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2022 (9) TMI 1413 - AT - Income TaxTP Adjustment - determination of Arm s Length Price (ALP) in respect of an international transaction entered into by the assessee with its Associated Enterprise (AE) - Comparable selection - high turnover is a ground for excluding companies as not comparable with a company that has low turnover - HELD THAT - We hold that the 3 companies whose turnover is more than Rs.200 Crores as listed in the chart below should be excluded from the list of the comparable companies. Deduction of interest paid on CCD s - Whether the revenue authorities were justified in treating the CCDs as Equity and disallowing claim for deduction of interest paid on CCD s? - HELD THAT - Disallowance of interest expenses cannot be sustained on the basis that CCDs were in the nature of equity. Tribunal has ruled that the definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible foreign currency. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during pre-conversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. The same principle will apply to the other corporate laws cited by the DRP in its directions. Whether on the basis of book entries by which the interest was not debited in the profit and loss account but claimed in the computation of income, the disallowance can be sustained? - On this aspect, the law is well settled and laid down in the case of Kedarnath Jute Mfg. Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. It is undisputed that the assessee has deducted TDS on the entire interest expenditure. The assessee while benchmarking interest payment to Associated Enterprise for the purpose of Sec.92 has benchmarked the entire interest amount of Rs.6.09 Crores. Thus, looked at from any perspective, the claim of the assessee for deduction of the sum deserves to be accepted. Disallowance of the said sum of interest expenses and the consequent addition to the total income is therefore deleted. The relevant ground of appeal of the assessee Ground is accordingly allowed. Disallowance of actual RSU cost recharge made to the holding company on account of allotment of its shares to the employees of the Company - HELD THAT - The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. The said decision has been upheld by the Hon ble Karnataka High Court in the case of BIOCON Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT Therefore the issue in so far as this Bench of ITAT is concerned is concluded by the decision of the Hon ble Jurisdictional High Court. Pendency of identical issue before the Hon ble Supreme Court cannot be the basis not to follow decision of jurisdictional High Court. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. We therefore hold that the claim of the assessee has to be allowed. Grd.No.11 is accordingly allowed.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Disallowance of interest on Compulsory Convertible Debentures (CCDs). 3. Disallowance of Restricted Stock Units (RSU) cost recharge. Issue-Wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The assessee contested the addition made to its total income due to the determination of ALP for international transactions with its Associated Enterprise (AE). The primary contention was the exclusion of companies with high turnover from the list of comparables. The Tribunal noted that the assessee's turnover was Rs.64.45 Crores and emphasized that companies with a turnover exceeding Rs.200 Crores should not be considered comparable, citing the Tribunal's consistent stand and several judicial precedents. The Tribunal directed the exclusion of three companies with turnovers exceeding Rs.200 Crores from the list of comparables, thereby allowing the assessee's profit margin to be at arm's length. Consequently, no other grounds regarding ALP determination needed adjudication. 2. Disallowance of Interest on Compulsory Convertible Debentures (CCDs): The assessee issued CCDs to its AE and claimed the interest paid on these CCDs as a deductible expense. The AO disallowed Rs.4,53,11,205 out of the total interest claimed, treating CCDs as equity based on RBI's FDI policy and thin capitalization rules. The Tribunal, referencing the ITAT Bangalore's decision in CAE Flight Training (I) Pvt. Ltd., held that CCDs should be treated as debt until conversion into equity. It emphasized that RBI's definition in the context of FDI policy cannot be applied to other contexts like interest allowability. The Tribunal ruled that the entire interest expense of Rs.6.09 Crores should be allowed as a deduction, rejecting the AO's disallowance based on book entries and emphasizing the principle of real income taxation. 3. Disallowance of Restricted Stock Units (RSU) Cost Recharge: The assessee incurred expenses related to RSUs allotted to its employees by the ultimate holding company and claimed these expenses as employee costs. The AO disallowed the claim, treating it as a capital expenditure. The Tribunal, referencing the Karnataka High Court's decision in Biocon Ltd., held that ESOP expenses are revenue expenditures and should be allowed as deductions. It emphasized that the expenditure was incurred to compensate employees for their services and should be treated as employee costs. The Tribunal allowed the assessee's claim, rejecting the AO's disallowance. Conclusion: The Tribunal partly allowed the assessee's appeal, directing the exclusion of high-turnover companies from the list of comparables for ALP determination, allowing the entire interest expense on CCDs, and permitting the deduction of RSU cost recharge as revenue expenditure.
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