Transfer pricing adjustment reduced from 0.77% to 0.2% for guarantee commission, ESOP expense allowed under section 37(1)

ITAT Ahmedabad upheld CIT(A)'s decision restricting transfer pricing adjustment for guarantee commission to 0.2% instead of AO's 0.77%, finding TPO incorrectly benchmarked 822-day transaction against 365-day rate and applied unjustified 0.25% markup. Court allowed ESOP expense deduction under section 37(1), treating employee share discount as ascertained business liability for securing services, not capital expenditure. Section 14A disallowance was deleted as assessee earned no exempt income during the year, following Supreme Court precedents in State Bank of Patiala and Chettinad Logistics cases. Revenue's appeal dismissed on all grounds.

---

---

Issues Involved:
1. TP Adjustment in respect of guarantee commission.
2. Disallowance of ESOP expenses.
3. Disallowance u/s 14A of the Act.

Issue-wise Detailed Analysis:

1. TP Adjustment in respect of guarantee commission:

The first three grounds pertain to the TP adjustment in respect of the guarantee commission. The assessee provided a corporate guarantee to two of its associated enterprises (AEs). The Assessing Officer (AO), relying on the Transfer Pricing Officer (TPO), made an arms-length price (ALP) adjustment of Rs. 26,32,930 u/s 92CA at 0.77% of the loan amount for which the guarantee was provided. The assessee did not charge any guarantee fee from its AEs. The CIT(A) restricted the TP adjustment to 0.2%, amounting to Rs. 5,71,727/-. The Departmental Representative contested this restriction, while the Authorized Representative supported the CIT(A)'s order.

The Tribunal found that the TPO had benchmarked the transactions based on a bank guarantee provided by Indusland Bank Ltd to the assessee. The guarantee commission rate was worked out at 0.52%, and a markup of 0.25% was applied by the TPO, resulting in an ALP rate of 0.77%. The CIT(A) noticed that the guarantee commission paid was for a period of 822 days, and the proportionate rate for 365 days was only 0.2%. The CIT(A) also found no justification for the 0.25% markup as the internal CUP was based on a third-party transaction. The Tribunal upheld the CIT(A)'s decision, finding it reasonable and correct, and dismissed the Revenue's ground.

2. Disallowance of ESOP expenses:

The fourth ground pertains to the addition of Rs. 1,50,21,000/- on account of ESOP expenses. The assessee claimed ESOP expenses of Rs. 150.21 lakhs u/s 37 of the Act, representing the difference between the market value of shares as per SEBI guidelines and the value at which shares were issued to employees. The AO treated this expenditure as capital in nature or notional and disallowed it. The CIT(A) deleted the addition, following the ITAT's decision in the assessee's own case.

The Tribunal examined the issue in detail, citing various High Court and ITAT decisions, including Biocon Ltd., PVR Ltd., New Delhi Television Ltd., and others, which held that ESOP expenses are an ascertained liability and allowable under section 37(1) of the Act. The Tribunal found no reason to deviate from the CIT(A)'s findings and upheld the deletion of the addition on account of ESOP expenses, rejecting the Revenue's ground.

3. Disallowance u/s 14A of the Act:

The fifth ground pertains to the deletion of the addition of Rs. 3,52,52,300/- on account of disallowance u/s 14A of the Act. The assessee did not earn any exempt income during the year. The AO observed that the assessee had not made any disallowance u/s 14A in its return of income and accordingly made the addition. The CIT(A) deleted the addition, relying on the ITAT's decision in the assessee's own case.

The Tribunal noted that it is well-settled law that no disallowance can be made under section 14A if no exempt income is earned. The Tribunal cited several decisions, including those of the Supreme Court, Gujarat High Court, and Delhi High Court, which held that section 14A cannot be invoked where no exempt income is earned. The Tribunal found the facts in the current year identical to the previous year and upheld the CIT(A)'s order, confirming the deletion of Rs. 3,52,52,300/- on account of disallowance u/s 14A. The Revenue's ground was rejected.

Conclusion:

In the result, the appeal of the Revenue is dismissed. The order was pronounced in the open court on 04-06-2024.

---