2023 (4) TMI 1363 - AT - Income Tax

Disallowance of ESOP expenditure u/s 37 - HELD THAT - We find that identical issue came up for consideration before in the case of Novo Nordisk India (P) Ltd. 2013 (11) TMI 218 - ITAT BANGALORE as held 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 - Decided in favour of assessee. Claim of refund of excess tax paid on distribution of dividend by the assessee to its non-resident shareholders - according to the assessee, ought to have been restricted to the rate prescribed under the Indo-German Double Taxation Avoidance Agreement (DTAA). Assessee has claimed that it is eligible for refund of the excess Dividend Distribution Tax (DDT) paid by it - HELD THAT - Assessee placed reliance on the decision of Coordinate Bench, Delhi in the case of Giesecke Devrient India Pvt Ltd. 2020 (10) TMI 750 - ITAT DELHI The correctness of the aforesaid decision has however been doubted in some other cases. We find that on this issue, there has been conflicting view, we find it proper and just to remit the matter back to the file of ld. AO for consideration of the issue afresh - Accordingly, ground no. 2 is allowed for statistical purpose. Disallowance towards delay in deposit of employees contribution to Provident Fund before the due date - HELD THAT - This issue is covered against the assessee by the decision of Hon ble Supreme Court in the case of Checkmate Services Pvt. Ltd. 2022 (10) TMI 617 - SUPREME COURT wherein it has been held that deduction u/s 36(1)(va) in respect of delayed deposit of amount collected towards employees contribution to PF cannot be claimed when deposited within the due date of filing of return even when read with Section 43B. Disallowance of notional IND-AS (Accounting Standards issued by Institute of Chartered Accountants of India) adjustment - HELD THAT - Lease deposit is required to be measured at fair value on initial recognition. The difference between the amount of deposit and its fair value is treated as prepaid lease expenses and amortized over the term of the lease. These amortized prepaid rents being notional expenses charged to the statement of Profit and Loss is disallowed in the tax computation. Interest income on lease deposit would accrue over the period of lease. It represents notional income arising on fair valuation of rental deposits recognised as per requirement of IND-AS and credited to the statement of Profit and Loss. No interest has actually accrued or arisen on this deposit and income is recognised on notional basis. Accordingly, since income is to be recognised on the principle of real income, the amount was reduced from income from other sources to arrive at the total income under the provisions of the Act. As we do not find any reason to interfere with the direction given by the Ld. DRP to the AO to reconcile the difference and accordingly, this ground of appeal is allowed for statistical purposes. Short credit for TDS and TCS given to the assessee as against claimed by it in the return of income - In this respect, we direct the ld. AO to provide the credit towards TDS and TCS claimed by the assessee after due verification of the documents and records and in accordance with the provisions of law. We also direct the assessee to furnish all the relevant documents and records to substantiate its claim in this respect. Accordingly, this ground of appeal is allowed for statistical purposes. TP adjustment - notional interest on delayed receivables from Associated Enterprise (AEs) - assessee submitted that these receivables are closely linked to the primary transactions and should not be tested separately, nor these can be re-characterised as loan transactions - whether or not the interest on receivables is a separate international transaction and the rate of interest? - HELD THAT - Outstanding receivables of the assessee from its AEs constitute international transactions liable to be benchmarked independently. However, in the present case, while arriving at the quantum of the said receivables, we do accept the contention of assessee for netting off the outstanding payables by the assessee to the AEs so that interest is computed on the net outstanding receivables for the year under consideration. Ld. Counsel has stated that the weighted average realisation of receivables for the relevant year is 47 days for the software distribution segment against which ld. TPO levied interest on outstanding receivables for more than 30 days by treating it as a separate international transaction. We are in concurrence with the ld. TPO taking 30 days as normal credit period for computing the interest on outstanding receivables which are to be netted off with the payables with the AEs. Rate of interest - As we find that adjustment is to be computed considering the interest rate applicable to transactions denominated in the currency in which the invoices are raised, in accordance with the view in the judgment of Cotton Naturals (I) (P.) Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT in which it is held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. In the present case, assessee has raised invoices on its AEs in EURO and hence, the EUR LIBOR prevalent during the financial year 2017-18 relevant to AY 2018-19 is to be considered for determining the arm s length rate of interest to be charged on the net outstanding receivables. Accordingly, ld. AO / TPO is directed to give effect to the above findings and directions and re-compute the amount of interest on the net outstanding receivables and determine the upward adjustment in this respect. Ground no. 2 is partly allowed.

Summary

Issues Involved:
1. Disallowance of ESOP expenses.
2. Refund of excess tax paid on distribution of dividend.
3. Disallowance of employee's contribution to Provident Fund.
4. Disallowance of notional IND-AS adjustment.
5. Non-grant of Tax Deducted at Source (TDS)/Tax Collected at Source (TCS) credit.
6. Levy of interest.
7. Initiation of Penalty proceedings.
8. Notional interest on delayed receivables from AEs (specific to AY 2018-19).

Issue-wise Detailed Analysis:

1. Disallowance of ESOP Expenses:
The primary issue was the disallowance of ESOP expenses claimed by the assessee for AY 2017-18 and AY 2018-19. The assessee argued that ESOP expenses are revenue in nature and should be allowed as a deduction under Section 37 of the Income-tax Act, 1961. The Tribunal referred to the decision in Novo Nordisk India (P) Ltd., where it was held that the difference between the fair market value of shares and the price at which they were issued to employees is a deductible business expenditure. The Tribunal allowed the deduction, holding that the expenditure was incurred wholly and exclusively for the business purpose of the assessee.

2. Refund of Excess Tax Paid on Distribution of Dividend:
The assessee claimed a refund of excess Dividend Distribution Tax (DDT) paid, arguing that the tax rate should be restricted to the rate prescribed under the Indo-German DTAA. The Tribunal noted conflicting views on the issue and observed that the matter was referred to a Special Bench. Consequently, the Tribunal remitted the issue back to the AO for fresh consideration post the Special Bench's decision, allowing the ground for statistical purposes.

3. Disallowance of Employee's Contribution to Provident Fund:
The Tribunal upheld the disallowance of the employee's contribution to the Provident Fund paid after the due date, following the Supreme Court's decision in Checkmate Services Pvt. Ltd. v. CIT, which stated that such deductions are not permissible even if paid before the due date of filing the return.

4. Disallowance of Notional IND-AS Adjustment:
The issue pertained to the disallowance of a notional IND-AS adjustment while computing total income. The Tribunal directed the AO to reconcile the differences as per the DRP's instructions and allowed the ground for statistical purposes.

5. Non-grant of TDS/TCS Credit:
The assessee claimed short credit for TDS and TCS. The Tribunal directed the AO to verify the documents and grant the appropriate credit as per law, allowing the ground for statistical purposes.

6. Levy of Interest:
The Tribunal noted that the grounds related to the levy of interest were consequential and did not require specific adjudication.

7. Initiation of Penalty Proceedings:
The Tribunal did not specifically address this issue, as it was consequential and dependent on the outcome of the substantive issues.

8. Notional Interest on Delayed Receivables from AEs (AY 2018-19):
The Tribunal addressed the transfer pricing adjustment on notional interest for delayed receivables. It held that such receivables constitute a separate international transaction and should be benchmarked independently. The Tribunal accepted the assessee's contention for netting off outstanding payables against receivables and directed the AO/TPO to apply the EUR LIBOR rate for determining the arm's length interest rate, allowing the ground in part.

In conclusion, the Tribunal partly allowed the appeals, providing relief on certain grounds while remanding or dismissing others based on legal precedents and factual analyses.