2019 (9) TMI 438 - AT - Income Tax

Addition on account of the transaction with AE s by considering the assessee as a tested party - HELD THAT - In the identical facts circumstances in the own case of the assessee, the ITAT Delhi Bench in the AY 2008-09 2016 (5) TMI 157 - ITAT DELHI held that AE s are accepted as tested party being the least complex for comparability analysis of international transaction of the assessee. Allowance of compensation on ESOP and reversal of compensation of ESOP - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. As regards the contention of the ld. DR about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability - order of AO is reversed holding that deferred employees compensation debited to the profit and loss account is allowable u/s 37(1) of the Act. Regarding the reversal of ESOP expenses in P/L account - We find force in the argument of the learned AR that if the same amount of provision has suffered tax the in the earlier years, then this the cannot be made subject to tax in the year under consideration. The learned AR in support of his claim has also filed the details demonstrating the years in which such amount was suffered to tax. The details are placed on record - such details were not provided by the assessee before the lower authorities. Therefore we are inclined to restore this issue to the file of the AO for fresh adjudication Disallowance of deduction in respect of contribution made to Ranbaxy community healthcare society (RCHS) and Ranbaxy Science Foundation (RCF) - assessee company made a contribution and claimed as deduction u/s 80G but the deduction has not been set off due to a loss in the return - assessee claimed the same as business expenditure u/s 37/35 - AO rejected the contention of the assessee by observing that the earlier year case is pending before the Hon ble High Court of Delhi - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI reverse the decision of the AO and direct to delete the disallowance of ₹ 47 lacs and ₹ 1250000/- of contribution made by appellant to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation. Furthermore regarding failure to deduct tax on this sum, Ld. DR. could not point out particular section, which warrants deduction of tax at sources on this payment. Therefore, we also hold that in absence of specific section under which the tax is required to be deducted on such contribution without their being any service rendered by the recipient of the contribution disallowance u/s 40a(ia) also cannot be made. Addition u/s 14A - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI no disallowance over and above what is admitted by the assessee can be made. - Decided in favour of assessee Computing the book profit u/s 115JB for the disallowance made u/s 14A - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI the amount of disallowance cannot be worked out by ld. AO without recording satisfaction on examination of books about the correctness of disallowance made by the assessee which in this case has been made by assessee of ₹ 3311708/-. We have also held that disallowance cannot exceed the amount of exempt income. Hence, now no disallowance survives u/s 14A of the act so far as normal computation of total incomeof the appellant. The AO has added to the book profit amount of expense disallowed u/s.14A applying rule 8D of the Income tax act. As per our considered view, no addition u/s.115JB is warranted for amount of disallowance u/s.14A Deduction u/s 80IB/IC - year of assessment - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI claim u/s 80IB which is in the 7th year of its claim out of 10 years, has earned eligible profit and deduction thereon is claimed at the rate of 30% thereof and New Tablet Plant-I u/s 80IC for which this is the 4th year of the claim and assessee has claimed 100% of the eligible profit as deduction, cannot be disallowed in this year. Re-computing the capital gain/loss on leasehold land along with building during the year under consideration - HELD THAT - Sale proceeds allocated by the assessee towards the land appear to be un-reasonable. In most of the cases, the value of the land appreciates, and the value of the building depreciates barring the in exceptional circumstances. But in the present case, no such exceptional circumstances were brought to our notice by the assessee. Therefore, we disagree with the value adopted by the assessee for the land and the building. But we also note that the AO has also not brought any reasonable basis for allocation the sale proceeds as discussed. To our mind, he should have referred the matter to the DVO for the valuation of the land and building for the allocating the sale proceeds, but he failed to do so. After considering the facts in totality, we allocate the sale value of the building as discussed above. Hence the ground of appeal of the assessee is partly allowed. Claim of weighted deduction u/s 35(2AB) on the cost of assets provided to employees working in approved R D facilities - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI neither the AO nor the ld. DRP has applied its mind to the facts of this case and has not adjudicated on the issue. Facts of this expenditure with adequate details are also not record before us. Therefore we set aside this ground of appeal to the file of AO to verify the claim made by the assessee and if the facts and circumstances are similar to the issue decided by the ITAT in case of assessee for earlier years same may be allowed Deduction on account of demand raised by the Ministry of Chemicals Fertilizers, Government of India - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI claim is prima facie allowable. Further, we also agree with the argument of ld. AR that when the claim is made by the assessee by way of note then the ld. AO as well as DRP should have considered the claim of the assessee on merits. Not considering the issue and not adjudicating thereon is an injustice to the claim to which the assessee is eligible. In view of this, we direct the Ld. AO to verify the claim - ground of appeal of the assessee is allowed with direction to AO for fresh adjudication as per the provision of the law. Adjustment of exchange fluctuation on external commercial borrowings, hedging contracts and hedging charges to cost of capital assets and allowing depreciation as part of the actual cost of depreciation - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI we set aside this ground of appeal to the file of AO to verify the amount of expenditure incurred by the assessee on account of fluctuation of foreign exchange; and if they are on capital account related to acquisition of asset then to grant depreciation thereon in accordance with the provisions of law. In case if this expenditure is found to be of revenue, nature then allows the same u/s 37(1) of the Act. Addition treating the MTM gain as taxable income under the normal provision of tax and u/s 115JB - HELD THAT - Amount written back by the assessee has already suffered the tax in the immediate preceding AY 2009-10. Accordingly, we hold that the amount written back by the assessee cannot be subject to tax either under normal computation of income or under section 115JB of the Act in the year under consideration. However, we find that the provision for ₹ 1431.63 crores was suffered to tax under section 115JB of the Act in the immediate preceding AY 2009-10 whereas it has been written back in the year under consideration for ₹ 1969.13 crores. Thus the difference between amount of provision disallowed under section 115JB of the Act in the immediate preceding assessment year 2009-10 viz a viz the amount written back in the year under consideration is of ₹ 537.50 crores ( 1969.13-1431.63 crores). Thus the assessee cannot claim the relief more than the amount suffered to tax in the immediate preceding AY 2009-10 while determining the income under section 115 JB of the Act. Thus we direct the AO to restrict the relief to the assessee while determining the income under section 115 JB of the Act to the extent of ₹ 1431.63 crores only - ground of appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Legality of the assessment order.
2. Transfer pricing adjustments.
3. Treatment of Employee Stock Option Plan (ESOP) expenses.
4. Contributions to Ranbaxy Community Healthcare Society (RCHS) and Ranbaxy Science Foundation (RSF).
5. Disallowance under section 14A of the Income Tax Act.
6. Deduction under sections 80IB and 80IC of the Income Tax Act.
7. Mark-to-market (MTM) gains and losses.
8. Capital gains on transfer of leasehold land and building.
9. Non-compete fee treatment.
10. Weighted deduction under section 35(2AB) of the Income Tax Act.
11. Adjustment of exchange fluctuations on External Commercial Borrowings (ECBs) and hedging contracts.
12. Interest under sections 234B, 234C, and 234D of the Income Tax Act.

Detailed Analysis:

1. Legality of the Assessment Order:
The assessee challenged the legality of the assessment order on the grounds that it was passed beyond the prescribed limitation period and under the wrong section of the Income Tax Act. The Tribunal dismissed these grounds as they were general and consequential in nature.

2. Transfer Pricing Adjustments:
The assessee contested the DRP's decision to treat it as the tested party instead of its Associated Enterprises (AEs). The Tribunal noted that in the previous assessment year, the ITAT had accepted the AEs as the tested party. The Tribunal directed the AO to follow the same approach for the current year, thus allowing the assessee's ground for statistical purposes.

3. Treatment of ESOP Expenses:
The assessee argued that the deferred employee compensation related to ESOPs should be allowed as a deduction. The Tribunal referred to its previous decision in the assessee's case, where it had allowed such expenses. The Tribunal directed the AO to follow the same approach and allowed the ground for statistical purposes.

4. Contributions to RCHS and RSF:
The assessee claimed deductions for contributions made to RCHS and RSF. The Tribunal referred to its previous decision, which allowed such contributions as business expenses under section 37 of the Act. The Tribunal directed the AO to allow the deduction and ruled in favor of the assessee.

5. Disallowance under Section 14A:
The assessee challenged the disallowance made under section 14A by applying Rule 8D. The Tribunal referred to its previous decision, which held that no further disallowance under section 14A could be made if the assessee had already made a reasonable disallowance. The Tribunal directed the AO to follow the same approach and allowed the ground.

6. Deduction under Sections 80IB and 80IC:
The assessee contested the disallowance of deductions under sections 80IB and 80IC. The Tribunal referred to its previous decision, which allowed such deductions based on the consistent method of allocation of expenses and the maintenance of separate accounts for eligible units. The Tribunal directed the AO to allow the deductions and ruled in favor of the assessee.

7. Mark-to-Market (MTM) Gains and Losses:
The assessee argued that the MTM gains should not be taxed as the corresponding MTM losses were disallowed in the previous assessment year. The Tribunal agreed with the assessee and directed the AO to ensure that the MTM gains are not taxed if they had already suffered tax in the previous year. The Tribunal allowed the ground for statistical purposes.

8. Capital Gains on Transfer of Leasehold Land and Building:
The assessee contested the AO's allocation of sale consideration between land and building. The Tribunal found the AO's allocation unreasonable and directed the AO to refer the matter to the DVO for a fair valuation. The Tribunal allowed the ground for statistical purposes.

9. Non-Compete Fee Treatment:
The assessee argued that the non-compete fee should be treated as a revenue expenditure. The Tribunal noted that the assessee did not press this ground and dismissed it.

10. Weighted Deduction under Section 35(2AB):
The assessee claimed a weighted deduction under section 35(2AB) for the cost of assets provided to employees working in approved R&D facilities. The Tribunal set aside the matter to the AO for fresh adjudication as per the law and allowed the ground for statistical purposes.

11. Adjustment of Exchange Fluctuations on ECBs and Hedging Contracts:
The assessee argued that exchange fluctuations on ECBs and hedging contracts should be adjusted to the cost of capital assets. The Tribunal set aside the matter to the AO for fresh adjudication as per the law and allowed the ground for statistical purposes.

12. Interest under Sections 234B, 234C, and 234D:
The Tribunal dismissed the grounds related to the charging of interest under sections 234B, 234C, and 234D as they were general and consequential in nature.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the AO to follow the Tribunal's previous decisions and to re-adjudicate certain issues as per the law.