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2017 (10) TMI 52 - AT - Income TaxTPA - selection of comparable - selection criteria - study of diverse activities - Held that - Assessee is engaged in providing analytical solutions to its AEs to lower the cost of customer acquisition to improve brand performances improve multi dimensional reporting understand consumer behavior and many other analytical services thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparability. Disallowance u/s 37(1) for ESOP compensation expenses - Held that - The issue now stands covered in favour of the assessee by the decision of Special Bench in the case of Biocon Limited v. DCIT 2013 (8) TMI 629 - ITAT BANGALORE . No contrary decision of higher judicial forum on the issue of allowability of ESOP expenses has been shown to us. We note that the above decision of the Special Bench is germane and was not before the authorities below. Accordingly we remit the issue to the file of the Assessing Officer. The Assessing Officer shall consider and quantify the amount allowable as per the decision and guideline mentioned in the decision supra.
Issues Involved:
1. Validity of the order passed by the Assessing Officer (AO), Dispute Resolution Panel (DRP), and Transfer Pricing Officer (TPO). 2. Assessment of total income. 3. Transfer Pricing Adjustment. 4. Disallowance of deduction under section 37(1) for ESOP compensation expenses. 5. Levy of consequential interest under section 234B and 234C. 6. Initiation of penalty proceedings related to Transfer Pricing adjustment. Issue-wise Detailed Analysis: 1. Validity of the Order by AO, DRP, and TPO: The appellant contended that the orders passed by the AO, DRP, and TPO were "bad in law and liable to be quashed" as they were not in accordance with the law. However, this issue was not pressed further by the appellant's counsel during the proceedings. 2. Assessment of Total Income: The AO assessed the total income of the appellant at INR 9,64,54,610. This included an adjustment of ?5,60,02,461 related to international transactions and ?1,13,579 for disallowance under section 14A. 3. Transfer Pricing Adjustment: The appellant challenged the TPO’s adjustment of ?5,60,02,461 on several grounds: - Disregarding Transfer Pricing Documentation: The TPO did not consider the transfer pricing documentation and submissions made by the appellant. - Use of Multiple Year Data: The TPO rejected the appellant’s plea for using multiple year data as specified in Proviso to rule 10B(4). - Tested Party Selection: The TPO considered the appellant as the tested party instead of the Associate Enterprises (AE). - Re-characterization as KPO: The TPO re-characterized the appellant as a KPO service provider instead of an ITeS service provider. - Comparable Companies: The TPO rejected functionally comparable companies selected by the appellant and conducted a fresh search, selecting companies that were not functionally comparable to the appellant. - Segmental Profit and Loss Account: The TPO did not consider the segmental profit and loss account maintained by the appellant. - Overall Profitability: The TPO did not consider the overall profitability of the Fractal group. - Adjustment Limitation: The TPO did not restrict the adjustment to transactions entered with associated enterprises. - 5% Range Benefit: The TPO did not grant the benefit of a 5% range while computing the arm’s length price. - Economic Adjustments: The TPO did not grant economic adjustments while computing the margins of the companies. The Tribunal concluded that Eclerx Services should not be included as a comparable due to its diverse functions and lack of segmental data. The issue was remitted to the TPO to recompute the transfer pricing adjustment after excluding Eclerx Services. 4. Disallowance of Deduction under Section 37(1) for ESOP Compensation Expenses: The DRP upheld the AO’s decision to disallow the ESOP compensation expenses, considering them capital and contingent in nature. The appellant argued that the issue was covered in their favor by the Special Bench decision in Biocon Limited v. DCIT, which allowed ESOP expenses as a deductible expense under section 37(1). The Tribunal remitted the issue to the AO to consider and quantify the allowable amount as per the guidelines in the Biocon Limited case. 5. Levy of Consequential Interest under Section 234B and 234C: The appellant contended that the AO erred in levying consequential interest under sections 234B and 234C. However, this issue was not pressed further during the proceedings. 6. Initiation of Penalty Proceedings: The appellant argued that the AO erred in initiating penalty proceedings related to the Transfer Pricing adjustment. However, this issue was not elaborated upon during the proceedings. Conclusion: The appeal was partly allowed. The Tribunal remitted the issues related to the selection of comparables and the disallowance of ESOP compensation expenses to the AO and TPO for reconsideration and fresh computation as per the law and relevant guidelines. The Tribunal directed the AO to grant adequate opportunity of being heard to the appellant.
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