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TMI Blog2023 (6) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... the coordinate bench in assessee's own case we delete the disallowance made by the assessing officer. Disallowance of ESOP expenditure - ESOP expenses has not crystalised and that the same is capital in nature - HELD THAT:- As decided in assessee own case [ 2023 (3) TMI 1376 - ITAT MUMBAI] we hold that the addition made by the AO towards ESOP expenses be deleted. - I.T.A. No.2107/Mum/2022, I.T.A. No.2108/Mum/2022 - - - Dated:- 11-5-2023 - AMIT SHUKLA JUDICIAL MEMBER AND MS. PADMAVATHY S. ACCOUNTANT MEMBER For the Assessee : Ms. Karishma Phatarphekar, shri Harsh Shah For the Department : by Shri Samuel Pitta ORDER PER BENCH These appeals of the assessee are directed against the order of the Assistant Commissioner of Income-tax, Central Circle-5(3), Mumbai passed under section 143(3) read with section 144C(13) dated 28/06/2022 and 28/07/2022 for the Assessment Years 2017-18 and 2018-19, respectively. Since identical issues are agitated in these appeals, both the appeals are disposed of by way of this common order. 2. The assessee, Unilever India Exports Limited (UIEL) is a wholly owned subsidiary of Hindustan Unilever Limited (HUL). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed without DIN. Grounds 3 to 7 : Transfer pricing adjustment for payment of central fees Grounds 8 9 : Disallowance under section 14A Grounds 10-13 : Disallowance of ESOP expenses. Ground 14 : Excess levy of interest under section 234B 234D Ground 15 : Initiation of penalty under section 270A 7. TP adjustment towards payment of central services (Ground No. 3 to 7) 7.1 The brief facts are that the assessee company has made payment to its AE, viz. Unilever Plc towards central service charge. The Central Service Charge consists of the following services:- Corporate Services; Category Services; Global Market Leadership Services; and Other Services 8. Unilever PLC has granted a non-exclusive license to Unilever India Exports Ltd. i.e. assessee; firstly for using technical documentation, information, technical knowhow and improvements; and secondly, for central services vide common- technology, trade mark license and simple service agreement, effective from 01/02/2013. The copy of agreements has been filed before us in the paper book. In so far as payment made by the assessee to Unilever PLC for using technical docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- is considered for adjustment in relation to the impugned transaction. The Ld. DRP, finding that the facts of the case remain the same during the year under consideration, chose to follow the decision arrived at for the preceding years. 9. During the course of hearing the ld. AR drew our attention to the various documents filed in the paper book to examine the redemption of central services by giving over PLC to the assessee and commensurate benefits desired from such services. These were highlighted in the following manner vis- -vis the documents given in the paper book. Services PB reference 2017-18 PB reference 2018-19 Finance Kit (FKIT) Finance Kit is the Treasury Management System used by Unilever Treasury Team for Risk management and treasury operations. Finance Kit is developed by Wall Street System (a global leader in providing treasury management solutions) and offers immediate visibility, control and simplified compliance throughout the enterprise). The solution combines depth of functionality with seamless integration by enabling all cash management, trading, funding and investment ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 398 PB Pg. 350 to 353 Issue management tools Due to widespread information available through social media and other mediums, any issue can flare up with lightning speed. To manage such crises, guidelines are provided by Unilever to provide necessary protocols for crisis management and to prevent any mishaps. There are various templates and training documents about risk and issue management. This tool also helps in understanding the best practices to be adopted. Further, there are constant improvements to improve the usability and functionality of logging issues. There is guidance available depending on the priority of issues eg. critical, high, low, etc. PB Pg. 399 to 400 PB Pg. 354 to355 Personal Care Identity Toolkit To increase the awareness and position of UIEL s products in a more unique, authentic and different way than its competitors. Unilever has created a special tool which is adopted by UIEL to ensure consistency in the visibility of the products both internally and externally in the market. The toolkit uses techniques like visual identity, pho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents such as sparkle key activities, sparkle training decks, sparkle support model etc PB Pg. 433 to 434 PB Pg. 388 to 389 TalentPlusOnline Unilever has provided an online tool which isused by UIEL as a recruitment, talent and performance management system for keeping track of one's individual performance development. It allows UIEL employees to manage their Talent Profile, set goals, create Individual Development Plans and conduct mid-year and annual reviews for self-development purposes. PB Pg. 435 to 457 PB Pg. 390 to 412 Assistance by Unilever for undertaking various business processes: Specification management UIEL also receives process-related support from the global team. For example, the specification management tool is a communication tool between the R D team and the supply chain team. This tool contains the detailed specification of products including the formulation and manufacturing process (with flow diagrams). The same is used to support the raw material purchasing decision for the procurement team and the manufacturing of a product for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, safety incident investigation, discussions with internal and external consultants without any cost to UIEL and provide in-depth advice. Process Safety UIEL Team gets training on specialist subjects from Subject matter experts Group Security It provides specialized security training via web and face-to-face in addition to site assessments. They also guide security strategy hardware standards for access control security surveillance that help UIEL get the right hardware at the right cost without bringing in external consultants PB Pg. 463 to 464 PB Pg. 418 to 419 Risk Management UIEL believes that effective risk management is fundamental to good business management and that the success of an organization like UIEL depends on its ability to identify and then exploit the key risks and opportunities for the business. Successful businesses take/manage risks and opportunities in a considered, structured, controlled and effective way. Unilever shares a lot of information on risk management with UIEL, which helps UIEL in framing its risk management policies. The risk management homepage dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us advisories, management advisory, strategic planning, business administration, marketing etc Mean 5.75% PB Pg. 119 Payment by Ld AR 1% PB Pg. 107 Conclusion At ALP 12. The Ld.DR, on the other hand submitted that the assessee has failed to substantiate that the services are indeed rendered, what benefit is derived and what is the need for availing the services from AE instead of locally etc. The ld DR further submitted that the evidences submitted by the assessee are only screenshots from the software and are inadequate. The ld DR also argued that what is the overall cost incurred by the AE for the services is not provided in order to understand that the amount paid is reasonable as compared to uncontrolled transactions. With regard to the contention that the TPO has not done any bench marking, the ld DR submitted that the TPO has adopted other Method for bench marking and had determined the ALP at NIL. The ld DR placed reliance on the decision of the Hon ble Delhi High Court in the case of Akzonobel India (P) Ltd vs ACIT (2022) 145 taxmann.com 468 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son that the determination of arm's length price by the Transfer Pricing Officer is not in accordance with the statutory provisions, the adjustment made deserves to be deleted. In any case of the matter, it is noticed by us that under the very same agreement, the AE is paid royalty by Hindustan Unilever Ltd. for domestic sales and by the assessee in respect of export sales. While examining the royalty payment in case of Hindustan Unilever Ltd. in assessment year 2013 14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at arm's length. Similarly, in the order passed under section 92CA(3) of the Act in respect of AE, the Transfer Pricing Officer has accepted the royalty payment to be at arm's length. That being the case, the arm's length price of royalty payment at the hands of the assessee cannot be determined at nil. In any case of the matter, it is not disputed that the assessee is remunerated by the AE on cost plus mark up basis. That being the case, royalty paid to the AE forms part of the cost base of the assessee on which it has charged mark up @ 9%. In the aforesaid circumstances, if the payment of royalty to the AE is disallowed by dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.75% in A.Y.2016-17; whereas the assessee has made payment at 0.50% in A.Y.2015-16 and 0.75% in 2016-17. Thus, the payment made by the assessee for Central services are at ALP and the adjustments made by the ld. TPO is deleted. 15. For the year under consideration, on perusal of records, we notice that the assessee has submitted evidences not only demonstrating the rendition of central services but also commensurate benefits derived from such services to the assessee. Further the assessee has done the bench marking analysis similar to AY 2015-16 and 2016-17 for the year under consideration also and therefore the impugned issue is squarely covered by the above decision of the coordinate bench and therefore respectfully following the same we direct the AO/TPO to delete the addition made towards inter group services. 16. Disallowance u/s 14A (Grounds 8 9) 16.1 The assessing officer noticed from the financial of the assessee that the assessee had made substantial investment where from the income shall not form part of the total income for the year. The total investment in such assets at the beginning of the year was Rs.9,98,138 Lakh and at the end of year was Rs. 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tan Unilever Foundation and Pond Exports Limited are not capable of yielding exempt income. However, the said contention of the assessee is not acceptable as the Act and relevant rules does not provide for such selective exclusion and what has to be considered is the investment wherein income received or receivable including in future is not includible in the total income. The Hon'ble Supreme Court had in the case of Maxopp Investment asserted that whether dividend income is earned or not is immaterial for the attracting of the provisions of Section 14A. Moreover, the CBDT Circular No. 5/2014 dated 11.12.2014 provides a clarification in this regard that the provisions of Rule 8D and Section 14A are applicable even when no exempt income is received. 7.5 In view of the said facts it is held that the contention of the assessee is not tenable and the disallowance of expenses related to the activity from which the income shall not form part of the total income is made as per the provisions of Rule 8D of the Income Tax Rules by considering the average investment wherein the income shall be not includible in the total income irrespective whether it is earned during the year or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast day of the previous year . 16.5 Accordingly, the Ld AR prayed that the disallowance made by the AO and upheld by the DRP ought to be deleted following the Hon ble Tribunal s decision for AY 2015-16 and AY 2016-17 (LPB Pg. 71 to 72, Para 23). 16.6 We notice that the similar issue has been considered and decided by the coordinate bench in assessee s own case (supra) in A.Ys 2015-16 2016-17 where it is held that:- 23. After considering the aforesaid submissions, we are in tandem with the contentions of the ld. Counsel, because in so far as investment made in A.Y.2015-16 is concerned, these are mostly growth options of UTI mutual funds which does not yield any dividend income but are taxable as capital gains, hence, the same cannot be taken up for computing the disallowance under section 14A. If the average investment of Rs.0.29 Crores is taken into consideration, then disallowance would work out under Rule 8D(2)(iii) would be only Rs.1.45 lakhs which is much less than the suo-moto disallowance made by the assessee. Similarly, in A.Y.2016-17 also the investment in Kotak Mahindra Mutual Fund-Direct Growth and Reliance Mutual Fund-Direct Plan Grown which yields taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnataka in the case of CIT(LTU) VS M/S Biocon Ltd in ITA.No.653 of 2013 dated 11-11- 2020 has observed as under: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPS is not a contingent liability but is an ascertained liability. 10. From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT. (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 11. We find the facts of the present case are similar respect of claim of ESOP Expenses and we follow ratio of judicial decision and direct the assessing officer to delete the addition and allow the grounds of appeal in favour of the assessee. 32. Accordingly, following the aforesaid decision in assessee s own case, this addition stands deleted. 17.3 The facts being identical for the year under consideration, respectfully fol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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