ESOP expenditure deduction allowed under section 37, transfer pricing on receivables confirmed as separate international transactions

The ITAT Bangalore allowed the assessee's appeal on ESOP expenditure deduction under section 37, following precedent in Novo Nordisk India case. For dividend distribution tax refund claim under Indo-German DTAA, the matter was remanded to AO due to conflicting judicial views. The tribunal upheld disallowance of delayed PF contribution deposits per Supreme Court ruling in Checkmate Services. IND-AS adjustment ground was allowed for statistical purposes. TDS/TCS credit issue was directed for verification. On transfer pricing, the tribunal confirmed outstanding receivables from associated enterprises constitute separate international transactions requiring benchmarking, but allowed netting with payables and directed use of EUR LIBOR rate for interest computation on net receivables exceeding 30-day credit period.

---

---

Issues Involved:
1. Disallowance of ESOP expenses.
2. Refund of excess tax paid on distribution of dividend.
3. Disallowance of employee's contribution to Provident Fund.
4. Disallowance of notional IND-AS adjustment.
5. Non-grant of Tax Deducted at Source (TDS)/Tax Collected at Source (TCS) credit.
6. Levy of interest.
7. Initiation of Penalty proceedings.
8. Notional interest on delayed receivables from AEs (specific to AY 2018-19).

Issue-wise Detailed Analysis:

1. Disallowance of ESOP Expenses:
The primary issue was the disallowance of ESOP expenses claimed by the assessee for AY 2017-18 and AY 2018-19. The assessee argued that ESOP expenses are revenue in nature and should be allowed as a deduction under Section 37 of the Income-tax Act, 1961. The Tribunal referred to the decision in Novo Nordisk India (P) Ltd., where it was held that the difference between the fair market value of shares and the price at which they were issued to employees is a deductible business expenditure. The Tribunal allowed the deduction, holding that the expenditure was incurred wholly and exclusively for the business purpose of the assessee.

2. Refund of Excess Tax Paid on Distribution of Dividend:
The assessee claimed a refund of excess Dividend Distribution Tax (DDT) paid, arguing that the tax rate should be restricted to the rate prescribed under the Indo-German DTAA. The Tribunal noted conflicting views on the issue and observed that the matter was referred to a Special Bench. Consequently, the Tribunal remitted the issue back to the AO for fresh consideration post the Special Bench's decision, allowing the ground for statistical purposes.

3. Disallowance of Employee's Contribution to Provident Fund:
The Tribunal upheld the disallowance of the employee's contribution to the Provident Fund paid after the due date, following the Supreme Court's decision in Checkmate Services Pvt. Ltd. v. CIT, which stated that such deductions are not permissible even if paid before the due date of filing the return.

4. Disallowance of Notional IND-AS Adjustment:
The issue pertained to the disallowance of a notional IND-AS adjustment while computing total income. The Tribunal directed the AO to reconcile the differences as per the DRP's instructions and allowed the ground for statistical purposes.

5. Non-grant of TDS/TCS Credit:
The assessee claimed short credit for TDS and TCS. The Tribunal directed the AO to verify the documents and grant the appropriate credit as per law, allowing the ground for statistical purposes.

6. Levy of Interest:
The Tribunal noted that the grounds related to the levy of interest were consequential and did not require specific adjudication.

7. Initiation of Penalty Proceedings:
The Tribunal did not specifically address this issue, as it was consequential and dependent on the outcome of the substantive issues.

8. Notional Interest on Delayed Receivables from AEs (AY 2018-19):
The Tribunal addressed the transfer pricing adjustment on notional interest for delayed receivables. It held that such receivables constitute a separate international transaction and should be benchmarked independently. The Tribunal accepted the assessee's contention for netting off outstanding payables against receivables and directed the AO/TPO to apply the EUR LIBOR rate for determining the arm's length interest rate, allowing the ground in part.

In conclusion, the Tribunal partly allowed the appeals, providing relief on certain grounds while remanding or dismissing others based on legal precedents and factual analyses.

---