2023 (10) TMI 651 - AT - Income Tax

TP Adjustment - international transaction of reimbursement of Employee Stock Option Plan (ESOP) Expenses - TPO determined ALP as Nil using Comparable Uncontrolled Price (CUP) Method as according to the TPO the ESOP expenses were notional in nature - HELD THAT - AO and the TPO had failed to appreciate that the expenses for which deduction has been claimed by the Appellant pertain to RSUs granted in 2015 and exercised in the FY 2017-18. ESOP expenses related to the RSUs granted and exercised were claimed as deduction by the Appellant over the vesting period. During the relevant previous year, the ESOP expenses were also remitted outside India on the basis of invoices raised upon the Appellant by its AE. Deduction for the ESOP expenses was claimed by the Appellant during the relevant previous year. Benefit accruing on account of ESOP plans we find merit in the contention advanced on behalf of the Appellant that for the purpose of granting the RSUs to the employee of the Appellant was to retain and motivate him for continuing his employment with the Appellant. The cost incurred by AE on exercise of the RSUs by the employee of the Appellant is the cost reimbursed by the Appellant which was initially picked up by the AE. ALP of the ESOP Expenses cannot be taken as Nil . The transfer pricing addition of INR. 26,53,078/- is, therefore, set aside and TPO/Assessing Officer is directed to re-compute ALP and the transfer pricing adjustment, if any, by following the method adopted by the Appellant for determination of ALP of the international transaction of reimbursement of ESOP Expenses.

Summary

Issues Involved:
The judgment involves issues related to assessment order under Income Tax Act, 1961, transfer pricing adjustment for reimbursement of Employee Stock Option Plan (ESOP) expenses, jurisdictional grounds, violation of Principles of Natural Justice, and penalty under section 270A of the Act.

Assessment Order Issue:
The appeal was against the Assessment Order passed for the Assessment Year 2018-19 under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961. The Appellant challenged the computation of total income by the Deputy Commissioner of Income Tax, Mumbai, pursuant to directions of the Dispute Resolution Panel. The jurisdictional issue was raised as the Final Assessment order was passed by the Assessing Officer instead of the National Faceless Assessment Centre, leading to a challenge on the validity of the order.

Transfer Pricing Issue - Reimbursement of ESOP Expenses:
The Transfer Pricing Officer proposed an adjustment of INR 2,497,737 to the income of the Appellant for alleged difference in the arm's length price of the international transaction of reimbursement of ESOP expenses. The Appellant contended that the reimbursement was notional and provided evidence to substantiate the pricing of ESOPs. The Dispute Resolution Panel and the Assessing Officer erred in disregarding the benchmarking methodology and determining the arm's length price as 'NIL' without proper reasoning. The Appellant was not provided adequate opportunity to be heard, violating the Principles of Natural Justice.

Conclusion:
The Tribunal found that the ESOP expenses were not notional and were actually incurred by the Appellant. The Transfer Pricing Officer failed to appreciate that the expenses were related to RSUs granted and exercised over a period. The ALP of ESOP Expenses cannot be taken as 'Nil', and the transfer pricing adjustment was set aside. The Assessing Officer was directed to re-compute the ALP following the method adopted by the Appellant. Some grounds of appeal were allowed, while others were dismissed as not pressed or infructuous. As a result, the appeal by the Assessee was partly allowed.