TaxTMI 
TaxTMI 
2017 (10) TMI 52
X X X X Extracts X X X X
X X X X Extracts X X X X
....law; 2. On the facts and circumstances of the case and in law, the learned AO erred in assessing the total income of the Appellant at INR 9,64,54,610; 3. On the facts and circumstances of the case and in law, the learned AO and the Hon'ble DRP have erred in confirming the action of the learned TPO in making an adjustment of Rs. 5,60,02,461 to the price charged in relation to the international transactions carried out by the Appellant by: 3.1 disregarding the transfer pricing documentation maintained by the Appellant and the submissions made by the Appellant; 3.2 rejecting the plea for use of multiple year data as specified in Proviso to rule 10B(4) of the Rules; 3.3 considering the Appellant as the tested party as against the Associate Enterprises ('AE') which was considered as the tested party by the assessee in its TP study report; 3.4 re-characterizing the Appellant as aKPO service provider instead of ITeS service provider; 3.5 rejecting functionally comparable companies to the AE, as selected in the transfer pricing documentation; 3.6 conducting a fresh search and arbitrary selecting companies a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l of the assessee submitted that out of the above grounds, several grounds are general in nature and some are consequential in nature. He submitted that he is pressing only the issues relating to transfer pricing adjustment and disallowance of deduction u/s 37(1) for ESOP compensation expenses. Issue relating to Transfer Pricing Adjustment 4. Brief facts of the case are as under:- 4.1 Fractal Analytics Pvt. Ltd. (hereinafter referred to as 'the Assesses'), is engaged in providing business process and back office services to customers through its wholly owned subsidiary company in USA. 4.2 The international transaction entered by the Assessee with its AEs during the year under consideration are given as under: Sr. No. Particulars Amount (Rs.) Method Selected 1. Rendering of business process and back office services 31,95,33,719 TNMM 2 Reimbursement of expenses 1,66,66,364 - 4.3 The TP report provided detailed functional and economic analysis of the international transaction entered into by the assessee. In the TP report the assessee has considered Associated Enterprise ('AE') i.e. Fractal Analytics inc. ('Fractal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ormances, improve multi dimensional reporting, understand consumer behavior, and many other analytical services. From the rendering of above services it is clear that the assessee is a Knowledge Process Outsourcing company which analyses various fields of business of its client and gives a report of its analyses to the client for better functioning of their business and hence, assessee is a KPO. We, therefore, uphold the action of TPO in rejecting Informed Technologies, e4e Healthcare, ICRA and Caliber Point as comparables which are ITeS /rating/research companies. 5.2.3 We also find that the comparables of KPO companies were given by the assessee itself and TPO had rejected only Datamatics Global to which assessee has objected. We further find that the same was functionally different and hence, considering the fact that the assessee had itself given the comparables, the TP adjustment considering the ALP @ 35.16 % made by the TPO by including Eclerx Services and Accentia Technologies (refer para 4.10 of TPO) is upheld and the assessee's ground of objection is rejected." 6. Consequently the Assessing Officer made transfer pricing adjustment of Rs. 5,60,02,461 to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....other analytical services. As against the above, we find that Eclerx Services is engaged into diverse range of activities which includes financial services and sales and marketing support services. Its functions primarily are consultancy, business analysis and solution testing. Thus, M/s.Eclerx Services is engaged into various functions and segments. Its segmental data are not available. In following case laws it has been held that the company should be rejected as comparable as its segmental data are not available:- (i) M/s.Capital IQ Information Systems (India) Pvt. Ltd. v. ACIT [ITA No.124/Hyd/2014] (ii) M/s.Excellence Data Research Pvt. Ltd v. ITO [ITA No.159/Hyd/2014] 13. Furthermore we note that in the case of Rampgreen Solutions Private Limited (supra) has held that although super profits could not be the only reason to exclude the comparable, however, Hon'ble High Court had expounded that in such circumstances it may be necessary to bear in mind the super normal profits in a certain cases indicated functional dissimilarity. That a wide deviation in the PLI amongst selected comparables could be indicative that the comparables selected are either....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isallowed Rs. 24,02,383/- on account of ESOP Compensation Expenses. However, during the course of assessment proceedings, the assessee requested the AO to consider the same and allow it as expenses based on various case laws. 4.2.2 The AO has not commented about the application made by the assessee to allow the ESOP compensation expenses disallowed in the return of income in the assessment order. 4.2.3 We have gone through the submission made by the assessee and from the same it is observed that the assessee had suo motu disallowed the ESOP compensation expenses in its return of income and later had claimed for relief before the AO, However, we note that the expenses incurred towards ESOP Compensation are capital in nature and do not have any revenue impact. Secondly, the expenses incurred towards ESOP Compensation are contingent in nature which may or may not have any future impact on the assessee's profit & loss account. 4.2.4 Hence, since the ESOP Compensation Expenses are not revenue expenditure as per section 37(1) and the said expenditure only has capital impact in the books of the assessee, the said ground of objection is rejected." 17. Agai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the revenue that by issuing shares to employees at a discounted premium, the company got a lowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yees. [Para 9.3.2] The principle laid down in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) was that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. Almost to the similar effect is the judgment of the Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422. [Paras 9.3.3 and 9.3.4] Considering the facts of the present case in the backdrop of the ratio laid down by the Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s nor when such options are exercised. [Para 10.5] Considering the questions of 'when' and 'how much' of deduction for discount on options is to be granted, it is held that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. Therefore, deduction of the discounted premium is to be allowed during the years of vesting on a straight line basis. [Para 10.8] Subsequent adjustment to discount Regarding the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and, hence, there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company during the period starting with the date of grant till the happening of this event, such discount needs to be reversed and taken as income. It is so because logically when the options have not eventually vested in the employees, to that extent, the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The amount of discount at the stage of granting of options with respect to the market price of shares at the time of grant of options is always a tentative employee cost because of the impossibility in correctly visualizing the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employee cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. [Para 11.1.6] Taxation vis-à-vis accounting principles The submissions put forth by the assessee that, in the absence of any specific provision in the Act, the accounting principles should be followe....