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2016 (8) TMI 821
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....ng a transfer pricing adjustment of Rs. 94,16,785/- u/s 92CA(3) of the Act, disallowing claim of software expenditure of Rs. 3,06,009/- as revenue expenditure and the claim of expenditure on ESOP of Rs. 21,28,41,993/-. 3. Aggrieved the assessee carried the matter in appeal. 3.1. The First Appellate Authority granted part relief. Both the assessee as well as the Revenue have filed these appeals to the extent they were aggrieved with the order of the Ld.CIT(Appeals). 4. We first take up the assessee's appeal in ITA 2851/Del/2013. The grounds of appeal read as follows. "1. That on facts and in law the orders passed by the Assessing Officer (A.O.)/CIT(A) Transfer Pricing Officer (TPO) are bad in law and void ab initio. 2. That on facts and in law the CIT(A)/TPO erred in upholding/making an addition of Rs. 94,16,785/- under Chapter X of the Act. 3. That on facts and in law, as regards appellant's receipts of Rs. 4,52,95,590/- the CIT(A) erred in upholding that the nature of services rendered by the appellant to its AE are in the nature of 'Management services' and not 'Shareholder services'. 3.1. That on facts and in law the CIT(A) erred in holding that the appellan....
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.... no.2 to 6 deal with transfer pricing issues and ground no.7 is on the issue of ESOP expenditure. 7. On the issue of transfer pricing the Ld.D.R. submitted that the assessee during the year, in order to diversify and expand into various domains, conceptualised, to establish a subsidiary in UK namely NDTV Net Works Plc. After taking us through the various international transactions reflected in 3CEB report in the transfer pricing study he emphasized on page 3 of the executive summary of the Transfer Pricing Report and drew our attention to the following lines in that report. "During the financial year 2006-07, NDTV has charged the amount incurred by it in rendering management services to NDTV Networks Plc at cost. Further, NDTV has also received consideration from NDTV Networks Plc for shareholder activity even though as per arm's length principle, NDTV is not required to charge any amount to NDTV Networks Plc for the shareholder activity. Hence, having regard to the amount charged by NDTV for management services at cost and further considering the amount received by NDTV for shareholder activity, it is reasonable to conclude that this international transaction appears to be c....
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....ear the TPO accepted 10% of the mark up whereas in this year the rate of mark up is taken at 17%. (h) Alternatively and without prejudice, he submitted that if at all an adjustment has to be made, it could not exceed Rs. 11,81,994 on Rs. 6,55,01,012. He filed a calculation sheet in support of this claim. (i) The Ld.Counsel raised a fundamental aspect as to whether the transaction in question i.e. share holder activity can be classified as an international transaction itself. For this proposition he relied on the judgement of Hon'ble Mumbai High Court in the case of Vodafone India Services P.Ltd. 368 ITR 1 (Bom) and submitted that advice given prior to incorporation is not an international transaction and hence such activity is outside the ambit of Transfer Pricing provisions. He submitted that, as a parent company, the assessee was performing its obligation of setting up of a Subsidiary. (j) He pointed out that the TPO has not charged any mark up on an amount of Rs. 1,68,85,054 and has done so only on an amount of Rs. 4,52,95,590 and that there is no logical explanation for doing so. (k) He submitted that merely because the Transfer Pricing report shows share holder act....
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....on is characterized as of international transaction with the transfer pricing study. 7.5. He further argued that the assessee can not at this stage retract and argue that this is not an international transaction. While submitting that the assessee based its opinion on OECD commentary, he relied on the very same commentary in paragraph 7.9 to 7.10 to argue that this activity is an international transaction. He referred to the examples given at para 7.10 of OECD commentary and argued that it is not the case of the assessee that the services mentioned in the example were rendered to NDTV Net Works Plc UK. He drew the attention of the Bench to the order of the TPO at page 6 to demonstrate that the nature of services rendered by the assessee are identical, though the assessee tried to classify them into two parts (a) provision of management services and (b) provision of share holder services. 7.6. He submitted that there are no share holder services as such and it was nothing but management services. He vehemently contended that transactions cannot be clubbed. He found fault with the arguments that, just because cost of share holder activity was reimbursed, there is no requirement....
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....studios across India which host modem and sophisticated production and newsgathering facilities. The Company's growth can be categorized into three phases. In the first phase, the Company was "content producer" supplying programming to others. Four years ago, the Company transformed into a 'News Broadcaster'. Now in the third phase, the Company is morphing into it full-fledged media network. To achieve its goal of moving beyond news into a full-fledged media company as well as turning global - a new company called NDTV Networks Plc was incorporated in the UK during financial year 2006-07. During the financial year 2006-07, NDTV has entered into international transactions with NDTV Networks B.Y. (Netherlands), NDTV Networks Plc (UK) and Emerging Markets 24X7 B.Y. (Netherlands). The relationship between NDTY. NDTY Networks B.Y. and NDTY Network Plc is depicted in the following diagram: 2.2 NDTV Networks B. V. NDTV Networks B.V. was incorporated in the Netherlands vide incorporation deed executed on 28 December 2006. The company has been incorporated to create the corporate structure for the global media and non-news media related businesses of NDTV. 2.3 ....
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.... Assistance in obtaining finances; • Negotiations with financial and tax consultants to conceptualise an efficient business model of NDTV Networks Plc; and • Provision of other services that may be deemed necessary to enable NDTV Networks Plc to commence and efficiently run its operations. 3.1.2 Assets NDTV has employed its human resources for the provision of management services to NDTV Networks Plc. NDTV has the manpower which has experience and knowledge to provide management services to NDTV Networks Plc. 3.1.3 Risk Analysis There are no inherent external risks associated with this transaction except foreign exchange fluctuation risk. which is borne by NDTV Networks Plc as the payment for management services has been made in Indian currency. 3.2 Grant and Repayment of Loan 3.2.1 Functions During the financial year 2006-07. NDTV has advanced loan of Euros 7,62.000 to NDTV Networks B.Y. Further. the loan was repaid by NDTV Networks B.Y. to NDTV during the financial year 2006-07. 3.2.2 Risk Analysis There are no inherent external risks in respect of the above international transaction except for foreign exchange fluctuation risk....
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....hom the international transaction has been entered into Description of transaction Amount received or receivable in the transaction: As per books of account As computed by the assessee having regard to the arm's length price (Rs.) Method used for determining the arm's length price S.92C(1) Clause 13(a) Clause 13(b) Clause 13(c ) Clause 13(d) 1. NDTV Networks B.V. Martinus Nijhoflan 2,264 ES Delft, Amsterdam, The Neth erlands Reimbursement of courier expenses 3,460 3,460 Refer Note 1 below 2. NDTV Networks Plc 90, High Holborn, London WC V 6XX Reimbursement of expenses in the nature of legal and consultancy, hotel, tour and travel 6,501,612 6,501,612 Refer Note 1 below 3. NDTV Networks Plc 90, High Holborn, London WC V 6XX Reimbursement of costs 62,180,644 62,180,644 Refer Note 2 below 4. NDTV Networks B.V. Martinus Nijhoflan 2,264 ES Delft, Amsterdam, The Neth erlands Subscription of shares 5,745,960 5,745,960 Refer Note 3 below 5. Emerging Markets 24x7 B.V. Martinus Nijhoflan 2,264 ES Delft, Amsterdam, The Neth erlands Subscription of shares ....
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....p or to the group as a whole. In a narrow range of such cases, an intra group activity may be performed relating to group members even though those group members do not need the activity ( and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a 'shareholder activity', distinguishable from the broader term 'stewardship activity' used in the 1979 report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group embers, for example services that would be provided by a coordinating centre. These latter types of non-shareholder activities could include detailed planning services for particular operations, emergency management or technical advise (trouble shooting), or in some cases assistance in day to day management." (Emphasis ours). 10.4. We would now examine the ....
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.... 12/31/2006 80005 Consultancy & Professional fees, entertainment, tour & travel, vehicle running & maintenance, salary cost, transfer 22,340,600 12/31/2006 80006 Employee Compensation expenses 16,963,470 12/31/2006 84249 Salary Cost 99,682 12/31/2006 84249 Employee Compensation expenses (152,099) 12/31/2006 84249 Travel Cost 51,008 12/31/2006 84249 Mobile Phone Charges (55,310) Total : 45,295,590 10.7. In our view the expenditure incurred prior to incorporation of the U.K. Company i.e. NDTV Network Plc UK can be classified as incurred for share holder activity. This subsidiary company has not come into existence on the date of incurring of this expenditure. The assessee company has incurred the expenditure solely because of its ownership interest. The pre incorporation expenses incurred of the type and nature incurred by the assessee prior to incorporation of its subsidiary NDTV Network Plc UK, in our view, is a different transaction from the one of provision of managerial services after incorporation. Expenditure incurred when an A.E. was not in existence, canno....
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....unal has upheld the action of the AO of denial of allowability of the claim of ESOP cost in the profit and loss account and has held that since the receipt of share premium is not taxable, any short receipt of such premium on issuing option to the employees will be notional loss and not actual loss for which any liability is incurred. However, Hon'ble Delhi High Court has admitted further appeal against the decision of Delhi Bench of the Tribunal in the above referred case, which is pending before the Hon'ble Court for decision. It is pertinent to mention here that Hon'ble Delhi High Court has admitted following questions of law:- (i) Whether on the facts and in the circumstances of the case, the tribunal erred in law in holding that the difference between the price at which stock options were offered to the employees of the appellant company under the ESOP Scheme and the prevailing market price of the stock on the date of grant of such options was not allowable expenditure under Section 37(1) of the Act? (ii) Whether on the facts and in the circumstances of the case, the tribunal erred in law in not holding that the difference between the prevailing market price of the stock....
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....ompensation and an allowable deduction u/s 37(1) of the Act? 1.4.1 Securities and Exchange Board of India (SEBI) has issued guidelines on employee stock option scheme (ESOP) which is known as Securities and Exchange Board of India Employee Stock Option Scheme and Employee Stock Purchase Scheme Guidelines 1999 up to dated September 3, 2009 (the SEBI Guidelines). The silent features of the guidelines are as under: 1.4.2 Employee compensation does not include ESOP. For the sake of clarity, definition of employee compensation as stipulated under the SEBI guidelines is extracted as under: "(2) employee compensation" means the total cost incurred by the company toward employee compensation including basic salary, dearness allowance, other allowances, bonus and commissions including the value of all perquisites provided, but does not include (a) the fair value of the option granted under an Employee Stock Option Scheme; and (b) the discount at which shares are issued under the Employee Stock Purchase Scheme. (2A) ''Employee Stock Option" means the option given to the whole-time Directors, Officers or employees of a company which gives such Directors, Officers or employees, ....
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....se period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense. " 1.4.4 Schedule 3 to the SEBI Guidelines provides methodology to determine fair market value of stock options. 1.4.5 The careful perusal of the SEBI guidelines on ESOP (relevant part of which have extracted above) has revealed that the conclusion of Special Bench of the Tribunal that the SEBI guidelines stipulate ESOP cost as employee compensation is contrary to clause (2) (a)(b) of the SEBI guidelines which clarifies that discounts at which share are issued to employee under ESOP is not employee compensation. The guidelines of SEBI on accounting policies as contained in Schedule 1 to SEBI guidelines has not laid down any principle that ESOP cost is revenue expenditure and is deductible in the Profit & Loss A/c of the assessee. It is evident from clause (f) of the Schedule 1 of the SEBI guidelines that ESOP cost has been classified as balance sheet item not an item of Profit & Loss A/c for the sake of clarity the relevant part of the guideline is reproduced as under:- "Employee S....
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....se, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called" the share premium account"; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the share premium account were paid- up share capital of the company. (2) The share premium account may, notwithstanding anything in subsection (I), be applied by the company (a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; fc) in writing off the expenses of or the commission paid or discount allowed on, any issue of shares or debentures of the company; or (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company. (3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act: Provided that any part of the premiums which has been so applied that it....
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....e share capital of a company are of capital in nature and therefore, cannot be taxed under the Act save for certain exceptions. 1.5.3 Till assessment year 2012-13 share premium received by any company was not deemed as income. Even from AY 2013-14 share premium received by a listed company and some other specified companies is not deemed as income. Deeming provision as per Section56 (vii b) (inserted w.e.f. 01.04.2013) is applicable only in case of shares issued at price higher than fair market price by closely held companies (subject to some exceptions). And this is not applicable to a company which is listed on a recognized stock exchange and some other companies, which are also considered as company in which public is substantially interested. In case of issue of shares at premium by listed companies, share premium is not considered as income. However, in case of un-listed companies premium can be considered as income in case the price charged is more than face value (that is at premium) and is also higher than fair market value. In such case, excess of issue price above the fair market value will be considered as income of issuing price. In case a company issues shares at fa....
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....bove referred to settled legal position on the issue of interpretation of statute, it is respectfully stated that the tribunal has misdirected itself in relying on the provisions of the FBT while examining the nature of share premium u/s 37(1) of the Act. 1.5.5 Since the legislature considers discounted premium to the employees as Fringe Benefit accordingly discounted premium is an expenditure and cannot be treated as short capital receipt. v^.6 As discussed above, the FBT was in force w.e.f assessment year 2006- 07 to 2009-10 and the object of FBT was to ensure that fringe benefits given by the employer to employees disguised in expenditure is best taxed in hand of employer i.e., to tackle issues of taxation of benefits which were treated as expenditure by the tax payers. For these reasons, employer was required to pay Fringe Benefit Tax on benefit derived by employee from ESOP. The employer was also allowed to recovers such FBT from the employees. It is amply clear from the intend and purpose of the FBT provisions that it was meant to tax benefits including capital benefits disguised as expenditure. In other words, the FBT was applicable both on capital and revenue expendit....
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....he term 'Expenditure' is what is paid out or away and is something which is given irretrievably. For the sake of clarity the relevant part of judgment is reproduced as under :- ''Expenditure'' is equal to ''expense: and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expense. But the idea of 'spending' in the sense of 'paying out or away' money is the primary meaning and it is with that meaning that we are concerned. 'Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably.' 12.2. He further relied on certain other case laws, which we do not feel it necessary to deal with, as the Special Bench of the ITAT has dealt with the same. 13. In any event, in view of the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. which is binding on us this issue is set aside to the file of the Assessing Officer for fresh adjudication. The A.O. for the A.Y. 2008-09 in an order passed u/s 250/143(3) of the Act on 14.9.2015, on the directions of the Ld.CIT(A) and allowed the claim of ESOPs expenditure by follow....