2020 (6) TMI 409 - AT - Income Tax

Disallowance of ESOP expenses - HELD THAT - As decided in own case 2016 (7) TMI 1486 - DELHI HIGH COURT and 2017 (2) TMI 1399 - DELHI HIGH COURT deciding the issue in favour of the assessee in the said case where the addition made by the Assessing Officer by way of disallowance of the expenses debited as cost of ESOP in profit and loss account was deleted by the Income-tax Appellate Tribunal. Disallowance of software expenses - Revenue or capital expenditure - HELD THAT - The assessee has been allowed the identical claim in earlier years by the CIT(A) and based on that decision the ld DRP was also of the view that the above expenditure incurred by the assessee is revenue in nature. The ld DR could not controvert that why the order of the ld DRP is erroneous. In view of this we do not find any infirmity in the direction issued by the ld DRP. In the result we confirm the direction of the DRP. TDS u/s 194H - Disallowance of commission expenditure under section 40 (a) (ia) - sale of advertisement time on its various channels, this advertisement time is sold generally through advertisement agencies - HELD THAT - As decided in assessee's own case for assessment year 2009 10 2017 (7) TMI 867 - ITAT DELHI referring to issue is of treatment of commission paid to the advertising agencies AO is directed to not to make this addition in the assessment order. Expenditure on obtaining license for use of accounting software - revenue or capital expenditure - HELD THAT - This issue has already been decided while deciding the appeal of the revenue wherein following the order of the coordinate bench for assessment year 2009 10 2017 (7) TMI 867 - ITAT DELHI the software expenditure disallowed by the learned assessing officer deleted. Therefore this ground of appeal of the assessee deserves to be allowed. Even otherwise the assessee has not purchased the software but has purchased the license to use this software for its accounting purposes. That is not capital expenditure but revenue expenditure. In view of this ground of the assessee is allowed. TPA - ALP of the corporate Guarantee - non making reference to the TPO - HELD THAT - In view of the M/S. S.G. ASIA HOLDINGS (INDIA) PVT. LTD. 2019 (8) TMI 661 - SUPREME COURT guidelines issued by the CBDT in Instruction No.3/2003 the Tribunal was right in observing that by not making reference to the TPO, the Assessing Officer had breached the mandatory instructions issued by the CBDT. Thus restore the matter back to the file of the learned assessing officer so that appropriate reference could be made to the TPO. Disallowance u/s 14A - HELD THAT - As there is no exempt income is received or receivable during the relevant previous year in the case of the assessee for this year, the disallowance under section 14 A cannot be made. Disallowance being the transmission and uplinking charges paid by invoking the provisions of section 40 (a (ia) - HELD THAT - As in own case for AY 2009 10 2017 (7) TMI 867 - ITAT DELHI we direct learned assessing officer to delete the disallowance on account of non-deduction of tax at source on Transmission and uplinking charges. Re characterizing of income - the income declared by the appellant as capital gain pursuant to sale of 212500 shares of M/s Astrao Awani Networks Limited as income from other sources and making an addition - HELD THAT - The CBDT circular dated 2/5/2006 speaks about the characterisation of income from transaction in listed securities as well as unlisted securities. In the present case before us the learned assessing officer could not prove that any of the three conditions mentioned in that circular applies. In fact the sale price of the shares is supported by the valuation report and also conform with provisions of FEMA. The learned assessing officer as well as the learned CIT A merely proceeded on the basis of an allegation that assessee wanted to show the higher profit in its books of account. It is not denied that the assessee was the owner of the shares, it held it for 13 months, there is no allegation that the price paid by the buyer was unfounded. In fact it was supported by the valuation report which was not controverted , except the conjectures and surmises. In view of this circular, we hold that the excess of consideration realised by the assessee on sale of the above shares is chargeable to tax as capital gain and not as income from other sources. In view of this ground number nine of the appeal of the assessee is allowed.

Issues Involved:
1. Limitation of the assessment order.
2. Nature of software expenditure.
3. Determination of Arm's Length Price (ALP) for Corporate Guarantee.
4. Disallowance under Section 14A.
5. Disallowance of transmission and uplinking charges under Section 40(a)(i).
6. Re-characterization of income from capital gains to income from other sources.
7. Disallowance of Employee Stock Option Plan (ESOP) expenses.
8. Disallowance of commission expenditure under Section 40(a)(ia).

Detailed Analysis:

1. Limitation of the Assessment Order:
The appellant contended that the assessment order dated August 3, 2008, was barred by limitation. The CIT(A) held that the assessment was valid in light of the extended time limit provided under Section 153 of the Income Tax Act, 1961. The tribunal dismissed the appellant's ground, citing the decision in AT&T Global Network Services (India) (P.) Ltd. v. Dy. CIT, which was upheld by the Delhi High Court.

2. Nature of Software Expenditure:
The appellant incurred expenses for obtaining licenses for accounting software, which the AO treated as capital expenditure. The CIT(A) upheld this view. However, the tribunal, following the decision in the appellant's own case for AY 2009-10, held that such expenditure is revenue in nature and allowed the appellant's ground.

3. Determination of ALP for Corporate Guarantee:
The AO determined the ALP for a corporate guarantee issued by the appellant to its subsidiary at 4.68% of the guaranteed amount. The CIT(A) upheld the addition but limited it to 40% of the underlying sum. The tribunal restored the matter to the AO to make an appropriate reference to the TPO, following the Supreme Court decision in Pr CIT v. S G Asia Holdings Pvt. Ltd., which mandates that the AO must refer the computation of ALP to the TPO.

4. Disallowance under Section 14A:
The AO disallowed ?8,96,000 under Section 14A for expenses incurred to earn exempt income. The tribunal, citing the Delhi High Court's decision in Cheminvest Ltd. v. CIT, held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. The tribunal allowed the appellant's ground and directed the AO to delete the disallowance.

5. Disallowance of Transmission and Uplinking Charges under Section 40(a)(i):
The AO disallowed ?7,38,43,516 paid to Intelsat Corporation, treating it as royalty under Section 9(1)(vi) and invoking Section 40(a)(i) for non-deduction of tax at source. The CIT(A) upheld the disallowance. The tribunal, following its decision in the appellant's own case for AY 2009-10, directed the AO to delete the disallowance, noting that the issue is covered by the Delhi High Court's decision in Intelsat Corporation.

6. Re-characterization of Income from Capital Gains to Income from Other Sources:
The AO re-characterized the income from the sale of shares of Astro Awani Networks Limited as income from other sources, suspecting the transaction to be a corporate restructuring to show inflated profits. The CIT(A) upheld this view. The tribunal, relying on CBDT Circular No. 225/12/2016 and noting the absence of evidence to question the genuineness of the transaction, held that the income should be taxed as capital gains and allowed the appellant's ground.

7. Disallowance of ESOP Expenses:
The AO disallowed ESOP expenses, treating them as notional. The CIT(A) deleted the disallowance, following the tribunal's decision in the appellant's own case for AY 2006-07, which was upheld by the Delhi High Court. The tribunal dismissed the revenue's ground, affirming the CIT(A)'s order.

8. Disallowance of Commission Expenditure under Section 40(a)(ia):
The AO disallowed ?45,53,30,999, treating the 15% trade discount retained by advertisement agencies as commission liable for TDS under Section 194H or 194J. The CIT(A) deleted the disallowance, following the Delhi High Court's decision in CIT v. Living Media India Ltd. The tribunal, following its decision in the appellant's own case for AY 2009-10, dismissed the revenue's ground and upheld the CIT(A)'s order.

Conclusion:
The tribunal partly allowed both the appellant's and the revenue's appeals, restoring the matter of ALP determination for the corporate guarantee to the AO for reference to the TPO, and allowed the appellant's grounds on software expenditure, Section 14A disallowance, transmission and uplinking charges, and re-characterization of income from capital gains. The tribunal dismissed the revenue's grounds on ESOP expenses and commission expenditure.

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