2017 (12) TMI 922 - AT - Income Tax

Tribunal upholds CIT(A) decisions on ESOP & PF, remands transfer pricing & 10A issues for fresh review

The Tribunal upheld the CIT(A)'s decisions on ESOP expenditure and employee's contribution to PF, allowing the claims. However, it remanded the transfer ... Expenditure incurred on ESOP - revenue or capital - Held that:- This issue is now covered in favor of the assessee by the decision of the Special Bench of the Tribubal at Bangaluru in the case of Biocon Ltd., Vs. DCIT reported in [2013 (8) TMI 629 - ITAT BANGALORE] wherein the expenditure incurred on ESOP has been held to be revenue in nature, and the CIT(A) has followed the said decision to grant relief to the assessee Delay in Employee’s contribution to PF - Held that:- We find that undisputedly, the employee’s contribution to PF has been paid with the delay of ten days only, but before the due date of filing of the return. In a number of cases, this Bench of the Tribunal has considered all the decisions relevant to the issue, both u/s 43B as well as 36(1)(va) r.w.s 2(24)(x) of the Act, including the decisions relied upon by the Ld. DR, and has held that both the contributions are allowable if they are paid before the due date of filing of the return of income u/s 139(1) of the Act ALP determination - TPA - Held that:- CIT(A) has called for a remand report from the A.O and on the basis of said remand report and subsequent reply of the assessee to the remand report, he has confirmed the TP study of the assessee. This approach of the CIT(A), in our opinion, is not correct. Since the assessee has filed the TP documentation before the CIT(A), he ought to have referred the matter to the file of the TPO for determination of the ALP. Since, it is also pointed out by the assessee that there are mistakes in the margins of the comparables, we deem it fit and proper to remand the issue to the file of the AO/TPO for fresh determination of the ALP in accordance with law. Deduction u/s 10A - certificate required u/s.10A(5) of the Act having not been filed along with the return – Held that:- We find that the Hon’ble Karnataka High Court, in the case of American Data Solutions India Pvt Ltd.[2014 (2) TMI 128 - KARNATAKA HIGH COURT ] was considering the case of an assessee, which had filed Form No. 56F before the CIT(A), who granted relief to the assessee after giving opportunity to the assessee. On an appeal by the Revenue, the Hon’ble High Court held that the proceedings before the First Appellate Authority is continuation of assessment process and the audit report though was not produced before the assessing authority, the lower appellate authority was duty bound to take note of the said audit report and grant benefit, if the assessee is entitled to. We find that in the case before us, the A.O has not held that the assessee has not fulfilled the other conditions prescribed u/s 10A of the IT Act. It is also not in dispute that the Form No. 56F has been filed before the A.O with a delay. The assessee has filed the additional evidence in support of the deduction u/s 10A of the Act. We are inclined to admit the same and remand to the file of the A.O with a direction to allow the deduction u/s 10A of the Act in accordance with law after verifying if the assessee satisfies all other conditions u/s 10A Issues Involved:1. Disallowance of expenditure on account of Employee Stock Option Scheme (ESOP).2. Disallowance of employee's contribution to Provident Fund (PF) under Section 36(1)(va) read with Section 2(24)(x) of the IT Act.3. Transfer Pricing adjustment concerning Arm's Length Price (ALP) in international transactions.4. Disallowance of deduction under Section 10A of the IT Act due to the delayed filing of Form No. 56F.Detailed Analysis:1. Disallowance of Expenditure on Account of Employee Stock Option Scheme (ESOP):The Assessing Officer (A.O) disallowed the expenditure of Rs. 12,80,470/- incurred on the ESOP scheme, considering it to be contingent and notional in nature. The A.O held that any notional loss should be written off against the share premium account and not allowed as revenue expenditure. However, the CIT(A) allowed the claim following the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. vs. DCIT, which held that ESOP expenditure is revenue in nature. The Tribunal found no reason to interfere with the CIT(A)'s order and rejected the Revenue's ground.2. Disallowance of Employee's Contribution to Provident Fund (PF):The A.O disallowed the employee's contribution to PF under Section 36(1)(va) read with Section 2(24)(x) of the IT Act, as the contributions were not remitted within the due date prescribed by the relevant Act. The CIT(A) allowed the claim, considering that the contributions were paid before the due date of filing the return under Section 139(1) of the IT Act. The Tribunal upheld the CIT(A)'s decision, referencing various judicial precedents, including the Supreme Court's decision in the case of Alom Extrusions Ltd., which allows such contributions if paid before the due date of filing the return.3. Transfer Pricing Adjustment Concerning Arm's Length Price (ALP):The A.O made an adjustment of Rs. 1,65,93,343/- towards ALP after the assessee failed to submit the relevant transfer pricing documentation. The CIT(A) called for a remand report, in which the A.O rejected most of the comparables selected by the assessee due to inappropriate turnover filters. The CIT(A) accepted the assessee's contentions and deleted the TP adjustment. The Tribunal found the CIT(A)'s approach incorrect as the matter should have been referred to the Transfer Pricing Officer (TPO) for determination of ALP. The issue was remanded to the A.O/TPO for fresh determination.4. Disallowance of Deduction Under Section 10A Due to Delayed Filing of Form No. 56F:The A.O disallowed the deduction under Section 10A as the assessee failed to submit Form No. 56F within the stipulated time. The CIT(A) granted relief, condoning the delay. The Tribunal noted that the filing of Form No. 56F is directory and not mandatory, and the deduction should be allowed if the assessee fulfills all other conditions under Section 10A. The Tribunal remanded the issue to the A.O for verification and directed to allow the deduction if the conditions are met.Conclusion:The Tribunal upheld the CIT(A)'s decisions on ESOP expenditure and employee's contribution to PF. However, it remanded the issues concerning transfer pricing adjustment and deduction under Section 10A for fresh consideration and verification by the A.O/TPO. The appeal was partly allowed for statistical purposes.