TaxTMI 
TaxTMI 
TaxTMI 
2017 (10) TMI 52
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....d 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 as comparables without considering the fact that their functions undertaken, assets employed and risks bo....
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.... 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 USA') as the tested party. Transactional Net Marginal Method ("TNMM") was considered as the most appropriate method taking operating profit to Sales ("QP/Sales") ratio as the PLI. 4.4 The Assessee identified....
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....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 income of the assessee. 7. Against the above order, the assessee is in appeal before us. 8. We have heard both the Counsel and perused the records. Learned Counsel of the assessee submitted that he will confine his argument with regard to the ....
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.... 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 materially dissimilar or the data used is not reliable. The Hon'ble High Court in the decision noted the findings of Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. wherein it was noted that Eclerx Services is engaged in data analytical, data processi....
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.... 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. Against this, the assessee is in appeal before us. 18. We have heard both the Counsel and perused the records. Learned Counsel of the assessee submitted that Rs. 24 lakh expended on ESOP was disallowed by the assessee itself erroneously in the return. But later on assessee gave letter in this regard to the Assessing Office....
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....h 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 lower capital receipt, is bereft of any force. By no stretch of imagination, such discount can be described as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. [9.2.6] The revenue also canvassed a view that an expenditure denotes "paying out or away" and unless the money goes out fr....
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....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 the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of each year on availing the services. It is, therefore, held that the discount in relation to options vesting during the year cannot be held as a contingent liability. [Paras 9.3.5 and 9.3.6] Whether deduction is allowable Also, it is discernib....
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....ing 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 company has incurred no employee cost. And if there is no cost to the company, the tentative amount of deduction earlier claimed on the basis of the market price at the time of grant of option ceases to be admissible and, hence, needs to be reversed. [Para 11.1.3] The second situation is when the options are exercised by the employees after putting in service during the vesting period. In such a scenario, the actual amo....
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.... 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 followed for determining the total income of the assessee are not acceptable. What is true for accounting purpose need not necessarily be true for taxation. Taxation principles are enshrined in the legislature. Power to legislate lies with the Parliament. Accounting standards or Guidance Note or Guidelines etc., issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or the SEBI are meant only to prescribe t....