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2022 (5) TMI 1514 - AT - Income TaxTP Adjustment - adjustment made on account of interest chargeable on Optionally Convertible Debentures (OCDs) - determining the ALP by imputing interest in respect of OCD s at LIBOR plus 150 bps - HELD THAT - We find that the issue in appeal is squarely covered in favour of the assessee by a coordinate bench decision in the case of Cadila Healthcare Ltd. 2017 (4) TMI 462 - ITAT AHMEDABAD held that the consideration for having given the loan is as we have noted earlier opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. While the learned Transfer Pricing Officer had discussed at length nature of debenture being a debt instrument what he has missed out is the fact the character of an optionally convertible debenture is materially different vis- -vis a debenture simplicitor and that it s the opportunity to subscribe to equity which in such a case becomes pre-dominant motive for subscription of the optionally convertible debenture. There is not even a dispute that the OCD s in question have been subsequently been converted into equity capital at par value. The actual value of OCD being in the convertibility of OCD in the equity capital is thus not even in doubt. We uphold the plea of the assessee and delete the impugned ALP adjustment - Decided in favour of assessee. Disallowing the amount of sundry advances written off - Amount written off by the appellant in its books of accounts considering the same as prior period expenses though accepting that same are for the purpose of business and are revenue in nature - AO disallowed the claim for write off of the advances written off with the short observation that the assessee could not provide enough justification for these write off - HELD THAT - CIT(A) has given a categorical finding to the effect that the expenses are revenue in nature and pertain to business of the assessee but has disallowed the write off only on the ground that expense pertains to the earlier years. What he has apparently missed out is the fact that so far as write off of dues on Business News Asia Pvt Ltd. and Seachange International is concerned the write off is for the amounts which are unrecoverable. The claim for deduction therefore can only arise in which amount is written off and that is preciously what the assessee has claimed. We see no infirmity in the same. So far as the amounts given to MIB are concerned it is only when the assessee realized that MIB issues only receipts and no separate instrument of the invoice nature for registration of channels that the write off was claimed. There is no dispute about genuineness or nature of payment or the fact that this deduction has not been made earlier. In these circumstances the amount admittedly being of revenue nature should have been allowed as a deduction. In view of these discussions as also bearing in mind entirety of the case we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance. Nature of expenses - Expenses incurred on account of Employee Stock Option Plan Scheme - revenue expenditure allowable as deduction u/s. 37 - HELD THAT - As decided in assessee own case for the assessment year 2008-09 sustain the order of the Ld.CIT(A) in deleting the ESOP expenses allowing the same as revenue expenditure. Ground raised by the Revenue is dismissed. Disallowance u/s 14A r.w.r. 8D - Sufficiency of own funds - HELD THAT - As decided in assessee s own case including the order for assessment year 2008-09 when assessee has sufficient own and interest free funds for making the investments no disallowance is warranted under Rule 8D(2) (ii) of I.T. Rules. Subject to verification the claim of the assessee is allowed. Disallowance under Rule 8D(2)(iii) of I.T Rules - As following the Special Bench decision in the case of Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI we hold that only those investments which yielded dividend income should be considered for disallowance under Rule 8D(2)(iii) of the I.T Rules. Thus we direct the Assessing Officer to recompute the disallowance u/s. 14a r.w. Rule 8d of the Act in the light of our above observations.
Issues Involved:
1. Determination of Arm’s Length Price (ALP) for Optionally Convertible Debentures (OCDs). 2. Disallowance of sundry advances written off. 3. Deduction of expenses incurred on Employee Stock Option Plan (ESOP) Scheme. 4. Disallowance under Section 14A of the Income Tax Act read with Rule 8D. Detailed Analysis: 1. Determination of ALP for OCDs: The primary issue revolved around the determination of the ALP for OCDs issued by the assessee to its associated enterprises (AEs). The Transfer Pricing Officer (TPO) considered the OCDs as debt and benchmarked the interest at LIBOR + 262 bps, resulting in an ALP adjustment of Rs. 2,46,40,344. The CIT(A) upheld the adjustment in principle but reduced the rate to LIBOR + 150 bps, limiting the adjustment to Rs. 1,59,79,785. The assessee argued that OCDs are quasi-equity and should not be benchmarked as debt. The Tribunal found that the issue was covered by the decision in Cadila Healthcare Ltd. vs ACIT, where it was held that OCDs are quasi-capital and the primary consideration is the opportunity to convert into equity on favorable terms. Consequently, the Tribunal deleted the ALP adjustment of Rs. 2,46,40,344, rendering the Assessing Officer’s grievances on quantification infructuous. 2. Disallowance of Sundry Advances Written Off: The assessee claimed a deduction of Rs. 59,01,363 for sundry advances written off, which the Assessing Officer disallowed, considering them as prior period expenses. The CIT(A) upheld the disallowance. The Tribunal noted that the CIT(A) acknowledged the expenses as revenue in nature and related to the business but disallowed them solely because they pertained to earlier years. The Tribunal found that the write-offs were for amounts unrecoverable and claimed in the year they were written off. The Tribunal allowed the deduction, directing the Assessing Officer to delete the disallowance of Rs. 59,01,362. 3. Deduction of ESOP Expenses: The issue of deducting ESOP expenses was considered a legacy issue, fully covered by earlier decisions in the assessee’s own cases for previous years. The Tribunal referred to the co-ordinate bench’s decision for AY 2008-09, which allowed ESOP expenses as revenue expenditure. Following the same, the Tribunal upheld the CIT(A)’s order, allowing the ESOP expenses as deductible under Section 37 of the Income Tax Act. 4. Disallowance under Section 14A read with Rule 8D: The Assessing Officer raised grievances regarding the disallowance under Section 14A read with Rule 8D, particularly concerning interest disallowance and the inclusion of investments yielding exempt income. The Tribunal noted that these issues were covered by earlier decisions in the assessee’s own cases, including AY 2008-09. It was held that if the assessee had sufficient own and interest-free funds, no disallowance under Rule 8D(2)(ii) was warranted. Additionally, only those investments yielding dividend income should be considered for disallowance under Rule 8D(2)(iii). The Tribunal directed the Assessing Officer to verify the claims and recompute the disallowance accordingly, confirming the CIT(A)’s order. Conclusion: The appeal filed by the assessee was partly allowed, and the appeal filed by the Assessing Officer was dismissed. The Tribunal upheld the deletion of the ALP adjustment for OCDs, allowed the deduction for sundry advances written off, confirmed the deductibility of ESOP expenses, and directed the recomputation of disallowance under Section 14A read with Rule 8D.
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