interpreted by various Courts including Supreme Court of India. In case of Indian Molasses Company Private Limited Vs. Commissioner of Income Tax, West Bengal [1959] 37 ITR 66, Hon ble Apex court has held the Spending in the sense of paying out or away of money is the primary amounting of expenditure . The term Expenditure is what is paid out or away and is something which is given irretrievably. For the sake of clarity the relevant part of judgment is reproduced as under :- ''Expenditure' is equal to expense: and expense is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another s expense. But the idea of spending in the sense of paying out or away money is the primary meaning and it is with that meaning that we are concerned. Expenditure is thus what is paid out or away and is something which is gone irretrievably ..... X X X X Extracts X X X X X X X X Extracts X X X X
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