TMI Blog2023 (11) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable income of the assessee, it has been added back to the total income as per computation filed by the assessee. As gone through the judgments relied on by the ld. AR in this regard noted supra where it is held that ESOP expenditure is not to be treated as operating expenditure. Therefore we hold that ESOP expenses is non-operating expenditure for the purpose of computation of operating margin. Accordingly, the ld. CIT is not justified in treating it as operating expenses. Foreign exchange fluctuation loss and loss on investments in subsidiaries CIT has himself noted that these do not prima facie constitute operating expenses . However, CIT has directed the AO for fresh consideration of all the above three issues. In respect of foreign exchange fluctuation loss and loss on investments in subsidiaries of Rs. 228 million, when the ld. CIT himself observed that these are not operating expenses, he cannot direct the TPO for fresh examination of the same issue. Accordingly, we hold that the order passed by the TPO is not erroneous and prejudicial to the interests of the revenue and the impugned order of the ld. CIT is quashed. Decided in favour of assessee. - Shri G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Para 8 above, the TPO had also excluded an amount of INR 228 million (i.e. INR 4,282 million less ESOP cost of INR 4,054 million) from the operating cost for which there is no explanation and without making inquiries or verification which should have been made. The above failure falls within the meaning and scope of clauses (a) and (b) of the said Explanation 2 above to section 263 of the Act thus rendering the order erroneous in so far as it is prejudicial to the interests of the revenue. The assessee has in its submissions referred to forex loss and impairment in investment in subsidiary that have been treated as non-operating items by the TPO. The reference made by the assessee therefore to forex loss and impairment in investment in subsidiary is not relevant to the issue at hand since even by the abovementioned definition in the safe harbour rules, the said items do not prima facie constitute -, operating expense. 27. In view of the above discussion and for the reasons detailed in the foregoing paragraphs, I hold that the order u/s 92CA(3)of the Act dated 24.01.2021 is erroneous and prejudicial to the interests of the revenue. Accordingly, the said order is set aside on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant is a private limited company, engaged in the business of providing software development services and Information Technology enabled Services ( ITeS ) comprising of customer and seller support services, transaction risk management services and other back-office support services to its Associated Enterprises ( AEs ). 10. During the previous year relevant to assessment year 2017-18, the appellant filed its return of income on 30.11.2017 declaring total income of Rs. 667.3 crores. Subsequently, the appellant s case was selected for scrutiny and reference was made to the TPO for determination of arm s length price of international transaction(s). 11. It is submitted that in the transfer pricing report for the relevant assessment year 2017-18, the segmental operating margin of the appellant company was computed by considering total operating cost at Rs. 37,821 million as against total expense of Rs. 42,103 million debited to the profit and loss account for the said year. [Refer pages 31 and 112 of the PB] 12. The aforesaid operating cost was computed by excluding three line items (aggregating to Rs. 4,282 million) as under: (a) Share based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts submitted during the course of assessment proceedings: Particulars of notice/reply Summary of information sought/filed before the TPO Notice dated 06.01.2020 [Copy enclosed at pages 16 to 17 of paperbook] The TPO vide the said notice, required the appellant to produce all documents relied upon in support of computation made to determine the arm s length price of the international transactions. The relevant extracts of the notice is re-produced hereunder: a. Complete set of audited final accounts and auditor's report. b. Copies of information and documents maintained under section 92D(1) of Income-tax Act read with rules 10D(1)and (3)of Income-tax Rules, along with a copy of transfer pricing study report. c. Copies of orders of CIT (Appeals) and ITAT for earlier years involving adjudication of transfer pricing issues. d. Copies of relevant agreements in respect of international transactions. e. Copy of FormNo.3CEB. f. Copy of TPO's order for the last assessment year . k. Details of all international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TP Study) reducing (i) share based compensation, (ii) foreign exchange differences; (iii) impairment of investment from operating cost. 24.01.2021 The TPO passed the order under section 92CA(3), duly accepting the aforesaid information filed by the appellant. 18. On perusal of the aforesaid, it will kindly be appreciated that the TPO made extensive/ necessary enquiries to verify and examine the operating cost as reported by the appellant in so far as pointed queries were raised qua: (a) Basis of determination of operating cost for the purpose of computation of segmental operating margin; (b) Stock Incentive Plan/ Employee Stock Option Plan/ RSUs granted by the AE to employees of appellant; (c) Forex loss/gain arising out of delay in trade receipts. 19. It is evident from the above that specific queries were raised by the TPO during course of assessment and detailed explanations were filed by the appellant in response thereto, on consideration of which the operating cost as reported by the appellant was accepted and no adverse inference was drawn by the TPO. 20. It may kindly be appreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the issues were specifically raised and considered by the TPO, in such circumstances, it is not open to the CIT(TP) to exercise revisionary jurisdiction, unless the TPO is found to have failed to make inquiries/ verification, which should have been made as per law but were not made. The CIT cannot, merely on difference of opinion with regard to the manner of the inquiries/ investigation, exercise revisionary jurisdiction. 25. In the aforesaid circumstance, it is submitted that the summary set aside of the TP Order by the CIT(TP), without any reasoning is wholly unjustified and without jurisdiction. Plausible view in law Order not erroneous 26. On perusal of the above, it is submitted that apart from the fact that there was no error whatsoever, in the TP order, the view adopted therein was, in any case, a plausible view and thereby no interference is called for in terms of section 263 of the Act. 27. It has consistently been held by the Courts that if the assessing officer (in this case, TPO) has adopted one of the courses permissible in law which has resulted in loss of revenue, or where two views are possible and the assessing officer (in this case, TPO) has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder that safe harbour provisions under Rule 10TA(j) of the Income Tax Rules, 1962 ( the Rules ) provide for inclusion of ESOP cost as part of the operating cost base, it is submitted that safe harbour rules cannot be considered as a benchmark in cases where the assessee itself has not opted for application of the same. [Refer: Rule 10TD r.w.r 10TE, CDBT Instruction No. 500/139/2012-FTD-I] 34. The fact that the appellant has not opted for application of safe harbour rules has been duly acknowledged/admitted by the CIT(TP) at para 20 of the order, by categorically observing The assessee has not opted for safe harbour rule . 35. In view of the above, it is submitted that the CIT(TP) erred in observing that ESOP cost should be treated as part of operating expense, by merely placing reliance on safe harbour rules, which has not even been opted by the appellant. Re: (ii) Forex loss to be excluded from operating expenses 36. It is submitted, that in the present case, the forex loss/gain is not on account of delay in trade receipts but in respect of fluctuation in forex rates (date of recording in books vs realisation date). Such forex loss/gain, it may be appreciated is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that have been treated as non-operating items by the TPO. The reference made by the assessee therefore to forex loss and impairment in investment in subsidiary is not relevant to the issue at hand since even by the abovementioned definition in the safe harbour rules, the said items do not prima facie constitute operating expense. (emphasis supplied) 43. Thus, on perusal of the aforesaid and the assessment records for the assessment year under consideration, it will kindly be noticed that hearings in relation to the assessment proceedings were spread over a long period of time. A number of hearings were conducted and various details were filed/produced on issues raised from time to time on various dates of hearings. The order of the TPO came after due application of mind on the issues raised by the CIT(TP) in the revisionary proceedings, taking into account the records and evidence filed by the appellant in that behalf. 44. In the case of the appellant, it is respectfully submitted that the TPO accepted the claims of the appellant after thorough investigation on the subject matter. Re: Lack of enquiry vs. Inadequate Enquiry 45. It is well settled law that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the appellant as elaborated supra and there was due examination and application of mind on part of the TPO which also stands recorded in the assessment order. Further, the view taken by the TPO is a plausible view as demonstrated above. 50. It is respectfully submitted that, in the aforesaid circumstances, the TP order dated 24.01.2021 for the assessment year 2017-18, is neither `erroneous nor `prejudicial to the interests of the Revenue warranting exercise of revisionary jurisdiction under section 263 of the Act. Re (c): Explanation 2 to section 263 relied upon by CIT(TP) 51. In the impugned order passed under section 263 of the Act, the CIT(TP) has harped upon Explanation 2 to section 263 of the Act to hold that non-conduct of proper enquiry by the TPO renders the order erroneous and prejudicial to the interest of the Revenue. 52. In this regard, it is submitted that the aforesaid Explanation cannot, in our respectful submission, be read to provide unfettered powers to the CIT to set aside an assessment order, on a paltry ground of insufficient enquiry being conducted by the TPO, at his whims and fancies. 53. Even after insertion of the aforesaid Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nonoperating without making necessary/proper enquiries and verification. The CIT(TP) has, however, not pointed out the error, if any, much less the prejudice caused to the interests of Revenue as a consequence of alleged non-verification, while setting aside the assessment. The CIT(TP) has not, before setting aside the assessment on the said issue, recorded any prima facie finding on the merits thereof. 57. The Courts have in the undermentioned decisions held that the CIT while exercising revisionary powers under section 263 of the Act and setting aside the assessment order, is required to record prima-facie finding on the merits of the matter after conducting necessary enquiry(ies) and is not empowered to blanketly set aside the assessment order on the ground that sufficient enquiries were not conducted by the assessing officer: - ITO v. DG Housing Projects Ltd.:343 ITR 329 (Del.) - DIT v. Jyoti Foundation: 357 ITR 388 (Del.) - CIT v. Delhi Airport Metro Express (P) Ltd.: ITA No. 705/2017 (dated 5.9.2017); - CIT v. Modicare Ltd.: 759/2016 (dated 20.9.2017) - CIT v. Prithvi Raj And Co.: 199 ITR 424 (Del) - CIT v. O. P. Seth: 201 ITR 635 (Del) - CIT, Mysore v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he intent of section 59 from which retrospective operation can be necessarily inferred. We are unable to see such intent . The new section 59 is altogether different from the old section 62 and there is nothing in the new section 59 from which an intent to give retrospective effect to it can be concluded. 6 There is a well settled principle against interference with vested rights by subsequent legislation unless the legislation has been made retrospective expressly or by necessary implication. If an assessment has already been made and completed, the assessee cannot be subjected to reassessment unless the statute permits that to be done . Reference may be made to CED v. Smt. Ila Das [1981] 132 ITR 720 (Cal.) where an attempt to reopen the estate duty assessment consequent upon the insertion of the new section 59 was held infructuous. 7. We hold that section 59 is not retrospective in operation and that the reopening of the assessment under section 59 is bad in law . (emphasis supplied) 63. Therefore, it is submitted that on this ground too, the impugned order needs to be quashed as void ab initio, passed wholly without jurisdiction. Re: Assessment order passed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the employees of the subsidiary company and debited expenses to the P L account of Rs. 4,054 million. He further noted that the foreign exchange fluctuation loss of Rs. 110 million and loss on investment in subsidiaries of Rs. 118 million was to be treated as operating expenses. However, the TPO has not treated these as operating expenditure and accepted the TP study of the assessee. We note that the TPO has issued show cause notice to the assessee and the assessee has duly replied. Copy of notices and reply are placed in the PB which were referred to by the ld. AR during the course of hearing. The ld. AR submitted that as per the disclosure policy, ESOP expenses are required to be disclosed as per the requirement of Ind-AS 102, therefore it was debited to P L account by the assessee. While calculating the taxable income of the assessee, it has been added back to the total income as per computation filed by the assessee. We have gone through the judgments relied on by the ld. AR in this regard noted supra where it is held that ESOP expenditure is not to be treated as operating expenditure. Therefore, respectfully following the above judgment, we hold that ESOP expenses is non- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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