TMI Blog2023 (1) TMI 1263X X X X Extracts X X X X X X X X Extracts X X X X ..... HIGH COURT] Decided in favour of assessee. - ITA No. 1015/Mum/2021 - - - Dated:- 2-1-2023 - SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER For the Appellant : Ms.Jasmin Amalsadvala Mr.Hiten Chande.AR For the Respondent : Mr. Jayant Jhaveri.DR ORDER PER PAVAN KUMAR GADALE JM: The assessee has filed the appeal against the order passed u/s 143(3) U/sec144C(13) r.w.s 143(3A) 143(3B) of the Income Tax Act, 1961 passed in pursuance to the directions of the Dispute Resolution Panel (DRP) order u/s 144C(5) of the Act dated 26.02.2021.The assessee has raised the following grounds of appeal. GENERAL: 1. On the facts and in the circumstances of the case and in law, the learned AO/ Assistant Commissioner of Income-tax (Transfer Pricing) -4(2)(2) ( TPO ) subsequent to the directions issued by the Hon'ble DRP has erred in assessing the total income at Rs. 152,67,16,425 as against returned income of Rs. 116,80,08,280 computed by the Appellant. 2. PARTI-TRANSFER PRICING ADJUSTMENTS: Transfer pricing ('TP') adjustment on account of benchmarking and allocation of royalty in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate that, as per the DRP directions, arm's length price of contract R D transaction to be determined protectively, as the ownership right in patents is being contested by the Appellant. 2.7 On the facts and in the circumstances of the case and in law, the learned AO/TPO erred in passing the order giving effect to the order of DRP without granting opportunity to the Appellant. 2.8 The Appellant prays that, the TP adjustment of Rs. 9,38,84,840/- made in respect of Contract R D by benchmarking cost plus mark-up fee be deleted and the book value of the said transactions be held to be the arm's length price of the transactions. Allocation of Royalty: 3. On the facts and in the circumstances of the case and in law, the learned AO/ TPO / DRP erred in holding that the Appellant has performed significant functions when providing scientific and technical services to Unilever and accordingly, should be entitled to a share in the royalty earned by Unilever amounting to Rs. 98, 10,00,000/-. 3.1 On the facts and in the circumstances of the case and in law, the learned AO/ TPO / DRP failed to appreciate that the Appellant is engaged into 'contract resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of accounting followed by the Appellant and applicable accounting standard; Appellant is required to account for all its expense on accrual basis. 7.3 They failed to appreciate that, these expenses are incurred for incentivizing, encouraging and retaining employees for smooth functioning of the business and therefore are revenue in nature and allowable u/s 37(1) of the Act. Deduction in respect of Education Cess: 8. That based on the facts and in the circumstances of the case and in law. Education Cess on income tax levied for AY 2016-17 ought to be allowed as a deduction under the head income from business and profession. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal. 2. At the time of hearing, the Ld.AR submitted that the Grounds of appeal no 1 to 5 are in respect of transfer pricing adjustment issues and the assessee has filed a dated 21.06.2022 intimating the conclusion of Advance Pricing Agreement(APA) and withdrawal of Grounds of appeal in case of transfer pricing adjustment, and the ground of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions entered by the assessee in respect of following issues: Sl No Transaction Adjustment (Rs.) 1. Scientific and technical services R D benchmarking following TNMM 9,38,84,840/- 2. Enterprise support service 48,61,66,505/- 3 Share in Royalty Income From AE 98,10,00,000/- Total 156,10,51,345/- 5. Subsequently, the AO has passed Draft assessment order u/s 144C of the Act with a transfer pricing adjustment of Rs. 156,10,51,345/-. Aggrieved by the draft assessment order, the assessee has filed objections before the DRP. Whereas the DRP has passed the directions u/s 144C(5) of the Act on 26.02.2021 with proposed adjustment to the earlier TP adjustments and the DRP has noted that the DRP directions are binding on the AO/TPO u/s 144C(10) of the Act. The AO/TPO has considered the DRP directions and revised the transfer pricing adjustments dealt at Page 3 Para 6 of the order as under: 6 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also rejected the objection no 6 raised by assessee on this issue and upheld the addition. 8.19 Hence, the claim of the assessee of 'Employees Share Option Scheme' (ESOP) Expense of Rs. 30,41,00,000/- is hereby disallowed and added to the income of the assessee. 7. Finally the AO has assessed the total income of Rs. 152,67,16,425/- and as per the provisions of book profit u/s 115JB of the Act of Rs. 128,54,54,042/- and passed the order u/s 143(3) r.w.s 144C(13)r.w.s 143(3A) 143(3B) of the Act dated 30.03.2021. Aggrieved by the final assessment order, the assessee has filed an appeal before the Hon ble Tribunal. 8. At the time of hearing the Ld. AR submitted that the A.O./DRP has erred in confirming the disallowance of foreign exchange loss, whereas the loss is in the nature of revenue expenditure and relied on the judicial decision of CIT Vs. Woodward Governer India (P) Ltd., [2009] 179 taxman 326 (SC). In respect of ESOP expenses claimed, the Ld. AR submitted that it is a revenue expenditure has to be allowed u/sec37(1) of the Act and relied on the decision of CIT(LTU) Vs M/s Biocon Ltd. The Ld.AR has substantiated the submissions with the factual paper boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d applicability of Ratio of the decision cannot be overlooked. Accordingly we direct the Assessing officer to delete the addition of foreign exchange loss . 10. The Ld.AR has made elaborate submissions on the ESOP scheme expenditure and provisions of law on the allowability of claim. We found that the Honble High Court of Karnataka in the case of CIT(LTU) VS M/S Biocon Ltd in ITA.No.653 of 2013 dated11-11- 2020 has observed as under: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 11. We find the facts of the present case are similar in respect of claim of ESOP Expenses and we follow th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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