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2022 (11) TMI 1017 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. Also comparable fails SWD service revenue 75% filter need to be rejected. Delay in receivables or deferred receivables as an international transaction - A.R. submitted that the period of credit given to the parties is only 24.5 days and as per agreement, 90 days credit has been given to the parties - HELD THAT - In our opinion, the argument of Ld. A.R. is justified. The provision for doubtful loans and advances cannot be considered for computation of interest on intra-group trade and advances as the recovery of the principal itself is doubtful. Hence, we direct the AO/TPO to consider net advances after deducting provision for doubtful loans and thereafter apply LIBOR 2% as held by Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd 2022 (1) TMI 1275 - ITAT BANGALORE - Accordingly, this issue remitted to the file of AO/TPO for re-examine if the credit period is more than 90 days adjustment towards interest receivable to be made. Issue is accordingly remitted to AO/TPO. Disallowing the expenditure on ESOP u/s 37 - Expenditure incurred is not notional expense - HELD THAT - Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd 2013 (11) TMI 218 - ITAT BANGALORE expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon ble Supreme Court in the case of Sassoon J. David Co. (P) Ltd. 1979 (5) TMI 3 - SUPREME COURT and Mysore Kirloskar Ltd. 1986 (9) TMI 62 - KARNATAKA HIGH COURT clearly support the plea of the assessee in this regard. Thus the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. The assessee is not liable for TDS u/s 195 - since, on perusal of the final assessment, it is clear that the disallowance of ESOP expenses has made under the provisions of section 37 of the I.T.Act (though there was some discussion in the draft assessment order with reference to disallowance u/s 40(a)(i) of the I.T.Act). - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustments 2. Interest on Receivables 3. Corporate Tax - Disallowance of ESOP Expenditure 4. Non-Applicability of Section 195 of the Act 5. Other Corporate Tax-related Grounds Detailed Analysis: Transfer Pricing Adjustments: 1. Adjustment of Transfer Price: The Tribunal noted the assessee's contention that the authorities erred in adjusting the transfer price by INR 1,18,75,36,269/- for international transactions. The authorities were criticized for rejecting the TP documentation under section 92C(3) and conducting a fresh comparability analysis with non-transparent filters. 2. Selection of Comparable Companies: The Tribunal addressed the rejection of companies based on financial year data availability and different financial year ending filters. They also discussed the rejection of companies with employee cost filters less than 25% of total sales and export earning filters of 75% of total sales. 3. Inclusion and Exclusion of Comparables: The Tribunal examined the inclusion and exclusion of specific companies like Inteq Software, Larsen & Toubro Infotech, Persistent Systems, Infosys, and others. For instance, Larsen & Toubro Infotech was excluded based on previous ITAT decisions and functional dissimilarities. 4. Bad and Doubtful Debts: The authorities considered bad and doubtful debts as non-operating, which the assessee contested. 5. Use of Section 133(6) Powers: The Tribunal addressed the use of section 133(6) to collate non-public information. 6. Working Capital and Risk Adjustments: The Tribunal noted the authorities' failure to allow appropriate adjustments for working capital and risk differences between the assessee and comparable companies. 7. Fresh Search for Comparables: The DRP's refusal to accept a fresh search for additional comparable companies during TP proceedings was contested. Interest on Receivables: 1. Treatment as International Transaction: The Tribunal addressed the authorities' treatment of delayed receivables as an international transaction and the subsequent TP adjustment. 2. Hypothetical and Notional Adjustments: The Tribunal emphasized that TP adjustments should not be made on a hypothetical basis without material evidence of undercharging real income. 3. Receivables and Working Capital Adjustment: The Tribunal noted that receivables should be adjusted in the working capital differential, and no separate adjustment is required. 4. Computation of Interest: The Tribunal discussed the authorities' method of computing interest on outstanding balances and the use of SBI short-term deposit interest rates instead of LIBOR. Corporate Tax - Disallowance of ESOP Expenditure: 1. Disallowance under Section 37: The Tribunal examined the authorities' disallowance of INR 18,18,00,000 ESOP expenditure under section 37, despite the assessee's reliance on Karnataka High Court and Bangalore Tribunal decisions allowing such expenditure. 2. Nature of ESOP Expenditure: The Tribunal emphasized that ESOP expenditure is actual and not notional, and it is a legitimate business expense incurred wholly and exclusively for business purposes. 3. Supporting Documentation: The Tribunal noted the assessee's submission of sample debit notes, employee listings, Form 16 copies, cost reimbursement agreements, and scheme documents to substantiate the ESOP expenditure. Non-Applicability of Section 195 of the Act: 1. TDS on ESOP Expenditure: The Tribunal addressed the authorities' contention that ESOP expenditure should be subject to TDS under section 195, despite the assessee's compliance with section 192 for perquisites in employees' hands. 2. Cost-to-Cost Reimbursement: The Tribunal emphasized that ESOP cross-charges are cost-to-cost reimbursements with no income element, making section 195 inapplicable. Other Corporate Tax-related Grounds: 1. Deduction for Education Cess: The Tribunal noted the authorities' failure to allow a deduction for education cess and secondary & higher education cess, although not claimed in the return. 2. Depreciation on Software: The Tribunal addressed the authorities' failure to consider the depreciation claim on the written-down value of software purchased in preceding years and claimed as revenue expenditure. Penalty Proceedings and Interest Levy: 1. Penalty under Section 271(1)(c): The Tribunal noted the initiation of penalty proceedings under section 271(1)(c) by the authorities. 2. Interest under Sections 234B and 234C: The Tribunal addressed the levy of interest under sections 234B and 234C, which is consequential. Conclusion: The Tribunal partly allowed the appeal, directing the exclusion of certain comparables, remitting issues related to interest on receivables back to the AO/TPO, and allowing the ESOP expenditure as a deductible business expense. The Tribunal also provided specific directions for fresh consideration and verification by the AO/TPO on various issues.
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