2024 (6) TMI 359 - AT - Income Tax

TP adjustment in respect of guarantee commission - AO made adjustment @ 0.77% of the loan amount for which guarantee was provided for the reason that assessee company did not charge any guarantee fee from its AEs in respect of a corporate guarantee provided - CIT(A) restricted the TP adjustment @ 0.2% only - HELD THAT - We do not find anything wrong with the order of the ld. CIT(A) - TPO had benchmarked the transaction on the basis of independent third-party transaction of the assessee but TPO did not consider the fact that guarantee commission as paid for the period from 20th June, 2016 to 19th Sep, 2018. The transaction for one financial year i.e. for 365 days cannot be benchmarked with the rate applicable for 822 days. Therefore, the CIT(A) had rightly worked out the rate applicable to one financial year and restricted the addition by applying the rate of 0.2%. The fact that the rate for one financial year worked out to 0.2% only has not been contested by the Revenue. There was no justification for applying mark up 0.25% when the transaction was bench marked with a third-party comparable transaction - TPO had also not given any basis for arriving at the mark up for 0.2%. CIT(A) was correct in deleting the mark-up of 0.25% as applied by the TPO, which was without any basis or rationale. Once the corporate guarantee fee is worked out on the basis of third-party prevailing market rate, there is no basis or justification for further mark-up. Ground taken by the revenue is dismissed. Addition on account of ESOP expense u/s 37 - expenses claimed by the assessee was the difference between market value of shares as computed under the guidelines of SEBI and the value at which the shares were issued to the employees - AO treated this expenditure as being capital in nature or being only notional entry and made the disallowance - CIT(A) has deleted the addition - HELD THAT - As decided in assessee s own case for the 2023 (1) TMI 1380 - ITAT AHMEDABAD assessment year 2016-17 held that assessee floated Employees Stock Option Plans (ESOP) and provided shares to its employees at a discount discount - on exercise of option by an employee, actual amount of benefit that had to be determined was only a quantification of liability, which would take place at a future date - discount on issue of ESOPs was not a contingent liability but was an ascertained liability. Accordingly, issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital. Thus, discount on issue of ESOP was allowable deduction under section 37(1) of the Act. The ground taken by the revenue stands rejected. Disallowance u/s 14A - assessee had not earned any exempt income during the year from the investment made by it - AO observed that the assessee had not made any disallowance u/s. 14A in his return of income, thus worked out the expenditure incurred in relation to earning dividend income in the manner provided u/s.14A @ 1% on average investment and made the addition - HELD THAT - There is no dispute to the fact that no exempt income was earned during the year. Therefore, no addition u/s 14A of the Act was called for as held by the Apex Court in the case of State Bank of Patial 2018 (11) TMI 1565 - SC ORDER wherein as held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income only. Also Hon'ble Supreme Court in the case of Chettinad Logistics (P.) Ltd 2018 (7) TMI 567 - SC ORDER ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year - Addlife Investments (P.) Ltd. 2020 (6) TMI 240 - ITAT AHMEDABAD held that disallowances made under section 14A read with rule 8D could not exceed amount of exempt income earned by assessee during year. Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. TP Adjustment in respect of guarantee commission.
2. Disallowance of ESOP expenses.
3. Disallowance u/s 14A of the Act.

Issue-wise Detailed Analysis:

1. TP Adjustment in respect of guarantee commission:

The first three grounds pertain to the TP adjustment in respect of the guarantee commission. The assessee provided a corporate guarantee to two of its associated enterprises (AEs). The Assessing Officer (AO), relying on the Transfer Pricing Officer (TPO), made an arms-length price (ALP) adjustment of Rs. 26,32,930 u/s 92CA at 0.77% of the loan amount for which the guarantee was provided. The assessee did not charge any guarantee fee from its AEs. The CIT(A) restricted the TP adjustment to 0.2%, amounting to Rs. 5,71,727/-. The Departmental Representative contested this restriction, while the Authorized Representative supported the CIT(A)'s order.

The Tribunal found that the TPO had benchmarked the transactions based on a bank guarantee provided by Indusland Bank Ltd to the assessee. The guarantee commission rate was worked out at 0.52%, and a markup of 0.25% was applied by the TPO, resulting in an ALP rate of 0.77%. The CIT(A) noticed that the guarantee commission paid was for a period of 822 days, and the proportionate rate for 365 days was only 0.2%. The CIT(A) also found no justification for the 0.25% markup as the internal CUP was based on a third-party transaction. The Tribunal upheld the CIT(A)'s decision, finding it reasonable and correct, and dismissed the Revenue's ground.

2. Disallowance of ESOP expenses:

The fourth ground pertains to the addition of Rs. 1,50,21,000/- on account of ESOP expenses. The assessee claimed ESOP expenses of Rs. 150.21 lakhs u/s 37 of the Act, representing the difference between the market value of shares as per SEBI guidelines and the value at which shares were issued to employees. The AO treated this expenditure as capital in nature or notional and disallowed it. The CIT(A) deleted the addition, following the ITAT's decision in the assessee's own case.

The Tribunal examined the issue in detail, citing various High Court and ITAT decisions, including Biocon Ltd., PVR Ltd., New Delhi Television Ltd., and others, which held that ESOP expenses are an ascertained liability and allowable under section 37(1) of the Act. The Tribunal found no reason to deviate from the CIT(A)'s findings and upheld the deletion of the addition on account of ESOP expenses, rejecting the Revenue's ground.

3. Disallowance u/s 14A of the Act:

The fifth ground pertains to the deletion of the addition of Rs. 3,52,52,300/- on account of disallowance u/s 14A of the Act. The assessee did not earn any exempt income during the year. The AO observed that the assessee had not made any disallowance u/s 14A in its return of income and accordingly made the addition. The CIT(A) deleted the addition, relying on the ITAT's decision in the assessee's own case.

The Tribunal noted that it is well-settled law that no disallowance can be made under section 14A if no exempt income is earned. The Tribunal cited several decisions, including those of the Supreme Court, Gujarat High Court, and Delhi High Court, which held that section 14A cannot be invoked where no exempt income is earned. The Tribunal found the facts in the current year identical to the previous year and upheld the CIT(A)'s order, confirming the deletion of Rs. 3,52,52,300/- on account of disallowance u/s 14A. The Revenue's ground was rejected.

Conclusion:

In the result, the appeal of the Revenue is dismissed. The order was pronounced in the open court on 04-06-2024.