2021 (9) TMI 1411 - AT - Income Tax

Tribunal Upholds Revenue Decisions on Corporate Fees, ESOP Deduction, and Section 14A Disallowance

The Tribunal upheld the decisions of the Commissioner (Appeals) on all issues raised by the revenue. The Tribunal affirmed the reduction of the corporate ... TP Adjustment - corporate guarantee to its overseas Associate Enterprise - Commissioner (Appeals) reducing the corporate guarantee fee to 0.5% as against 1.5% determined by the Transfer Pricing Officer - HELD THAT:- No infirmity in the aforesaid decision of learned Commissioner (Appeals). The Hon’ble jurisdictional High Court in case of CIT vs Everest Kento Cylinders Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT] has upheld the decision of the Tribunal in charging guarantee commission on corporate guarantee at 0.5%. The same view was expressed by the Hon’ble jurisdictional High Court in case of CIT vs M/s GlennmarkPharmceuticals Ltd [2017 (2) TMI 1305 - BOMBAY HIGH COURT] The aforesaid decision of the jurisdictional High Court was upheld by the Hon’ble Supreme Court while deciding the appeal of the revenue [2018 (12) TMI 608 - SUPREME COURT]. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals) on this issue. Grounds are dismissed. Disallowance of deduction claimed on employee stock option (ESOP) expenditure - whether ESOP expenditure is allowable u/s 37(1) ? - HELD THAT:- We find, while deciding identical issue in assessee’s own case in Assessment Year 2012-13 learned Commissioner (Appeals), following the decision of ITAT, Bengaluru Special Bench in case of M/s Biocon Ltd [2013 (8) TMI 629 - ITAT BANGALORE] allowed assessee’s claim of deduction by holding that ESOP expenditure is not a contingent liability; hence, is an allowable deduction under section 37(1) of the Act. We have also noted, identical issue has been decided in favour of the assessee in Assessment Year 2008-09 - Thus we uphold the decision of learned Commissioner (Appeals) while dismissing the ground raised. Disallowance u/s 14A r.w.r. 8D - suo motu disallowance made by assessee - HELD THAT:- As could be seen from the summary of average value of exempt income yielding investments, interest free fund available and disallowance computed under section 14A filed before us by the learned Counsel for the assessee, the assessee had sufficient interest free fund available with it. Therefore, no disallowance of interest expenditure can be made. Further, we also agree with assessee that disallowance under rule 8D(2)(iii) can only be made on the average value of assets yielding exempt income during the year. It is the case of the assessee that if disallowance under rule 8D(2)(iii) is computed on the average value of exempt income yielding investments, it will work out to Rs.64,24,889/– only. Whereas, assessee, suo motu, has disallowed Rs.11,68,95,186. We find substantial force in the aforesaid submissions of the assessee. Further, the contention of the assessee that the shares of DEN Network has no cost to the assessee as it was received by gift/voluntary contribution is acceptable. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals). This ground is dismissed. Disallowance u/s 14A r.w.s. rule 8D while computing book profit u/s 115JB - HELD THAT:- We are in agreement with learned Commissioner (Appeals) that while computing books profit under section 115JB of the Act, the assessing officer cannot invoke the provisions of section 14A r.w.r. 8D for making adjustment to the book profit. This legal proposition has been laid down in case of ACIT vs Vireet Investments (P) Ltd [2017 (6) TMI 1124 - ITAT DELHI].Though, the assessing officer is empowered to disallow expenditure incurred for earning exempt income in terms of Explanation 1(f) of section 115JB; however, such expenditure must have a direct nexus with the earning of exempt income and not something which is computed under rule 8D r.w.s. 14A of the Act. Therefore, we do not see any reason to interfere with the decision of learned Commissioner (Appeals) on the issue. Ground is dismissed. Issues:1. Reduction of corporate guarantee fee.2. Deduction claimed on employee stock option (ESOP) expenditure.3. Disallowance under section 14A r.w.r. 8D.4. Disallowance under section 14A r.w.s. rule 8D while computing book profit under section 115JB of the Act.Issue 1: Reduction of Corporate Guarantee FeeThe revenue appealed against the decision of the Commissioner (Appeals) to reduce the corporate guarantee fee from 1.5% to 0.5%. The Transfer Pricing Officer (TPO) had determined the fee at 1.5% but the Commissioner (Appeals) restricted it to 0.5%. The Tribunal upheld the decision citing precedents where the jurisdictional High Court had previously upheld charging guarantee commission at 0.5%. The Tribunal dismissed the grounds raised by the revenue, affirming the decision of the Commissioner (Appeals).Issue 2: Deduction claimed on Employee Stock Option (ESOP) ExpenditureThe assessing officer disallowed the deduction claimed on ESOP expenditure, stating it was not crystallized during the year. However, the Commissioner (Appeals) allowed the claim following precedents and held that ESOP expenditure is an allowable deduction under section 37(1) of the Act. The Tribunal upheld the decision of the Commissioner (Appeals) based on previous rulings and dismissed the ground raised by the revenue.Issue 3: Disallowance under Section 14A r.w.r. 8DThe assessing officer computed a disallowance under rule 8D for exempt income earned during the year. However, the Commissioner (Appeals) deleted the disallowance, considering the assessee's submissions regarding interest-free funds available and the computation under rule 8D(2)(iii). The Tribunal agreed with the assessee's contentions, upholding the decision of the Commissioner (Appeals) and dismissing the ground raised by the revenue.Issue 4: Disallowance under Section 14A r.w.s. Rule 8D while Computing Book Profit under Section 115JB of the ActThe revenue challenged the deletion of disallowance made under section 14A r.w.s. rule 8D while computing book profit under section 115JB of the Act. The Tribunal concurred with the Commissioner (Appeals) that the assessing officer cannot invoke the provisions of section 14A r.w.r. 8D for adjusting the book profit under section 115JB. The Tribunal referred to legal precedents to support this decision and dismissed the ground raised by the revenue.In conclusion, the Tribunal dismissed the appeal, upholding the decisions of the Commissioner (Appeals) on all the issues raised by the revenue. The Tribunal provided detailed analyses for each issue, considering legal precedents and interpretations of relevant sections of the Income Tax Act.