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of <h1>Tribunal adjusts comparables, allows full interest expense on CCDs, permits RSU cost deduction</h1> <h3>M/s. TE Connectivity Services India Private Limited, Versus National Faceless Assessment Centre, Delhi.</h3> M/s. TE Connectivity Services India Private Limited, Versus National Faceless Assessment Centre, Delhi. - TMI Issues Involved:1. Determination of Arm's Length Price (ALP) for international transactions.2. Disallowance of interest on Compulsory Convertible Debentures (CCDs).3. Disallowance of Restricted Stock Units (RSU) cost recharge.Issue-Wise Detailed Analysis:1. Determination of Arm's Length Price (ALP) for International Transactions:The assessee contested the addition made to its total income due to the determination of ALP for international transactions with its Associated Enterprise (AE). The primary contention was the exclusion of companies with high turnover from the list of comparables. The Tribunal noted that the assessee's turnover was Rs.64.45 Crores and emphasized that companies with a turnover exceeding Rs.200 Crores should not be considered comparable, citing the Tribunal's consistent stand and several judicial precedents. The Tribunal directed the exclusion of three companies with turnovers exceeding Rs.200 Crores from the list of comparables, thereby allowing the assessee's profit margin to be at arm's length. Consequently, no other grounds regarding ALP determination needed adjudication.2. Disallowance of Interest on Compulsory Convertible Debentures (CCDs):The assessee issued CCDs to its AE and claimed the interest paid on these CCDs as a deductible expense. The AO disallowed Rs.4,53,11,205 out of the total interest claimed, treating CCDs as equity based on RBI's FDI policy and thin capitalization rules. The Tribunal, referencing the ITAT Bangalore's decision in CAE Flight Training (I) Pvt. Ltd., held that CCDs should be treated as debt until conversion into equity. It emphasized that RBI's definition in the context of FDI policy cannot be applied to other contexts like interest allowability. The Tribunal ruled that the entire interest expense of Rs.6.09 Crores should be allowed as a deduction, rejecting the AO's disallowance based on book entries and emphasizing the principle of real income taxation.3. Disallowance of Restricted Stock Units (RSU) Cost Recharge:The assessee incurred expenses related to RSUs allotted to its employees by the ultimate holding company and claimed these expenses as employee costs. The AO disallowed the claim, treating it as a capital expenditure. The Tribunal, referencing the Karnataka High Court's decision in Biocon Ltd., held that ESOP expenses are revenue expenditures and should be allowed as deductions. It emphasized that the expenditure was incurred to compensate employees for their services and should be treated as employee costs. The Tribunal allowed the assessee's claim, rejecting the AO's disallowance.Conclusion:The Tribunal partly allowed the assessee's appeal, directing the exclusion of high-turnover companies from the list of comparables for ALP determination, allowing the entire interest expense on CCDs, and permitting the deduction of RSU cost recharge as revenue expenditure.
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