TMI Blog2017 (10) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... per the decision and guideline mentioned in the decision supra. - ITA No.1024/Mum/2017 - - - Dated:- 21-9-2017 - Shri Shamim Yahya, AM And Shri Ram Lal Negi, JM For The Appellant : Shri Ajit Kumar Jain For The Respondent : Shri Jayant Kumar ORDER Per Shamim Yahya, AM This appeal by the assessee is directed against the order of Assessing Officer pertaining to assessment year 2012-2013 passed pursuant to the direction of the Dispute Resolution Panel, Mumbai ( DRP for short) u/s 144C(5) dated 29.11.2016. 2. The grounds of appeal read as under:- The grounds stated hereunder are independent of, and without prejudice to one another. 1. On the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer ('AO'), the directions issued by the Hon'ble Dispute Resolution Panel ('DRP') and the order passed by the learned Transfer Pricing Officer ('TPO') are bad in law and liable to be quashed as they are not in accordance with law; 2. On the facts and circumstances of the case and in law, the learned AO erred in assessing the total income of the Appellant at INR 9,64,54,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble DRP is incorrect and ought to be allowed.... 5. On the facts and in the circumstances of the case and in law, the Learned AO has erred in levying consequential interest under section 234B and 234C of the Act. The Appellant prays before your Honour to direct the Learned AO to delete the levy of interest under section 234B and 234C of the Act. 6. On the facts and in the circumstances of the case and in law, the Learned AO has erred in initiating the penalty proceedings with regards to the Transfer Pricing adjustment. The Appellant prays that the additions made by the learned AO pursuant to the directions issued by the learned DRP be deleted and consequential relief be granted. The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law. 3. Learned Counsel of the assessee submitted that out of the above grounds, several grounds are general in nature and some are consequential in nature. He submitted that he is pressing only the issues relating to transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the findings given in A.Y, 2011-12. Other than stating that the TP method which could be most reliable and in less complex way be applied to the AE, no substantiation has been done and hence, the objection is ab initio rejected. 5.2.2 The assessee has next raised the objection that the TPO has considered the assessee as a KPO Company where as the assessee is an ITeS company and as per the comparables given by the assessee of various ITeS Companies, the ALP should be at 15.14 % of the Transaction and accordingly the assessee's operating margin considering its AE segment being at 20.03%, the transactions pertaining to rendering of business process and back-office services were at arm s length. However, taking the KPO companies into account, the TPO held the assessee to be a KPO and therefore, made TP adjustment considering the ALP to be at 35.16 %. 5.2.2 We have gone through the submission of the assessee and reject the claim of the assessee that it is an ITeS service provider and not a KPO company. It is seen that the main activity of the assessee company is to provide Analytic Solutions to lower the cost of customer acquisition, to improve brand performances, impr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company had 4000 employees while assessee employs only 200 employees. In this regard learned Counsel placed following case laws:- ( i) Delhi High Court decision in the case Pr.CIT v. Actis Global Services Private Limited [ITA No.417/2016 order dated 05.08.2016] ( ii) Delhi High Court decision in the case of Rampgreen Solutions Private Limited [ITA No.102/2015 order dated 10.08.2015] 10. Accordingly learned Counsel submitted that because of absence of segmental data and the diverse nature of activity which Eclerx Services engaged into, it should not be included in the comparables. 11. Per contra, the learned Departmental Representative submitted that the functional analysis shows that the assessee is providing high end analytical solution. It is also a K.P.O. He submitted that the functions are broadly similar. The learned DR further submitted that high profit is not a ground for rejection. 12. Upon careful consideration, we note that assessee is engaged in providing analytical solutions to its AEs to lower the cost of customer acquisition, to improve brand performances, improve multi dimensional reporting, understand consumer behavior, and many other analyti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, there are lot of other functions by M/s.Eclerx Services which arenot done by the assessee. Hence, absence of segmental data make comparability not feasible. In these circumstances and in the facts and circumstances discussed above considering the precedents as above, we are of the considered opinion that Eclerx Services is not comparable in this case to that of the assessee because of diverse nature of its functions. A large number of them are dissimilar to that of the assessee and the fact that proper segmental data are not available. Hence, holding that Eclerx Services cannot be taken as a comparable in this regard, we remit the issue to the TPO to make the computation afresh after excluding Eclerx Services as a comparable, and making further computation as per law. 16. Ground relating to disallowance u/s 37(1) for ESOP compensation expenses is not dealt with in the draft order of the Assessing Officer. However, the issue relating to this has been dealt with by the DRP. The DRP on this issue has dealt with as under:- 4.2.1 We have considered the facts of the case and submissions made by the assessee, The assessee in the return of income filed had disallowed ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n careful consideration, we find that allowability of ESOP expenditure u/s 37(1) was elaborately considered by the Special Bench in the case of Biocon Limited (supra). We may refer to the exposition in brief as under (Head Note only):- HELD : Whether discount under ESOP is a short capital receipt There is no doubt that the amount of share premium is otherwise a capital receipt and, hence, not chargeable to tax in the hands of company. If a company issues shares to the public or the existing shareholders at less than the otherwise prevailing premium due to market sentiment or otherwise, such short receipt of premium would be a case of a receipt of a lower amount on capital account. It is so because the object of issuing such shares at a lower price is nowhere directly connected with the earning of income. It is in such like situation that the contention of the revenue would properly fit in, thereby debarring the company from claiming any deduction towards discounted premium. [Para 9.2.6] It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its employees, but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure under section 37(1). [Para 9.2.7] Whether discount is a contingent liability It is a trite law that deduction is permissible in respect of an ascertained liability and not a contingent liability. From the stand point of the company, the options under ESOP vest with the employees at the rate of 25 per cent only on putting in service for one year by the employees. Unless such service is rendered, the employees do not qualify for such options. In other words, rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honour its commitment of allowing the vesting of 25 per cent of the option. It is at the end of the first year that the company incurs liability of fulfilling its promise of allowing proportionate discount, which liability would actually be discharged at the end of the fourth year when the options are exercised by the employees. [Para 9.3.2] The principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod depending upon the length of service provided by him to the company. In all such schemes, it is at the end of the vesting period that option is exercisable albeit the proportionate right to option is acquired by rendering service at the end of each year. [Para 10.3] Similar is the position from the stand point of the company. An obligation falls upon the company to allot shares at the time of exercise of option depending upon the length of service rendered by the employee during the vesting period. The incurring of liability towards the discounted premium, being compensation to employee, is directly linked with the span of service put in by the employee. It, therefore, transpires that a company, under the mercantile system can lawfully claim deduction for total discounted premium representing the employees cost over the vesting period at the rate at which there is vesting of options in the employees. [Para 10.4] Therefore, it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised. [Para 10.5] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reduced by the amount actually paid. The position that such amount was or was not taxable during some of the years in the hands of the employees is not relevant in considering the occasion and the amount of benefit accruing to the employee under ESOP. Any exemption or the deductibility of an allowance or benefit to employee from taxation does not obliterate the benefit itself. It simply means that the benefit accrued to the assessee but the same did not attract tax. The position has now been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. [Para 11.1.4] It is palpable that since the remuneration to the employees under the ESOP is the amount of discount with respect to the market price of shares at the time of exercise of option, the employee cost in the hands of the company should also be with respect to the same base. [Para 11.1.5] The amount of discount at the stage of granting of options with respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price at which option is given to the employees. However, since there was no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a subsequent year, the assessee-company took the market price of the share on the date of grant of option at ₹ 919. No material worth the name was placed on record to indicate as to how a share with face value of ₹ 10 had been valued at ₹ 919 for claiming deduction towards discount at ₹ 909 per share. This aspect of valuation of shares at ₹ 919 per share needs to be examined by the Assessing Officer. [Para 12.2] 21. No contrary decision of higher judicial forum on the issue of allowability of ESOP expenses has been shown to us. The decisions referred by the learned Departmental Representative from the jurisdictional High Court in the case of Vodafone India (supra) is not on the subject of deductibility of ESOP expenditure. In the said decision of Hon ble jurisdictional High Court has held that issue of shares at a premium by the assessee to its non-resident holding company does not give rise to any income from an admitted internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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