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Facts
The assessee company, a subsidiary of TE Singapore, provides shared services and is compensated on a cost-plus mark-up basis. The appeal concerns adjustments related to transfer pricing, interest on overdue receivables, interest on Compulsorily Convertible Debentures (CCDs), and disallowance for cross-charges.
Held
The Tribunal restored the issue of working capital adjustment to the TPO for fresh consideration, agreeing that it could subsume the interest on overdue receivables. Regarding interest on CCDs, the issue was restored to the AO for substantiating the claim. The disallowance on reimbursement of ESOP expenses was directed to be deleted as it was a cost-to-cost payment without income element.
Key Issues
Whether working capital adjustment is warranted and if interest on CCDs can be claimed as a deduction without a revised return. Also, whether reimbursement of ESOP expenses is disallowable under Section 40(a)(i).
Sections Cited
92CA, 143(2), 144C, 40(a)(i), 94B, 37
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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.
Per Prashant Maharishi, Vice President
This appeal is filed by TE Connectivity Services India Pvt. Ltd. (the assessee/appellant) for the assessment year 2020-21 against the assessment order passed by the Assessment Unit, Income Tax Department [ld. AO] on 30.7.2024 wherein the returned income of the assessee at Rs.Nil as per return of income filed on 31.12.2020 was IT(TP)A No.1887/Bang/2024 Page 2 of 14
assessed at Rs.29,19,047 making adjustment on account of arm’s length price [ALP] of international transaction at Rs.10,62,815 & variation in respect of disallowance of Rs.9,56,232.
The assessee is aggrieved and has preferred the appeal on the following 3 adjustments:-
(i) TP adjustment in respect of interest on overdue receivables of Rs.10,62,805. (ii) Claim for allowance of interest on Compulsory Convertible Debentures [CCDs] of Rs.6.11 crores; & (iii) Disallowance of Rs.0.09 crores u/s. 40(a)(i) of the Act in relation to payment made towards the cross charge.
The brief facts of the case show that assessee is a company who filed its return of income on 31.12.2020 being wholly owned subsidiary of TE Singapore engaged in providing shared services in the areas of Information Technology, Finance back-office, Human Resource, customer support for TE group for which it is compensated on cost plus mark-up basis.
As assessee has entered into international transactions, reference u/s. 92CA was made after issuing notice u/s. 143(2) of the Act, which was approved by the PCIT and thereafter the TPO passed an order u/s. 92CA(3) of the Act on 11.5.2023 proposing an adjustment of Rs.7,95,56,559.
Subsequently a draft order was passed on 12.9.2023 which was objected before the ld. DRP. The ld. DRP passed its directions. Based
IT(TP)A No.1887/Bang/2024 Page 3 of 14 on the directions, the TP adjustment of Rs.7,74,88,000 was reduced to Nil, interest on delayed receivable of Rs.20,68,559 was reduced to Rs.10,62,815. Thus as per the order giving effect to the direction of the DRP u/s. 144C dated 10.7.2024, the TP adjustment to the extent of Rs.10,62,815 was retained. So far as Transfer pricing issues are concerned, in Final assessment order Transfer pricing adjustment of Rs.10,62,815 was retained.
The ld. AO during the course of assessment proceedings found that there are foreign outward remittances to AE Tyco Electronics ETA Ltd. wherein assessee has not deducted tax at sources and further no evidence was provided that there is no element of income chargeable to tax in India in those remittances On objection before the DRP, it was stated that the above amount is a share based expenses and no tax is required to be deducted on the same as it is in the nature of reimbursement of expenses. The ld. DRP rejected the contention holding that assessee has not submitted any documentary evidence to prove that payment was in the form of reimbursement of expenses and therefore the objection was rejected. Accordingly the addition of Rs.9,56,232 was made.
During the course of assessment proceedings, the assessee claimed to reduce its income by Rs 545,30,728 as the assessee did not file any revised return and has not claimed in its original return, therefore placing reliance on the decision of Goetze India Ltd.[ TS-21-SC-2006- O](2006) 284 ITR 323 (SC) 157 Taxman 01 The ld. AO did not accept
IT(TP)A No.1887/Bang/2024 Page 4 of 14 the argument of the assessee in the draft assessment order. On objection before the ld. DRP, same was rejected holing that a fresh claim during the assessment proceedings is not accepted. Accordingly the total income of Rs. 20,19,047 was determined. The assessee is in appeal before us.
Ground No.1 was stated to be general in nature, not pressed and therefore same is dismissed.
With respect ground No.2, the ld. AR submitted that the adjustment is made in the hands of assessee by the TPO as per para 19 of the order passed u/s 92CA(3). He further referred to para 13 of the TPO’s order wherein the assessee has asked for working capital adjustment. It was submitted that the ld. TPO has not granted such working capital adjustment. If the working capital adjustment is granted to the assessee by the TPO, the adjustment would not have been made on this count. He submitted that in the TP Study Report the assessee has claimed working capital adjustment. He submits that at page 46 a detailed note of working capital adjustment is provided wherein if the working capital adjustment is provided, the median margin of the assessee is 11.35% and at page 49 the post net working capital adjustment was also provided. He further referred to para 4 at page 23 of 43 of DRP directions wherein the working capital adjustment was not granted. He referred to the direction and submitted that it is held by the DRP that reasonable actuarial adjustment is not possible as the difference in working capital in working capital requirement itself is based on IT(TP)A No.1887/Bang/2024 Page 5 of 14
various assumptions. Further the assessee has failed to demonstrate such material differences as to warrant an adjustment. He submits that denial of working capital adjustment to the assessee is not proper. If the same is granted automatically the difference in ALP of interest on overdue receivable will obliterate.
The ld. CIT(DR) relied on the order of the TPO and direction of the DRP stating that assessee’s working capital adjustment is difficult to measure and hence not granted. ‘The ld. DR further argued that adjustment is with respect to interest on overdue receivables and therefore it is a separate international transaction and it cannot be considered as subsumed in the ALP of international transaction of other services.
We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. We completely agree with the arguments of the ld. AR that if working capital adjustment is granted to the assessee, the interest on overdue receivables adjustment of Rs.10.62 lakhs would subsume in the ALP of the international transaction of ITeS segment. In its TP Study Report in Appendix F, assessee has specifically asked for working capital adjustment. Working capital was calculated as trade receivable plus inventory minus trade payable. The adjustment was done by calculating the value for differences in the level of working capital between the tested party and the comparables reflecting the time value of money by use of appropriate interest rate and such result is adjusted to reflect the differences in the level of IT(TP)A No.1887/Bang/2024 Page 6 of 14
working capital. After considering the weighted average landing rate, the assessee submitted the range of mark-up of the comparable companies and thereafter worked out net working adjustment. When the ld. TPO was asked to provide the working capital adjustment in para 1 of the order u/s. 92CA(3) at page 58 of 102, the ld. TPO rejected the same holing that taxpayer has not been able to demonstrate the working capital differences had impact on its profits and further there is no analysis whether the comparables have financed their working capital by own funds or borrowed funds. No details were available that any cost has been incurred on the working capital by the comparable companies and further how such cost has its impact on its profitability. The TPO further held that difference in working capital levels cannot be accurately measured and even if available, its impact on the profit margins cannot be measured. Thereafter, he held that the segmental working capital is not disclosed in the annual accounts of comparable companies and further the cost of capital in respect of different companies is different. Accordingly, if working capital adjustment is granted, it may not lead to a reliable result. The ld. DRP echoed similar observations and upheld the action of the AO as per para 4 while dealing with the objection No.3.1 at page 23 of 43 of such direction.
No doubt, the working capital adjustment represents one of the most sophisticated comparability adjustment in TP analysis to determine the ALP. The main point of working capital adjustment rests on economic reality with difference in inventory levels, payment terms and credit
IT(TP)A No.1887/Bang/2024 Page 7 of 14 arrangement materially impact the profit of the comparables or the tested party. The theory behind working capital adjustment is based on the business reality with independent parties in market would factor in the cost of financing with commercial terms. It is also important that TNMM is applied as the most appropriate method, the differences in the working capital structure between the tested party and the comparables can significantly sway profit margin comparison. The complexities of the capital adjustment increase when jurisdictions, currencies, regulatory environments and other factors change, but that cannot deter to make appropriate adjustment to the ALP. It cannot be denied that working capital adjustments may be complex, but should be granted. It becomes more necessary when material differences exist between the working capital structure and of tested party and comparable companies. The material difference is required to be measured quantitatively and qualitatively which could influence decision making process between unrelated parties. It also depends on industry practices and specific business model of the comparable companies and also on the production cycle, etc.
The lower authorities have rejected the working capital adjustment merely because of its complexity without looking into the working provided by the assessee at page 46 & 48 of the TP Study Report. Naturally the adjustment on account of interest on overdue receivables would subsume in the working capital adjustment. The Hon’ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd., 398 ITR 66 (Del) also supports the above view.
IT(TP)A No.1887/Bang/2024 Page 8 of 14
In view of the above facts, we restore this ground of appeal to the file of ld. TPO to consider the submission of the assessee for granting of the working capital adjustment and then decide the issue afresh. If the working capital adjustment is granted to the assessee, naturally the addition on account of interest on overdue receivable would stand deleted. Accordingly, ground No.2 of the appeal is allowed with the above direction.
15. Ground No.3 of the appeal is with respect to interest on Compulsorily Convertible Debentures (CCDs). During the FY 2015-16, assessee has issued 6,50,00,000 CCDs of Rs.10 each to its AEs by way of a right issue carrying simple interest of 3 months of MIBOR + 150 basis points capped to 9.75% p.a. The total amount of interest expenses payable to AE for this year is Rs.6,11,15,550 towards the aforementioned CCDs. Admittedly the assessee did not claim the above sum as deductible expenses in the return of income.
16. The assessee has raised objections as per ground No.3 before the DRP which is dealt with at pages 38 to 43 of the direction. It was the claim of the assessee that while filing original return of income, the assessee did not claim interest expenditure of Rs,5,45,30,728. The company could not revise its return of income due to change in the management and other COVID-19 pandemic situation. The company did not realise the error in the return earlier, when it was realised the due date for filing of revised return had already elapsed/passed. It was stated that due to the IND-AS requirement out of the total recognised interest of IT(TP)A No.1887/Bang/2024 Page 9 of 14
Rs.6,11,15,550, the company has charged to the P&L account only to the extent of Rs.65,83,293 and therefore the balance sum of Rs.5,45,30,728 which was supposed to be claimed in the return of income was inadvertently missed while filing return of income. The assessee also pressed into service the provisions of section 94B stating that assessee company is eligible to claim 30% of the Earnings Before Interest, Tax, Depreciation and Amortization, etc. as interest expenses.
The ld. DRP held that the assessee has made a fresh claim during the assessment proceedings without filing a revised return, so cannot be entertained. It was further held that assessee is assisted by knowledgeable auditors and therefore the claim is correctly rejected by the AO. The AO also followed the decision of the Supreme Court in the case of Goetze India Ltd., 204 CTR (SC) 182 that assessee can make claim for deduction only by filing revised return within the time allowed.
The ld AR submits that assessee has merely requested to correct the claim of expenditure. The ld. AR’s argument is that total expenditure payable is Rs.6.11 crores, out of which assessee has already claimed finance cost of Rs.65,83,000/- and therefore it is merely a correction of the claim and not a fresh claim. He submits that both the lower authorities are incorrect in holding that it is a fresh claim. He further submitted that there is no bar in reducing the total income of the assessee less than the returned income in assessment. For this proposition, he relied on the decision of the Hon’ble Supreme Court in IT(TP)A No.1887/Bang/2024 Page 10 of 14
the case of Wipro Finance Ltd. , 443 ITR 250 and also the decision of Hon’ble jurisdictional High Court in the case of Karnataka State Co-op. Federation Ltd., 128 taxmann.com 1 and upon the decision of Hon’ble Madras High Court in Perlo Telecommunications and Electronic Components India Pvt. Ltd. 2021 (10) TMI 236.
The ld. DR vehemently supported the orders of ld. lower authorities and submitted that fresh claim made by the assessee without filing revised return could not have been entertained by the AO in view of the decision of Supreme Court in the case of Goetze India Ltd. [ supra] It was further stated that assessee itself has claimed only part of the debt and enhancement of such further claim amounts to fresh claim. Therefore there is no infirmity in the orders of the ld. lower authorities.
We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. We find that assessee in Form 3CD in para 30B(b) with respect to payment of interest has categorially stated that assessee has paid amount by way of expenditure on interest of Rs.6,11,15,550 and also made a computation of allowable expenditure u/s. 94B. While filing return of income assessee added to the total income the actual interest paid of CCDs as per clause 30B of Form 3CD of Rs.6,11,15,550. While reducing the total income, it claimed deduction as interest allowable as per section 94B of Rs.5,22,24,373. Thus, in fact, it claimed deduction of interest expenditure of only Rs.88,91,176.
During the course of assessment proceedings, the assessee submitted a revised computation of total income wherein it says that the interest on CCDs is also required to be adjusted by reduction of the income to the extent of Rs.5,45,30,728. During the assessment proceedings the assessee also IT(TP)A No.1887/Bang/2024 Page 11 of 14
submitted a letter addressed to the Chairman, CBDT dated 29.7.2021 for condonation of delay in filing the revised return to claim deduction of Rs.5,49,30,728 on account of amortisation of financial liability component. The assessee also sent communication by email dated 11.5.2023 from DCIT, Circle 7(1)(1), Bangalore, asking for the object of filing revised return. The assessee replied to the same on 15.5.2023. The assessee also explained the respective computation of total income and the manner of accounting. However, as there is no response, the claim was made before the AO which was rejected by applying the decision of Hon’ble Supreme Court in the case of Goetze India Ltd. We find that the claim is also made before us to grant the above deduction. The Hon’ble Karnataka High Court has categorically held that there is no fetter on the right of assessee to make a fresh claim before the appellate authority, even if the same is not claimed in the original return of income, if no revised return of income is filed. Such is the mandate in 128 taxmann.com 1. It is also the claim of assessee that deduction of above sum is already considered in assessee’s own case for AY 2017-18 as well for AY 2018-19. In view of this, we restore the issue of allowability of interest expenditure back to the file of the ld. AO, with a direction to the assessee to substantiate the claim and its quantification, which the ld. AO may examine and then grant deduction, if in accordance with law. Accordingly ground No.2 of the appeal is allowed.
Ground No.3 is with respect to reimbursement made to AE. During the assessment proceedings, it was found that assessee has made share based actual payment of Rs.9,56,232. It is the claim of assessee that as per IND- AS-6 it is mandatory for the company to charge off the expenses on a credit vesting option of Employee Stock Option Plan [ESOP]. The company recognised the expenses for the vesting period from the transition date for IT(TP)A No.1887/Bang/2024 Page 12 of 14
such plan along with corresponding impact on equity. Thus the assessee incurred ESOP expenditure upon vesting which is allowable. Accordingly assessee has paid Rs.9,56,232 as actual cross charge of ESOP expenses which is adjusted in equity compensation reserve under the changes in other equity. It is in the nature of actual expenditure which is claimed as deduction u/s. 37 while computing the taxable income. It was further submitted that the payment to Tyco Electronics ETA Ltd. is in the nature of reimbursement of employee related expenses and share based expenses on cost to cost basis. Since there is no element of income in these payments, withholding tax provisions would not be applicable. The ld. AO held that assessee has failed to give any documentary evidence that there is no element of income and therefore in the draft assessment proceedings, he made the addition.
The matter reached the DRP which deal with the issue in para 9 which confirmed the action of the AO holding that assessee has not submitted any documentary evidence that payment was in the form of reimbursement of expenses.
Before us, the ld. AR submitted Form 16 with respect to 2 employees viz., Anuraj Joshi & Mudabbirnauman to whom the ESOP expenditure of Rs.6,77,139 & Rs.2,87,240 was paid which was stated to be in Form 16 of both these employees. This amount pertains to the ESOP Scheme. This amount was reimbursed to its AE. Thus it is apparent that it is cost to cost payment, there is no income element involved therein.
The ld. DR relied upon the order of the ld. AO.
IT(TP)A No.1887/Bang/2024 Page 13 of 14
We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The only dispute is that whether the amount of reimbursement in on cost to cost basis or not. The ld. lower authorities have denied this on the basis of non-submission of any documentary evidence by the assessee. Now before us, the assessee has submitted that this payment relates to only 2 employees. In Form 16 of those employees, the above amount of ESOP is mentioned and is matching. Thus it is proved that it is on cost to cost basis. It is thus clear that there is no income element involved in those payments. The mandate of Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., 327 ITR 456 is that if there is no element of income in the payment made which is chargeable tot tax u/s. 45 & 9 of the Act, no withholding tax requirement is hit. In the present case, it is shown before us that it is a reimbursement at cost to cost. Thus, we find that there could not have been any disallowance u/s. 40(a)(i) of the Act. In view of this, we direct the ld. AO to delete the disallowance on reimbursement made to AE of Rs.9,56,232. Thus, ground No.4 is allowed.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 18th day of August, 2025.