Deletion of transfer-pricing adjustment for inter-group central services upheld; s.14A/Rule 8D disallowance removed; ESOP costs treated as capital

ITAT MUMBAI upheld deletion of a transfer-pricing adjustment for inter-group central services, finding contemporaneous evidence of service rendition and commensurate benefit and following a coordinate-bench benchmarking analysis. The tribunal deleted the disallowance under s.14A read with Rule 8D, noting the AO applied Rule 8D without recording requisite satisfaction or examining whether investments yielded exempt income. The tribunal also deleted the addition for ESOP expenses, holding they had not crystallised and were capital in nature.

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Issues Involved:
1. Transfer Pricing Adjustment for Payment of Central Services
2. Disallowance under Section 14A
3. Disallowance of ESOP Expenses
4. Excess Levy of Interest under Section 234B & 234D
5. Initiation of Penalty under Section 270A
6. Final Order of Assessment Issued without DIN

Summary of Judgment:

1. Transfer Pricing Adjustment for Payment of Central Services:
The assessee, Unilever India Exports Limited (UIEL), paid Central Services Charges to its AE, Unilever Plc, and benchmarked the transaction using the CUP method. The TPO rejected the assessee's method and determined the ALP at NIL, leading to an adjustment of Rs. 11,65,31,532/-. The Tribunal noted that the assessee had provided substantial documentation demonstrating the rendition and benefits of the services. The Tribunal found that the TPO's determination was not based on any prescribed method and was contrary to the mandate of section 92C. The Tribunal, following its earlier decisions, directed the deletion of the TP adjustment.

2. Disallowance under Section 14A:
The AO disallowed Rs. 1,83,83,273/- under section 14A, stating the assessee's suo-moto disallowance was inadequate. The Tribunal observed that the AO had not recorded any cogent satisfaction for rejecting the assessee's calculation and had mechanically applied Rule 8D. The Tribunal, following its earlier decisions, deleted the disallowance made by the AO.

3. Disallowance of ESOP Expenses:
The AO disallowed Rs. 1,47,50,000/- towards ESOP expenses, claiming they were not crystallized and were capital in nature. The Tribunal, referencing its earlier decisions and the Karnataka High Court's ruling in Biocon Ltd., held that ESOP expenses are allowable under section 37(1) and directed the deletion of the addition.

4. Excess Levy of Interest under Section 234B & 234D:
The Tribunal directed the AO to reconsider the facts and rectify any errors in the calculation of interest under sections 234B and 234D after giving the assessee a reasonable opportunity to be heard.

5. Initiation of Penalty under Section 270A:
The Tribunal did not provide a separate adjudication for this ground as it was consequential.

6. Final Order of Assessment Issued without DIN:
The assessee raised a legal issue regarding the assessment order being issued without a Department Identification Number (DIN). The Tribunal noted that since the issues were decided on merits in favor of the assessee, this legal issue became academic and was left open.

Conclusion:
The appeals for AY 2017-18 and 2018-19 were allowed, with the Tribunal directing the deletion of the TP adjustment, disallowance under section 14A, and ESOP expenses. The AO was instructed to rectify the errors in the calculation of interest under sections 234B and 234D. The legal issue regarding the assessment order without DIN was left open due to the favorable decisions on merits.

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