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2017 (8) TMI 1674 - AT - Income TaxTP Adjustment on account of Restricted Stock Units (RSU) given to Employee which was reimbursed by the Associated Enterprise (AE) - TPO noted that the assessee has made payment to only one employee in the entire year comprising of the salary and RSU - value of the 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 employee at Rs.15,93,80,905 being perquisite for the purpose of deduction of tax at source - HELD THAT - Method of valuing the stock option it is settled proposition that prior to the vesting date on which the options granted to the employee vest with him there will be no liability accruing to the assessee. The liability on account of stock option accrued only on the date when the employee becomes entitle to exercise the option at the end of the vesting period and it is only when the actual amount of discount at the hand of the employee would be determined for the purpose of quantifying perquisite. Hence at the end of the each anniversary 20% of the total stock option granted would be treated as the expenses incurred on account of perquisite / cost of employee and the value of the said perquisite will be difference between the market price of the units on the date of vesting and the price at which the shares were granted. Prior to the date of vesting neither the assessee has incurred any liability to issue the shares nor the employee is entitled to exercise such option. Therefore only on the date of vesting this liability accrued/incurred and the assessee becomes liable to issue the shares at the time of exercise of option. Though the definite value of the shares can be quantified only at the time of exercise of option by the employee however, market price at the time of vesting can be considered for working out the amount of discount which is being perquisite during the vesting period. Thus an appropriate adjustment on account of difference in the market price at the time of vesting the right and at the time of exercise of option can be made in the accounts. In the case on hand the assessee has accounted the value of the RSU on the basis of market price at the time of grant whereas the perquisite in the hand of the employee is valued on the basis of the market price at the time of vesting date and exercise of option. Therefore 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. TP Adjustment on account of notional interest on the outstanding receivable - HELD THAT - As decided in M/S. TALLY SOLUTIONS PVT. LTD. VERSUS ASST. COMMISSIONER OF INCOME TAX 2016 (8) TMI 774 - ITAT BANGALORE 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. As regards the transaction of loan and advances the same is international transaction in itself and therefore the interest chargeable to the AE has to be decided as per the arm s length interest. However, there are various decisions on the point that the advance is given in foreign exchange therefore the arm s length interest has to be applied on the basis of LIBOR 1.5%. Accordingly, the TPO/A.O. is directed to recompute the arm s length interest on loans and advances on the basis of LIBOR 1.5% and consequent adjustment if any.
Issues Involved:
1. Validity of the final assessment order. 2. Rejection of the Transfer Pricing (TP) Study Report. 3. Addition on account of transfer pricing adjustment related to Restricted Stock Units (RSU) and interest on outstanding balances and advances. 4. Transfer Pricing Adjustment on RSU paid to an employee. 5. Transfer Pricing Adjustment on Outstanding Receivables. 6. Application of plus-minus 5% variation while computing arm’s length price. Detailed Analysis: 1. Validity of the Final Assessment Order: The appellant challenged the final assessment order passed by the AO/TPO under the directions of the DRP, claiming it was "bad in law." However, this issue was deemed general and did not require specific adjudication. 2. Rejection of the Transfer Pricing (TP) Study Report: The AO/TPO rejected the TP Study Report based on various presumptions and surmises, which the appellant contested as erroneous in law and on facts. 3. Addition on Account of Transfer Pricing Adjustment: The AO/TPO made an addition of Rs. 126,360,387 to the appellant's total income due to transfer pricing adjustments related to RSUs given to an employee and interest on outstanding balances and advances receivable from Associated Enterprises (AEs). 4. Transfer Pricing Adjustment on RSU Paid to an Employee: The TPO noted that the appellant made payments to an employee, including salary and RSUs. The appellant disclosed an equivalent amount of RSUs received from its AE. The TPO found discrepancies in the value of RSUs granted and added Rs. 8,99,23,422 to the appellant's income. The appellant argued that the RSUs were recorded at market value on the grant date and amortized over the vesting period. The Tribunal directed the AO/TPO to verify whether the appellant charged more than Rs. 6,94,57,483 to the profit and loss account as against the payment to the AE, and to consider both sides of the transaction for accurate assessment. 5. Transfer Pricing Adjustment on Outstanding Receivables: The TPO noted significant outstanding debts from AEs and imputed notional interest on these receivables. The appellant contended that these were not separate international transactions and suggested using LIBOR + 1.5% for interest calculation. The Tribunal referred to various decisions, including those from the Delhi Bench and Hon'ble High Courts, which supported the appellant's view. The Tribunal directed the AO/TPO to consider the outstanding period as part of the main international transaction and to use LIBOR + 1.5% as the arm's length interest for recomputation. 6. Application of Plus-Minus 5% Variation: The appellant requested the application of a plus-minus 5% variation while computing the arm's length price under section 92C. This issue was not specifically adjudicated in the judgment. Conclusion: The Tribunal partly allowed the appeal, directing the AO/TPO to verify and recompute the adjustments based on the guidelines provided, particularly considering the methodology for valuing RSUs and the appropriate interest rates for outstanding receivables and advances. The judgment emphasized the importance of considering both sides of transactions and adhering to established legal precedents in transfer pricing cases.
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