Transfer pricing on ESOP and RSU benefits fails where no actual cost or liability was borne by the assessee.

Transfer pricing adjustment on ESOP or RSU employee perquisite value was held unsustainable where the assessee incurred no actual cost and recorded no corresponding liability. The relevant arm's length computation required profit margin to be derived from costs actually incurred, and "incurred" was read as an existing financial obligation or outflow. Because the foreign parent granted the shares, the assessee neither acquired the shares nor bore the grant cost, and the TDS reimbursement was treated as a reimbursement without mark-up. A hypothetical or notional cost could not be imputed for transfer pricing purposes, and the adjustment was deleted.

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Issues: Whether the transfer pricing adjustment made in respect of ESOP or RSU benefits granted by the foreign parent company to the assessee's employees could be sustained when no cost was incurred by the assessee and no corresponding liability was recorded in its accounts.

Analysis: The adjustment was based on a notional valuation of employee perquisite cost and a mark-up thereon. The relevant transfer pricing rule requires the net profit margin to be computed in relation to costs incurred, and the expression "incurred" denotes an actual financial obligation or outflow. The assessee neither acquired the shares nor bore the cost of the ESOP or RSU grant, and the TDS reimbursement was treated as a reimbursement without mark-up. In the absence of any real cost or contractual liability to bear such expenditure, a hypothetical or opportunity-based cost could not be imputed for transfer pricing purposes.

Conclusion: The transfer pricing adjustment in respect of the ESOP or RSU-related perquisite value was not sustainable and was directed to be deleted.

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