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TMI Blog2022 (2) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ('the Act'), by the National e-Assessment Centre ('the NeAC'), be struck down as invalid, as the order is bad in law and on facts. 1.2. The Hon'ble Dispute Resolution Panel ('ORP') has erred in completing the proceedings in undue haste and in violation of the principles of natural justice by not affording an opportunity to the Appellant to furnish additional submissions and documents which are pertinent to the additions made. thereby rendering the impugned order to be bad in law and liable to be quashed. 2. Reliance on the Draft Assessment Order (`DAO') of AY 2009-10 dated October 28, 2013 for making adjustments for AY 2015-16 2.1. The NeAC and the Hon'ble DRP have erred in law and on facts by placing reliance on the DAO dated October 28, 2013 of AY 2009-10. Specifically, the NeAC and Hon'ble DRP have erred: a) In not following the settled legal principle of res judicata not applying to income-tax proceedings; b) In not appreciating the facts that the order on which reliance is placed was a draft assessment order; c) In not appreciating the facts that the DAO dated October 28, 2013 on which the NeAC has placed reliance is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;) even though the Appellant has not submitted any ICA with the learned Jurisdictional Assessing Officer. Bangalore ('JA0')/ NeAC during the course of the assessment proceedings for the subject AY. 3.8. The Hon'ble DRP has erred on facts by concluding that the Appellant failed to match the accounting invoices with the SOFTEX forms without taking cognizance of the submissions made by the Appellant during the assessment proceedings for the subject AY. 3.9. The Hon'ble DRP has erred on facts by concluding that the Appellant failed to produce the relevant documents and cogent evidences in support of its claim, and has failed to prove receipt of sale proceeds of computer software exported out of India is being brought into India without taking cognizance of the submissions made by the Appellant before the Hon'ble DRP. and with the learned JAO during the DRP proceedings for the subject AY. 3.10 The NeAC and the Hon'ble DRP have erred on facts by concluding that the Appellant failed to produce the relevant documents citing voluminous data without taking cognizance of the various submissions made by the Appellant before the Hon'ble DRP, and with the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd concluding that the Appellant has not furnished evidences. 4.5. The NeAC has erred on facts and in law in not appreciating that certain sums paid are mere reimbursements and hence the Appellant was not required to deduct tax at source on such payments. 4.6. The NeAC has erred in law and on facts in placing reliance on the sworn statement of the CA issuing Form 15CBs which does not pertain to the current year to hold that the certificates issued by the CA are not reliable and disallowing the amount for the current year. 5. Disallowance of claim made under section 40(a) of the Act pertaining to AY 2014-15 5.1. The NeAC and the Hon'ble DRP have erred on facts and in law in disallowing a sum of INR 35.63,42,098 claimed under section 40(a) of the Act, holding the same was disallowed under section 37 of the Act in AY 2014-15. 5.2. Without prejudice to the above, the NeAC and the Hon'ble DRP have erred in failing to appreciate that as a consequence of the said disallowance of the amount in AY 2014-15 under section 37(1) of the Act. the Appellant is to be allowed a deduction in the current AY, since the reversal of provision has been credited to profit and loss accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble DRP have erred on facts in not taking cognizance of the submissions by the Appellant that in the Advance Pricing Agreement entered into by the Appellant and the CBDT, ESOP expense has been considered as Operating cost. The NeAC and the Hon'ble DRP have erred on facts and in law in considering the same as capital in nature, as this would amount to the two arms of government treating the same transaction differently. 8. Assessment and reference to the Assistant Commissioner of Income-tax - Transfer Pricing - 1(3)(2) (`the then learned TPO') are bad in law 8.1. The final assessment order issued by the NeAC is bad on facts and in law and is in violation of the principles of natural justice. 8.2. The learned JAO erred in making a reference to the then learned TPO, inter-alia. since he did not record an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 8.3. On the facts and in the circumstances of the case and in law, the Additional Commissioner of Income-tax - Transfer Pricing - 1(1), 1(2) & 1(3) ('learned TPO') / NeAC/ learned JAO erred in not demonstrating that the motive of the Appellant was to shift prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of the Act and the Rules. The Hon'ble DRP / NeAC erred in upholding the same. 9.7. The learned TPO/ learned JAO also erred on facts and in law, in presuming that the Appellant has incurred 'excessive expenditure' as part of its AMP function of promoting 'brand' of the AE. In this regard, the learned TPO/ learned JAO erred in questioning the commercial expediency of the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10. Without prejudice to Objection in Ground No. 9 above, the learned TPO/ learned JAO erred in selecting functionally dissimilar companies while determining the arm's length price for the alleged AMP function performed by the Appellant. The learned TPO/ learned JAO further erred in not taking cognizance of the intensity of AMP functions undertaken by respective comparable companies selected vis a vis the alleged AMP function performed by the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10.1. The learned TPO/ learned JAO erred in selecting Goldmine Advertising Ltd. without establishing functional similarity between the Appellant and the aforementioned company in relation to the all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he NeAC erred in upholding the same. 12. The Hon'ble DRP has erred in law and on facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the learned JAO / transfer pricing order issued by the learned TPO and confirming the draft assessment order. 13. Non grant of credit for entire Tax Deducted at Source (`TDS') 13.1. The NeAC has erred in law and on facts in not granting credit for the entire TDS of INR 554.53.87.685 claimed in the return of income. 14. Short grant of Foreign Tax Credit (`FTC') 14.1. The NeAC has erred in law and on facts in restricting the credit of FTC to INR 74,69,20,665 as against INR 85.25,08,406 claimed in the modified return of income. 14.2. Without prejudice to the above, the NeAC has erred in law and on facts in not granting foreign tax credit for the full amount of foreign taxes paid, disregarding that relief for tax holiday claim under section 10AA of the Act was fully denied. 15. Non grant of credit for Self-Assessment Tax paid 15.1. The NeAC has erred in law and on facts in not granted for the Self-Assessment Tax credit amounting to INR 11.41.57,197 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in both the appeals stands dismissed. 5. Ground No. 3 - It is submitted that, this Tribunal in Assessment Year 2013-14 had examined the various aspects of the relief claimed u/s. 10AA of the Act and held it in favour of assessee, subject to the proceeds having been brought into India in convertible foreign exchange. It is submitted that this Tribunal remanded only one aspect to the DRP i.e. to verify whether the sale proceeds have been brought into India in convertible foreign exchange by IBM India. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. This Tribunal observed and held as under. "D.9.4. Respectfully following the same, we remand this issue to DRP to verify receipts if sale proceeds of computer software exported out of India, being brought into India in convertible foreign exchange. DRP is at liberty to examine whether, convertible foreign exchange brought into India represents consideration received for export of computer software. Accordingly, this objection is remanded to DRP." "6.11. As observed in detail by coordinate bench of Pune Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y applying the principles laid down by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence (P.) Ltd. reported in (2021) 432 ITR 471. Accordingly this ground raised by assessee stands allowed for statistical purposes. 7. Ground Nos. 5 & 6 is in respect of disallowance under section 37(1) in respect of amounts that was suo moto disallowed by assessee u/s. 40(a). We have perused the submissions advanced by both sides in the light of records placed before us. This issue has been considered by this Tribunal in Assessment Year 2013-14 as under: "7.14.6.DRP shall then verify the detaild filed by assessee, in respect of disallowances made under section 40 (a) for non-deduction of TDS: I. DRP shall verify the nature of provisions created by assessee in preceding year (AY:2012-13), and year under consideration that is disallowed under section 40 (a) of the Act. II. DRP shall verify if, TDS applies on amounts mentioned in provision account vis-a-vis the vendor invoice, and that, if, TDS has been complied with in accordance with the relevant provision in the year under consideration; III. DRP shall verify if any vendor have provided for a 'NIL' withholding/l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have perused the submissions advanced by both sides in light of records placed before us. The Ld.AR submitted that, as per the APA, the operating expenses in relation to the export services include the ESBP cross charges and therefore, it was submitted that, if one arm of the Government accepted the transactions, the other arm of the Government must also respect the same. The revenue authorities however disallowed the amount under the ESOP and also disallowed as a part of disallowance of payments to AEs thereby leading to a double disallowance of the same expense. 10. The issue of deductibility of ESOP expense issue is covered in favour of the assessee by following judicial precedents of various High court / Tribunals, including Special Bench: * Delhi High Court - Pr. CIT v. Lemon Tree Hotels (P.) Ltd. reported in (2019) 104 taxmann.com 26 (Delhi) SLP granted by SC reported in (2019) 104 taxmann.com 27 (SC) "1. .............................. since the ITAT followed the previous judgments in CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) the expenditure had to be allowed. ........................... 2. Although the Revenue urges that in terms of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arising on account of the employees' stock option plan. This expenditure incurred as per the SEBI Guidelines and granted by the Officer could not be considered as erroneous one calling for the exercise of jurisdiction under section 263 of the Act." * Bangalore Special Bench - M/s Biocon Ltd. v. DCIT [2013] 35 taxmann.com 335 (Bangalore - Trib.) (SB) "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 when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for discount on options is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd.'s case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. 12.2 It would be imperative to highlight certain points having bearing on the issue which have come to our notice during the course of hearing. The AO is directed to look, inter alia, into these aspects in quantifying the amount of eligible deduction. a. The assessee-company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scount was deductible over the vesting period. Further the Special Bench pointed out that the liability for discounts which arose or were incurred during the vesting period required adjustment due to the fact that the actual discount could only be determined at market price when the employees exercise their options. The assessee should make a suitable downward or upward adjustment at that time. 11. Before coordinate bench of this Tribunal in case of Novo Nordisk India (P.) Ltd. v. DCIT reported in (2014) 42 taxmann.com 168 similar issue arose on identical facts like that of assessee. This Tribunal relied on (i) Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) and (ii) Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836/30 Taxman 467 (Kar.) The Tribunal held that the expenditure in question was wholly and exclusively used for the purpose of the business of the assessee and motivated its workforce and allowed the deduction u/s 37(1) of the Act. Respectfully following the above view, we direct to grant deduction to assessee on ESPO expenses in accordance with law, based on the principles laid down in the decision referred hereinabove. Accordingly this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transac's tion that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between assessee and its AE, whereby assessee is obliged to spend excessively on AMP in order to promote the brand of AE in India. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the - burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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