TaxTMI 
TaxTMI 
2023 (11) TMI 30
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.... the case was referred to TPO after obtaining approval from the competent authority. The TPO passed order on 24.01.2021 and accordingly the AO passed the final assessment order on 23.04.2021. The ld. CIT on examination of records noted that the TPO while calculating the PLI (OP/OC) had not considered the following three items as operating expenses of the assessee :- (i) Share based compensation - Rs. 4,054 million. (ii) Foreign exchange fluctuation loss - Rs. 110 million (iii) Impairment of investments in subsidiaries - Rs. 118 million. 3. These expenses were debited to the Profit & Loss account by the assessee. Accordingly, he issued show cause notice to the assessee on 17.02.2023 for revision of the order u/s. 263 of the Act. After considering the submissions of the assessee, the ld. CIT held as under:- "26. In line with the principles laid down in the above rulings which clearly apply to the facts and circumstances of this case and in the absence of verification in the manner required under the Act by the TPO to determine the inclusion of the share-based compensation in the form of ESOP cost in the Operating Cost base in TP proceedings, the....
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....a Limited: 268 ITR 128 (P&H) [affirmed in 295 ITR 282 (SC)] - CIT v Kwality Steel Suppliers Complex: 395 ITR 1 (SC) - CIT vs. Amitabh Bachchan: 384 ITR 200 (SC) - CIT v. Hindustan Lever Ltd: 343 ITR 161 (Bom.) - CIT v. Vikas Polymers: 341 ITR 537 (Del.) - CIT v. Sunbeam Auto Ltd.: 332 ITR 167 (Del) - CIT vs. Development Credit Bank Ltd: 323 ITR 206 (Bom.) - Vimgi Investment (P) Limited: 290 ITR 505 (Del) - Hari Iron Trading Co. vs. CIT: 263 ITR 437 (P&H) - CIT vs. Gabriel India Limited: 203 ITR 108 (Bom) 7. It is further settled law that if the assessing officer has adopted one of the courses permissible in law which may have resulted in loss of revenue, or where two views are possible and the assessing officer has taken one view with which the Commissioner does not agree, the exercise of revisionary power under section 263 of the Act would be without jurisdiction [refer Malabar Industrial (supra), Max India (supra), CIT vs Kwality Steel Suppliers Complex (supra)]. Transfer Pricing order neither "erroneous" nor "prejudicial to interests of Revenue" 8. Applying the aforesaid s....
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....f investment in subsidiary) from the operating cost without making necessary/proper enquiries and verification. 15. It may be pertinent to note that the CIT(TP) failed to appreciate that the amount of Rs. 228 million comprised of two components viz., exchange difference of Rs. 110 million and impairment of investment in subsidiary of Rs. 118 million, which as per the CIT(TP)'s own admission are not in the nature of operating expense [Refer para 26 @ pg 16 of the impugned revisionary order]. Re: TPO made enquiries and applied mind - order not erroneous 16. It is emphatically submitted that the TPO, in the course of original transfer pricing proceedings for the assessment year 2017-18, was not only conscious/ aware of the aforesaid issues but also conducted extensive/ necessary enquiries/ investigations, as required in law, therein before accepting the same, as would be evident from the details of enquiries conducted. 17. In this connection, the appellant is providing herein below details of relevant queries raised by the TPO vide notices/questionnaire and information/ replies filed by the appellant in response thereto from time to time, which clea....
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.... (a) Amazon Export Sales LLC (United States of America) (@relevant at page 150 of the PB) (b) Amazon CS Ireland Limited (Ireland) (@relevant at page 165 of the PB) - Form 3CEB - Computation of total income SCN dated 19.12.2020 [Copy enclosed at pages 178 to 200 of paperbook] Vide show cause notice ('SCN'), the TPO required the appellant to, inter alia, furnish following details: (a) Forex loss/profit arising out of delay in trade receipts (@relevant at page 197 of the PB) (b) Stock Incentive Plan/ Employee Stock Option Plan/ restricted stock units ('RSU') granted by the AE to employees of appellant (@relevant at page 198 of the PB) Reply dated 15.01.2021 [Copy enclosed at pages 201 to 408 of paperbook] In response to the aforesaid query, the appellant filed elaborate reply justifying, inter alia: - Information pertaining to ESOP cost and why the same should not be considered as part of cost base; (@relevant at page 239, 405- 408 of the PB) - Details qua forex loss/profit arising out of the delay in trade receipts; (@relevant at page 231-238 of the PB) - Segmented financial informat....
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....the assessment record: − Hari Iron Trading Co. vs. CIT: 263 ITR 437 (P&H) − CIT vs. Eicher Limited: 294 ITR 310 (Del) - confirmed in CIT vs. Kelvinator of India Ltd.: 320 ITR 561 (SC) − CIT vs. Anil Kumar Sharma: 335 ITR 83 (Del) − CIT v. Sunbeam Auto Ltd.: 332 ITR 167 (Del) − CIT v. Vikas Polymers: 341 ITR 537 (Del.) − CIT vs. Vodafone Essar: 212 Taxman 184 (Del.) − CIT vs. Development Credit Bank Ltd: 323 ITR 206 (Bom.) − CIT v. Hindustan Lever Ltd: 343 ITR 161 (Bom.) − CIT v. Goyal Private Family Specific Trust: 171 ITR 698 (All) − CIT v. Ganpat Ram Bishnoi: 296 ITR 292 (Raj) − CIT vs. Girdhari Lal: 258 ITR 331 (Raj.) − Paul Mathew and Sons v. CIT 263 ITR 101 (Ker.) − CIT v. Arvind Jewellers: 259 ITR 502 (Guj.) − CIT v. Ratlam Coal Ash Co. 171 ITR 141 (MP) 23. As a necessary corollary, when on a particular issue the TPO conducted extensive enquires during the course of proceedings, such order cannot, it is submitted, be regarded as erroneous so as to warrant exerc....
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....ed hereunder: Re: (i) ESOP costs to be excluded from operating expenses 30. It is submitted that treatment of ESOP cost as nonoperating expense for the purpose of computation of operating margin has been upheld by the Tribunal in the following cases: - i2 Technologies Software (P.) Ltd v. CIT(A): 83 taxmann.com 143 (Bang - Trib.) - HOV Services Ltd v. JCIT: 73 taxmann.com 311 (Pune - Trib.) 31. In the present case, it may be noted that the appellant's ultimate parent company, Amazon.com, Inc. ("Amazon US") grants RSUs to select employees that vest at a specific future date. In terms of the agreement between the appellant and Amazon US, the appellant is not required to discharge any payments qua the awards given to the employees of the appellant. Therefore, it is submitted that the RSU cost is a notional cost in the appellant's statement of profit and loss account; and in order to meet the requirements of Ind-AS 102 the same has been recorded in the financial statements. Further, it is also pertinent to mention that the appellant has, accordingly, not claimed the aforesaid expense as admissible expenditure in the return of income. ....
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....es for exclusion of foreign exchange fluctuation from the ambit of operating expenses. Re: (iii) Impairment to investment in subsidiary to be excluded from operating expense 39. It is submitted that loss on account of investment in a subsidiary is an extraordinary expenditure which is not related to the normal business operations of the appellant and thus cannot be included as part of operating expense. 40. In the following decisions it has been held that extraordinary expenditure cannot be included in the cost base for purposes of computing operating profit margin: - Transwitch India Pvt Ltd v. ACIT: ITA No. 6083/Del/2010 (Del Trib.) - approved by Delhi High Court in ITA No. 678/2021 - DCIT v. Terex India Pvt Ltd: ITA No. 6775/Del/2015 (Del - Trib.) - ACIT v. Fiat India Pvt Ltd: ITA No. 1848/Mum/2009 (Mum - Trib.) - Sony India Limited v. 114 ITD 448 (Del - Trib.) 41. Further, even the CIT(TP) has observed that safe harbour provisions under Rule 10TA(j) of the Rules provide exclusion of extraordinary expenditure from the ambit of operating expenses. 42. It may be critical to note that the CIT(TP) has h....
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.... may be regarded as "erroneous", but that would not be so in the latter case where enquiry had actually been conducted by the concerned officer, even though the CIT(TP) may not agree with the nature and manner of conducting enquires. 47. As a necessary corollary, when on a particular issue the TPO conducted certain enquires during the course of proceedings, such order cannot, it is submitted, be regarded as erroneous so as to exercise revisionary jurisdiction under section 263 of the Act. 48. In simple words, where an issue has been examined by the TPO, the CIT(TP) cannot set aside the assessment merely because according to the CIT(TP) enquiries should have been conducted in a particular manner and/ or further enquiries ought to have been conducted by the TPO. CIT(TP) cannot substitute his opinion in place of that of the TPO as to the manner and the form in which the enquiries should have been conducted during the course of assessment. - CIT vs. Sunbeam Auto Ltd: 332 ITR 167 (Del) - CIT v. International Travel House: 344 ITR 554 (Del) - CIT vs. Vikas Polymers: 341 ITR 537 (Del) - Gulmohar Finances Limited: 170 Taxman 483 (Del.) ....
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....iries or verification conducted by the TPO was not in accordance with the enquiries or verification that would have been carried out by a prudent officer. 54. Reliance is placed on the following decisions, wherein it has been held that Explanation 2 to section 263 of the Act does not authorize or give unfettered powers to CIT to revisit each and every order: - PCIT vs. Shreeji Prints Pvt. Ltd.: TA No. 828 of 2019 (Guj) - PCIT vs. Harikrishan S Virmani: ITA No. 164 of 2019 (Guj) - Bagrrys India Ltd., v. Pr.CIT: ITA No.3785 of 3018 (Del) - M/s Arun Kumar Garg HUF vs. Pr.CIT (ITA No. 3391/Del/2018 (Del) - Pr. CIT vs. Indian Farmers & Fertilizers Co-operative Ltd.: ITA No. 597/2017 (Del) - Amira Enterprises Ltd vs PCIT in ITA No 3206/Del/2017 dated 29/11/2017 (Del) - Narayan Tatu Rane v. ITO: [2016] 70 taxmann.com 227 (Mum) - Shree Bhagawati Enterprises vs. PCIT: ITA No. 525 of 2016 (Mum) - Torrent Pharmaceuticals Ltd vs. DCIT: ITA No.164 of 2018 (Ahd.) - Shri Narasimha Reddy Peechu v. ITO: ITA No. 932 of 2017 55. In the light of the aforesaid settled legal position, it is the re....
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....sence of verification in the manner required under the Act by the TPO". The CIT(TP) has not even carried out minimal enquiries to allege that claim of appellant is not acceptable. That apart, it is not even suggested/ explained by the CIT(TP) as to what more enquiries was the TPO is required to make prior to accepting the claim of the appellant. Order under section 92CA(3) of the Act passed on 24.01.2021 -amendment under section 263 applicable only from 01.04.2022 59. The Finance Act, 2022 amended section 263 of the Act to include within its ambit, orders passed under section 92CA of the Act. The said amendment was inserted in the statute w.e.f. 01.04.2022. 60. In the present case, the TPO has passed the order under section 92CA(3) of the Act, at the time when the statute did not permit exercise of revisionary jurisdiction qua orders passed by the TPO under section 92CA of the Act [Refer: JCB India Ltd [TS- 26-ITAT- 2022(DEL)-TP]. 61. The legislature, it is submitted has consciously considered the application of the law to be prospective in nature and thus it follows logically that only orders passed by the TPO, after the date in this regard, i.e....
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.... assessing officer/TPO after incorporating directions of the Pr.CIT, is erroneous and prejudicial to the interest of the Revenue. 65. Reference in this regard is invited to the original TP order dated 24.01.2021 passed under section 92CA(2) of the Act (which is subject matter of revisionary proceedings), wherein it has been specifically recorded that reference was made to the Pr. Commissioner of Income Tax - 1, Bengaluru ("PCIT") for approval vide reference letter No.08/CIT/BLR- 1/92CA/2019-20 dated 30.04.2019 which was duly accorded by the PCIT. It may thus be noted that the original TP order was passed with the due approval of the Pr.CIT in line with the CBDT Instruction 3 of 2016 dated 10.02.2016. 66. Further support in this regard is drawn from the following decisions wherein it has been held that where the assessment order was passed with the approval of CIT such an order was not amendable to revisionary jurisdiction under section 263 of the Act: - Hari Iron Trading Co. v. CIT: 263 ITR 437 (P&H) - CIT v. Hastings Properties: 253 ITR 124 (Cal.) - Festo Elgi (P) Limited v. CIT: 246 ITR 705 (Mad.) - Orient (Goa) Ltd. v. DCIT: ....