2014 (12) TMI 515 - AT - Income Tax

Tribunal remits issues to Assessing Officer, emphasizes DRP's directions. ESOP expenses deductibility clarified. Penalty proceedings premature.

Apollo Health Street Versus Deputy Commissioner of Income-tax

The Tribunal allowed the assessee's appeal for statistical purposes, remitting various issues back to the Assessing Officer for reconsideration in ... Admission of additional ground - Non-compliance of DRP directions – Transfer pricing adjustment made in excess of global profits – Held that:- The assessee had raised an objection before the DRP, and the DRP had given a direction to the Assessing Officer that the TP adjustments should not exceed the global profits of the assessee company - the AO has not given effect to this finding of the DRP while passing the assessment order and therefore, this ground is very much admissible and has to be considered on merits. Therefore, we admit the additional ground of appeal. Sub-section (10) of S.144C provides that every direction issued by the DRP shall be binding on the AO – the AO ought to have given effect to the directions of the DRP - the issue needs to be remitted to the file of the AO to re-compute the Transfer Pricing Adjustment, duly complying with the directions of the DRP that the TP adjustments shall not exceed the global profits earned by the assessee company – the matter is to be remitted back to the AO after giving reasonable opportunity of hearing to the assessee – Decided in favour of assessee. ESOPs to the employees – Held that:- M/s. Biocon Limited and others Versus The Dy. Commissioner of Income-tax (LTU) and others [2013 (8) TMI 629 - ITAT BANGALORE] - the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees - The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time - an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option - No accounting principle can be determinative in the matter of computation of total income under the Act - discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession' – thus, the matter is to be remitted back to the AO – Decided in favour of assessee. Issues Involved:1. Non-compliance with DRP directions and TP adjustments exceeding global profits.2. Selection of Infosys BPO Ltd. as a comparable company.3. Levy of interest under Section 234B of the Income-tax Act.4. Disallowance of ESOP expenses.5. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Non-compliance with DRP Directions and TP Adjustments Exceeding Global Profits:The assessee, a global healthcare services company, contended that the Transfer Pricing Officer (TPO) made adjustments exceeding the global profits of the group. The Dispute Resolution Panel (DRP) had directed that the TP adjustments should not exceed the global profits. However, the Assessing Officer (AO) failed to comply with this direction. The Tribunal found that the DRP's directions are binding per Section 144C(10) and remitted the issue back to the AO to recompute the TP adjustments in compliance with the DRP's directions.2. Selection of Infosys BPO Ltd. as a Comparable Company:The assessee raised an additional ground challenging the selection of Infosys BPO Ltd. as a comparable. Since the issue of TP adjustment was remitted to the AO, the Tribunal also remitted this issue for fresh consideration, making the adjudication of this ground academic at this stage.3. Levy of Interest under Section 234B:The levy of interest under Section 234B was deemed consequential. The Tribunal remitted this issue to the AO for allowing consequential relief, if any, due to the assessee.4. Disallowance of ESOP Expenses:The assessee claimed the discount on ESOPs as an employee expense. The AO disallowed this, treating it as notional capital expenditure. The DRP upheld the disallowance. However, the Tribunal referred to the Special Bench decision in Biocon Ltd., which allowed the discount on ESOPs as a deductible employee cost. The Tribunal remitted this issue to the AO to reconsider in light of the Biocon Ltd. decision.5. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal found that the initiation of penalty proceedings under Section 271(1)(c) was premature and misconceived in these quantum proceedings and thus rejected this ground.Conclusion:The Tribunal allowed the assessee's appeal for statistical purposes, remitting several issues back to the AO for fresh consideration in accordance with the law and the directions provided. The Tribunal emphasized the binding nature of DRP's directions and referenced the Special Bench decision in Biocon Ltd. for the allowability of ESOP expenses.