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TMI Blog2017 (8) TMI 1674X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 erred in law and on facts by making transfer pricing adjustment to the service revenue of the Appellant although no services were rendered by the Appellant to its AEs during the year under consideration. 4.2 The learned AO/DRP/TPO has erred in law and on facts by concluding that the Appellant has undervalued the payment made for RSUs to Mr. Bharat Khanna, in the financial statements and thereby adding the entire differential amount between the financial statement and the form 16A of the employee and the markup as TP adjustment. 4.3 The learned DRP/TPO has erred in laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 on contemporary stock price on New York Stock Exchange (NYSE). The assessee does not grant its own share to Mr. Bharat Khanna but the shares of another company which is listed in New York Stock Exchange were to be granted as per the contract. Further the number of shares have to be calculated by taking into consideration the amount of USD 3.5 Million and divided by the average closing price on the NYSE of the share for 20 trading days prior to 8th Sept., 2008. Since the shares were to be allotted in 5 tranches annually and therefore for the Assessment Year 2011-12 the number of share were to be allotted by considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 to the employee of the assessee by the AE and the value of the said stock vested with the employee is recorded in the books of accounts of the assessee as a cost of employee and contra entry as a receipt being reimbursement from the AE. The learned Authorised Representative has explained the methodology how the units were to be vested in equal instalments of 20% per year on each anniversary i.e. on 8th September starting from 2009 over five years. Thus he has submitted that 40,323 stock units vested during the FY 2009-10 and 2010-11 respectively. He has further submitted that the stock units were computed by the AE bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 disputed that as per the TDS Certificate under Form 16 the assessee has valued it at Rs.15,93,80,905. The TPO took the same value as the benefit received from the AE on account of grant of stock and since the assessee has been charged by the AE at Rs.6,94,57,483 the differential amount of Rs.8,99,23,422 was added to the income of the assessee. It is pertinent to note that the question of any benefit on this account arises only when the assessee charged to its profit and loss account on account of perquisite to the employee at Rs.15,93,80,905 as shown in the TDS Certificate but the AE of the assessee has charged the assessee onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore 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 whether the assessee has charged more than Rs.6,94,57,483 to the profit and loss account as against the payment to the AE resulting benefit or income to the assessee. Accordingly, for the limited purpose of verification we remand this issue to the record of the TPO/A.O. 10. Ground No.5 is regarding Transfer Pricing Adjustment on account of notional interest on the outstanding receivable. 11. The TPO noted that the assessee has outstanding debts of Rs.25,85,90,057 from its AE M/s. OZ Management LP and Rs.2,44,23,120 from M/s. Oz Real Estate, Singapore. He has further noted that debts are outstanding for a period of more than one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tar 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 the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm's length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the view that after the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended 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 closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP." Accordingly, by following the earlier decision of the Tribunal we direct the TPO/A.O. to consider the outstanding period as part of the main international transaction and then make necessary and appropriate adjustment in the margins by taking LIBOR + 1.5% as arm's length interest. 13. As regards the transaction of loan and advances the same is international transaction in itself and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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