Assessee wins on transfer pricing, depreciation, professional fees, and ESOP tax exclusion under Section 115JB

The ITAT Mumbai dismissed the revenue's appeals on multiple grounds. Regarding TP adjustment on bank guarantee, the tribunal followed its own precedent holding no adjustment was warranted despite the transaction being international. For depreciation on plant machinery, the tribunal allowed depreciation where the assessee had possession and capitalized the machinery despite principal ownership. Professional fees for arbitration were held allowable as business expenses. The tribunal also upheld exclusion of ESOP tax payments from book profit computation under Section 115JB, noting such employer payments on behalf of employees don't constitute income tax under the statutory definition.

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Issues Involved:
1. Limitation on filing cross-objections.
2. TP adjustments related to bank guarantee fees.
3. Allowance of depreciation on the written down value (WDV) of plant & machinery.
4. Disallowance of professional fees paid for arbitration awarded.
5. Exclusion of tax on ESOP in computing the book profit u/s 115JB of the Act.

Issue-wise Detailed Analysis:

1. Limitation on Filing Cross-Objections:
The assessee filed cross-objections which were barred by limitation. The Tribunal, after perusing the affidavit and considering the reasons for the delay, found that the assessee was prevented by reasonable and sufficient cause from filing the cross-objections within the stipulated time. Therefore, the delay was condoned, and the cross-objections were admitted.

2. TP Adjustments Related to Bank Guarantee Fees:
The revenue's grievance was that the CIT(A) erred in reducing the bank guarantee fee levied by the AO, while the assessee challenged the very levy of the bank guarantee. The Tribunal noted that similar issues had been adjudicated in the assessee's favor in previous years. It was observed that the performance guarantee provided by the assessee was for its own contract performance, and no fee was charged to the associated enterprise (AE). The Tribunal concluded that the entire benefit and profit from the guarantee went to the assessee, and no TP adjustment was warranted. Consequently, the Tribunal directed the TPO/AO to delete the adjustments, making the revenue's appeal infructuous.

3. Allowance of Depreciation on the Written Down Value (WDV) of Plant & Machinery:
The Tribunal noted that this was a recurring issue and had been consistently decided in favor of the assessee in previous years. It was established that the machinery was purchased by the principal but utilized by the assessee for its business, with the cost debited to the assessee's account and capitalized in its books. Following the precedent, the Tribunal saw no infirmity in the CIT(A)'s order and dismissed the revenue's ground.

4. Disallowance of Professional Fees Paid for Arbitration Awarded:
The AO disallowed professional fees for arbitration on the grounds that the corresponding arbitration award income was not offered for taxation. However, the Tribunal, following its previous decisions, held that the professional fees were incurred for business purposes and justified as an expenditure. The Tribunal noted that the AO's disallowance was merely to keep the issue alive, without disputing the business purpose of the expenditure. Therefore, the Tribunal upheld the CIT(A)'s deletion of the disallowance.

5. Exclusion of Tax on ESOP in Computing the Book Profit u/s 115JB of the Act:
During scrutiny assessment, the AO added back the tax on ESOP to the book profits, arguing it was covered under clause (a) of Explanation 1 to Section 115JB. The assessee contended that the tax paid on behalf of employees was a business expenditure, not an income tax liability of the company. The CIT(A) agreed, noting that the definition of "income tax" for the purposes of clause (a) did not include such payments. The Tribunal upheld this view, finding no reason to interfere with the CIT(A)'s findings and dismissed the revenue's ground.

Conclusion:
The Tribunal dismissed the appeals of the revenue and allowed the cross-objections raised by the assessee. The order was pronounced in the Court on 21st August, 2024, at Mumbai.

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