2013 (7) TMI 1200 - AT - Income Tax

Tribunal remands ALP determination, re-adjudicates depreciation, allows ESOP expenses claim.

The Tribunal remanded the issue of Arm's Length Price (ALP) determination back to the Transfer Pricing Officer (TPO) for fresh consideration, directed the ... Arm's Length Price - Comparable Uncontrolled Price (CUP) Method - Resale Price Method - High degree of comparability - Consistent treatment in transfer pricing - Remand to Transfer Pricing Officer - Depreciation - opening Written Down Value - Employees Stock Option Plan - revenue or capital expenditureArm's Length Price - Comparable Uncontrolled Price (CUP) Method - Resale Price Method - High degree of comparability - Consistent treatment in transfer pricing - Validity of upward revision to ALP by adopting CUP instead of RPM in respect of sales to Associated Enterprises - HELD THAT: - The TPO rejected the Resale Price Method adopted by the assessee and applied the CUP method comparing prices of sales to AEs with sales to various non-AEs across different geographies and quantities, resulting in upward adjustments for AYs 2007-08 and 2008-09. The assessee contended material differences in product grade, geography, volume, level of market and functions performed, relied on earlier and later years where RPM had been accepted, and pointed to the TPO's remand report which accepted that several specific contentions deserved consideration. The Tribunal found that while RPM was not appropriate on the facts, the CUP exercise undertaken by the TPO was flawed because it compared wholesale sales to the AE in the USA with small-quantity/trial sales to non-AEs in disparate geographies without adequate comparability. Given that CUP may only be applied where truly comparable transactions exist, and having regard to the factual dissimilarities and the TPO's own remand observations, the Tribunal held that fresh determination of ALP is required by reference to truly comparable transactions in the relevant market (USA). Accordingly the Tribunal restored the transfer pricing issue to the file of the TPO for reconsideration and fresh determination of ALP on appropriate comparables. [Paras 29]Issue remanded to the Transfer Pricing Officer for fresh determination of ALP after considering genuinely comparable transactions (restoration for statistical purposes).Depreciation - opening Written Down Value - Remand to Assessing Officer - Allowability of depreciation claimed in AY 2008-09 in respect of additions in earlier assessment years where bills/vouchers were earlier not produced - HELD THAT: - The Assessing Officer had disallowed depreciation in earlier years for lack of bills/vouchers, which produced corresponding closing WDV figures; the assessee later submitted that most invoices (except a small amount) were available and accepted under the appellate remand in AY 2005-06. The DRP had sustained the disallowance on the ground that earlier years' closing WDVs were final. The Tribunal noted the appellate finding accepting bills/vouchers for the majority of the earlier additions and that the Assessing Officer and parties had no objection to reconsideration. In the interest of justice and having regard to the appellate direction in AY 2005-06, the Tribunal directed that the question of depreciation for AY 2008-09 be adjudicated afresh by the Assessing Officer, allowing the assessee a reasonable opportunity to produce evidence and for verification. [Paras 2]Orders set aside and matter remanded to the Assessing Officer to re-adjudicate depreciation allowance afresh in light of earlier appellate findings.Employees Stock Option Plan - revenue or capital expenditure - Treatability of ESOP expenses claimed as revenue deduction for AY 2008-09 - HELD THAT: - The Assessing Officer characterised the ESOP expenditure as capital and disallowed the claim; the DRP confirmed that view observing that the ESOP led to an increase in capital and conferred a voluntary benefit rather than an expenditure incurred pursuant to contractual obligation. The assessee relied on Tribunal and High Court decisions (including Madras High Court authority) holding that ESOP expenses, where accounted for in compliance with SEBI guidelines and representing an ascertained liability on exercise, are allowable as revenue expenditure. The Revenue conceded that issue was covered by the Madras High Court decision. In view of the binding judicial view favouring allowability where SEBI-regulated ESOP accounting establishes the liability, the Tribunal set aside the disallowance and directed allowance of the ESOP expense. [Paras 9]ESOP expense of the assessee allowed and the lower orders set aside; Assessing Officer directed to allow the claimed ESOP deduction.Final Conclusion: Appeals allowed in part: transfer pricing adjustments under challenge remanded to the TPO for fresh ALP determination on proper comparables; depreciation claim remanded to the Assessing Officer for fresh adjudication in light of earlier appellate findings; ESOP expenditure held allowable and directed to be allowed by the Assessing Officer. Issues Involved:1. Upward revision of Arm's Length Price (ALP) for international transactions.2. Disallowance of depreciation on opening Written Down Value (WDV).3. Disallowance of Employee Stock Option Plan (ESOP) expenses.Summary:1. Upward Revision of ALP:The primary issue in assessment years 2008-09 and 2007-08 was the upward revision of ALP by Rs. 9,06,35,400/- and Rs. 1,00,76,210/- respectively. The assessee-company, engaged in the manufacture and selling of bulk drugs, had international transactions of sales to Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) rejected the Resale Price Method (RPM) adopted by the assessee and instead used the Comparable Uncontrolled Price (CUP) method, resulting in the upward adjustment. The Dispute Resolution Panel (DRP) and CIT(A) upheld the TPO's decision. The Tribunal found that both RPM and CUP methods were not applicable due to differences in geographical and volume factors. Therefore, the issue was remanded back to the TPO to determine fresh ALP considering similar transactions and commodities sold in the USA by other enterprises.2. Disallowance of Depreciation on Opening WDV:The assessee's claim for depreciation on opening WDV aggregating to Rs. 3,97,21,857/- was disallowed based on earlier assessment years' proceedings. The DRP confirmed the disallowance. The Tribunal noted that the CIT(A) had allowed depreciation on verified bills in assessment year 2005-06 and remanded the matter back to the Assessing Officer to adjudicate the issue afresh in line with the CIT(A)'s order for assessment year 2005-06.3. Disallowance of ESOP Expenses:The assessee claimed Rs. 14,91,000/- towards ESOP expenses, which was disallowed by the Assessing Officer and confirmed by the DRP as capital in nature. The Tribunal relied on the decision of the Hon'ble Madras High Court in CIT vs PVP Ventures Ltd., which allowed ESOP expenses as revenue expenditure. Consequently, the Tribunal directed the Assessing Officer to allow the ESOP expenses claimed by the assessee.Conclusion:In conclusion, the Tribunal remanded the issue of ALP determination back to the TPO for fresh consideration, directed the Assessing Officer to re-adjudicate the depreciation issue, and allowed the ESOP expenses claim. The appeals of the assessee were allowed for statistical purposes.