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Facts
The revenue filed appeals against the deletion of disallowance of bank guarantee fee and depreciation, while the assessee filed cross-objections challenging the levy of bank guarantee. The assessee also challenged the addition to book profit for tax on ESOP.
Held
The Tribunal held that the cross-objections were delayed but condoned the delay. It further held that the bank guarantee was for the assessee's own performance and not an international transaction warranting TP adjustment, thus deleting the addition. The depreciation claim was allowed following a previous consistent view. The tax on ESOP was not to be added to book profit as it was a contractual liability and not income-tax as defined.
Key Issues
Whether TP adjustment is required for bank guarantee; whether depreciation on plant & machinery is allowable; whether tax on ESOP should be added to book profit.
Sections Cited
Sec 92B, Sec 40(a)(v), Sec 115JB
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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI RAHUL CHAUDHARY, HON’BLE
आदेश/O R D E R PER NARENDRA KUMAR BILLAIYA, AM : & , are two separate appeals by the revenue preferred against the two separate orders of the ld. CIT(A)-55, Mumbai, dated 30/12/2016 and 29/05/2019 pertaining to AYs 2011-12 & 2012-13 and C.O. No. 02/Mum/2024 & C.O. No. 03/Mum/2024, are cross-objections by the assessee for the respective Assessment Years.
Both the cross-objections are barred by limitation. The assessee through an affidavit has mentioned the reasons for the delay in filing the cross-objections which are on record. We have carefully perused the contents of the affidavit and are of the considered view that the assessee was prevented by reasonable and sufficient cause for not filing the cross-objections within time. Considering the facts of the case in the light of the previous history of the assessee and in the interest of justice, the delay is condoned and both the cross-objections are admitted.
The appeals and the cross-objections were heard together and are disposed off by this common order for the sake of convenience and brevity.
The grievance of the revenue is that, the ld. CIT(A) erred in reducing the bank guarantee fee levied by the AO and the assessee in its cross-objection has challenged the very levy of the bank guarantee.
Since the cross-objections go to the root of the matter, we take up the same for adjudication first.
Representatives were heard at length. Case records perused and the judicial decisions brought to our notice, duly considered in the light Rule 18(6) of the ITAT Rules, 1963.
The underlying facts show that the assessee along with Afcons Construction Mideast LLC and Saipem Afcons Joint Venture for securing contract for some projects in UAE. The joint ventures were required to furnish bank guarantee and the assessee provided bank guarantee along with its partner. For the said bank guarantee, TP adjustments were made by the AO. 6.1. On similar circumstances, the Co-ordinate Bench in assessee’s own case in & 1357/Mum/2014 for AY 2009-10 considered a similar quarrel and held as under:- “14. As noted above, for the performance of the entire contract work, guarantee was provided by FGB for provision of banking facilities to Afcons Mideast which in the F.Y. 2008-09 was of Rs. 824 Crores. During the year four types of facilities were provided as noted above which mostly consist of letters of credit, letters of guarantee and letters of advance payment, performance bond and letter. By way of security for providing these facilities FGB required the assessee to execute irrevocable and unconditional corporate guarantee and accordingly, performance guarantee was given by FGB in favour of Road Transport Authority, Dubai. It was only a guarantee that Afcons Mideast would not suspend or delay repayment of the advance of AED 108 million. The assessee had not charged any guarantee fee from Afcons Mideast on the ground that effectively guarantee has been given for its own performance of the contract or a guarantee given for repayment of advance which would also only arise in the case of a non-performance of the contract by the assessee. Thus, we agree with the contention of the ld. Senior Counsel that giving the performance of the corporate guarantee was to execute the work which in effect was carried out by the assessee itself for which the majority of the profit and the benefit went to the assessee. Even it is to be treated as international transaction, then also under the scope and meaning of international transaction as defined in Section 92B- “92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.”
Ergo, it is to be seen whether such transaction is having a bearing on the profits, income, losses or assets or any kind of a mutual agreement or arrangement for the allocation or apportionment or contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided. Thus, the transaction or the arrangement should have the bearing of profit or income or any kind of benefit or facility. Here providing of performance guarantee or corporate guarantee did not gave benefit to the AE, albeit on the facts of the case the entire benefit for giving such guarantee is only to the assessee because the guarantee was given to carry out the work which was done de-facto by assessee. Even the work performed by the Afcons Mideast was totally done by the support service through infrastructure and man power and the organizational support of the assessee company only and that’s the reason why the entire reward and profit went to the assessee Once, the entire benefit and the profits belong to the assessee, and then it cannot be held that assessee has given any kind of benefit by providing corporate guarantee to Afcons Mideast. Here, in this case what has to be seen that the entire functions to carry out the work either in the form of sub-contract or executing the contract work by providing entire support services through its own infrastructure, man power, management, technological support, organizational support, etc. all has been done by the assessee. The function of the AE in the execution of work was only on paper and as a legal entity to comply with the domestic laws. In substance there is negligible function performed by the AE. Apart from that, even the assets deployed belonged to the assessee. The entire risk lied upon the assessee that is the risk assumed for executing the contract and carrying out the entire work solely belonged to the assessee. Ergo the rewards of the risks were also entirely reaped by the assessee in the form of 99% profit. Thus, even if one does FAR analysis of the performance guarantee given by the assessee to FGB for execution of the contract where entire risk and rewards and the benefit was of the assessee only, then where is the question of making
I.T.A. No. 2390/Mum/2 C.O. No. 02/Mum/2024 C.O. No. 03/Mum/2024 5 any adjustment of ALP in the hands of the assessee that any benefit has been passed on to the AE.
Even if it is reckoned as international transaction, then also on FAR analysis and looking to fact that the reward or profit to the AE is almost negligible, i.e. the ultimate profit is not even 1%, the adjustment if at all would also be negligible on the facts of the present case. Thus, on the facts of the present case we hold that no transfer pricing adjustment can be made on account of corporate guarantee. Accordingly, the addition made by the ld. TPO / ld. AO is deleted.”
It can be seen from the above decision of the Co-ordinate Bench that the impugned transactions were considered as international transactions and yet the Bench came to the conclusion that no TP adjustment can be made and the addition was deleted. 7.1. Similar was the fact in AY 2010-11 where the Co-ordinate Bench in & C.O. No. 01/Mum/2024, has decided the quarrel in favour of the assessee and against the revenue.
In light of the decisions of the Co-ordinate Bench (supra) and respectfully following the same, we do not find any merit in the impugned adjustments and direct the TPO/AO to delete the same. Accordingly, both the cross-objections of the assessee are allowed and appeal of the revenue to this extent becomes infructuous.
In ITA No. 2390/Mum/2017 for AY 2011-12, the next ground relates to the allowance of depreciation on the written down value (WDV) of plant & machinery. This issue was also considered by the Co- ordinate Bench in AY 2010-11 and the relevant findings read as under:- “17. We heard the parties. We notice that this is a recurring issue and that Co- ordinate Bench in assessee's case for AY 2009-10 while considering the issues has held that:-
“23. In so far as disallowance of depreciation of Rs.25,000/- and written down value of speed boat, it has been submitted that the issue is in favour of the assessee by ITAT in assessee’s own case for the A.Y. 2001-02, A.Yrs. 2002- 03 to 2005-06 and A.Yrs 2006- 07 to 2008-09. As per the Tribunal order, it was held that:- (i) As per the facts on record, machinery was purchased by the principal but the assessee had been vested with the possession of them and utilized them for its business. (ii) It is not disputed that the principal has debited the cost of machinery to the assessee's account and the assessee has capitalized it in its books of account. (iii) The Tribunal applying the ratio laid down in the decisions of Mysore Minerals Ltd (SC), Dilip Singh Sardarsingh Bagga (Bom.) Varanasi Auto Sales (All.), dismissed the department's ground.
Accordingly, ground raised
by the Revenue is dismissed.”
18. The assessee has claimed depreciation on the written down value of the same asset during the year under consideration and therefore, the above decision of the Co- ordinate Bench is clearly applicable for the year under consideration also. Accordingly, we see no infirmity in the order of the CIT(A).”
Respectfully following the same, we decline to interfere. Accordingly, Ground No. 5 is dismissed.
Ground No. 6 relates to the deletion of the addition out of professional fees paid for arbitration awarded. This issue was also considered by the Co-ordinate Bench in AY 2010-11 (supra). The relevant findings read as under:- “19. During the year under consideration the assessee has incurred Professional Fee of Rs. 64,26,858/- for Arbitration. The AO disallowed the said expenditure by following the earlier years for the reason that the assessee has not offered the corresponding arbitration award income for taxation. The relevant observations of the AO are extracted below: “5. Professional Fees for Arbitration Awards: 5.1 During the year, the assessee company has incurred professional fees of Rs.64,26,858/- for arbitration. In earlier A.Yrs, such expenses were disallowed as the assessee had not offered the corresponding arbitration award income for taxation. The assessee had got relief from the first Appellate Authority. However, second appeal on this issue has been pending before
I.T.A. No. 2390/Mum/2 C.O. No. 02/Mum/2024 C.O. No. 03/Mum/2024 7 Hon'ble ITAT for earlier years. Hence, to keep the issue alive, addition of Rs 64,26,858/- is disallowed and added to the income of the assessee.”
We heard the rival submissions and perused the material on record. We notice that the similar issue has been considered by the Tribunal for AY 2009-10 where it has been held that “27. The Tribunal in A.Y.2005-06 has held that, firstly, the professional fees was incurred in respect of arbitration award and therefore, same was for the business of the assessee. Secondly, assessee was justified in claiming the said amount as expenditure in its profit and loss account and lastly, the Tribunal declined the observation of the ld. AO that since the income from arbitration award is excluded from the total income, therefore, professional fees incurred in this should be disallowed. This exact observation of the ld. AO as made in the present assessment year also has been rejected and accordingly, the ground raised
by the Revenue is dismissed.”
21. We notice from the above extracted observations of AO that the reason for disallowance during the year under consideration is simply to follow the earlier year disallowance and to keep the issue alive. The AO for the year under consideration also has not disputed the fact that the professional fee is incurred for the purposes of business. Therefore, respectfully following the decision of the Co-ordinate Bench, we hold that the CIT(A) has rightly deleted the disallowance made by the AO. Accordingly, this ground raised by the Revenue is dismissed.
Respectfully following the same, we decline to interfere. Ground No. 6 is also dismissed.
Accordingly, Ground Nos. 1 to 4 of become infructuous and Ground Nos. 5 and 6 are dismissed. 14. In AY 2012-13, the solitary grievance left for our adjudication relates to the exclusion of tax on ESOP in computing the book profit u/s 115JB of the Act. 15. Briefly stated the facts of the case are that, during the course of scrutiny assessment proceedings, the AO noticed that the assessee has during the year debited a sum of Rs.37,98,345/- as tax on ESOP. The AO further found that for the purpose of computation of income under normal provisions, the assessee has added the amount to the income and offered it to tax. However, the same was not added to the book profits computed u/s 115JB of the Act. Accordingly, assessee was asked to explain as to why the tax payment on ESOP should not be added back to the book profit u/s 115JB of the Act. The assessee filed a detailed reply which reads as under:- “During the F.Y. 2006-07, the assessee company had allotted certain shares to its employees under the ESOP. As per the said scheme, the employees under were allotted shares of the assessee company at a concessional rate a compared to their market price on the relevant date.
During the FY 2011-12. 33 employees exercised their option for 1,30,770/- shares. As per the terms of agreement between the assessee company and its employees, the Income tax on such perquisite has been borne by the assessee, Accordingly, the assessee deposited an amount of Rs.37,98,345/- to the credit of the Central Government towards income tax paid on behalf of employees in respect of perquisite values of shares allotted to them.
The aforesaid amount of Rs.37,98,345/- being an expenditure in the hands of the assessee was debited to the profit and loss account for the year ended 31.03.2012.
In the return of income filed for the assessment year under consideration i.e. AY 2012-13, the assessee disallowed the amount of Rs.37,98,345/- in terms of section 40(a)(v) of the Act in computing the total income under the normal provisions of the Act.
As may be noted from above, Explanation 1 to section 115JB provided for various adjustments to be made to the net profits of a company for the purpose of arriving at the book profit of a relevant assessment year.
Clause (a) to Explanation 1 deals with addition to be made in respect of 'income-tax paid or payable on the provisions thereof.
(iii) In the regard, it is submitted that the aforesaid clause deals with the income-tax liability of the assessee on the profits made/income earned by it during the relevant assessment year. The aforesaid adjustment is made to arrive at the correct income- tax liability based on the book profits of a company. It does not deal with income-tax liability incurred by the company on account of any contractual obligation.
In the assessee's case the assessee company has discharged the income-tax liability of its employees on account of the perquisite provided to them. The said income tax liability has not arisen to the assessee on its income/book profits. The said tax liability is of the employees which has merely been discharged by the assessee as per the terms of agreement between the assessee company and its employees. Therefore, from assessee Company's perspective, the said payment is nothing but a contractual liability incurred in the course of regular business of the assessee. Hence, the said amount is business expenditure of the assessee company and not its tax payment. The said expense has been debited to the profit and loss account for the year ended 31 March 2012.
Hence, the aforesaid expenses cannot be added back in computing the book profits under section 115JB of the Act.
(v) The assessee further submits that income-tax paid by an employer on behalf of an employee in respect of a non-monetary perquisite provided to him is specifically disallowed under section 40(a)(v) in computing the total income of the assessee under the normal provisions of the Act. However, no such specific disallowance/addition has been mandated in computing the book profits under section 115JB of the Act.
It is respectfully submitted that Explanation 1 lists down various items that are required to be added back to the net profits in computing the book profits under section 115JB of the Act. If the statute required a similar disallowance to be made under section 115JB as well, it would have specifically provided for the same. In the absence of such provision, no adjustment in this regard ought to be made under section 115JB of the Act.
(vi) The assessee also invites your goodself's attention to Explanation 2 to section 115JB of the Act. As may be noted from therein, the said explanation provides for specific inclusions to the term 'income-tax' for the purpose of clause (a) to Explanation 1: any tax on distributed profits under section 115-0 or on distributed income under section 115R; any interest charged under this Act; surcharge, if any, as levied by the Central Acts from time to time; Education Cess on income-tax, if any, as levied by Central Acts form time to time; Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.
I.T.A. No. 2390/Mum/2 C.O. No. 02/Mum/2024 C.O. No. 03/Mum/2024 10 Hence, it is submitted that any payment not covered by the above explanation cannot be added back while computing book profits under section 115JB. Further, it is submitted that the aforesaid Explanation does not make any reference to income-tax payments made by an employer on behalf of its employees in respect of any non- monetary perquisite provided to them. As discussed above, such income- tax payment has been specifically disallowed under section 40(a)(v) in computing the total income under the normal provisions of the Act. If the statute required similar addition to be made under section 115JB, it would have made specific mention of the same under Explanation 2 to section 115JB.”
The submissions of the assessee were considered by the AO but did not find any favour with him who was of the opinion that the amount was payable by the employees by virtue of their income arisen on receipts of the ESOP since the payments are in the nature of income tax, the same are covered by clause (a) to Explanation 1 to Section 115JB of the Act and accordingly disallowed Rs.37,98,345/- and added to the book profit. 16.1. Assessee agitated the matter before the ld. CIT(A) and reiterated its submissions made before the AO. After considering the facts and the submissions and analyzing the relevant provisions, the ld. CIT(A) was of the opinion that the definition of the term “income tax” for the purpose of clause (a) of Explanation 1 to Section 115JB of the Act does not cover income tax payment made by an employer on behalf of the employees and accordingly directed the AO to delete the impugned adjustment of Rs.37,98,345/-.
I.T.A. No. 2390/Mum/2 C.O. No. 02/Mum/2024 C.O. No. 03/Mum/2024 11 17. Before us, the ld. D/R strongly supported the findings of the AO and the ld. Counsel reiterated what has been stated before the lower authorities.
We have given a thoughtful consideration to the orders of the authorities below. The entire quarrel revolves around Clause (a) of Explanation 1 to Section 115JB of the Act. For the purpose of clause (a) of Explanation 1, the amount of income tax shall include, (i) any tax on distributed profits under section 115-0 or on distributed income under section 115R; (ii) any interest charged under this Act (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by Central Acts form time to time; (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time. 18.1. A perusal of the aforementioned explanation shows that any tax payment made by the employer on behalf of the employee is not covered under the definition of income tax. In fact, Section 40(a)(v) of the Act disallows such payments by the employer on behalf of the employee. Considering the definition of Income tax in Clause (a) of Explanation 1 to Section 115JB of the Act, we do not find any reason to interfere with the findings of the ld. CIT(A). This Ground is accordingly dismissed.
Accordingly, in respect of Ground Nos. 1 & 2 are dismissed as infructuous and Ground No. 3 is dismissed.
In the result, appeals of the revenue are dismissed and cross- objections raised by the assessee are allowed. Order pronounced in the Court on 21st August, 2024 at Mumbai. Sd/- Sd/- (RAHUL CHAUDHARY) (NARENDRA KUMAR BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 21/08/2024 *SC SrPs *SC SrPs *SC SrPs *SC SrPs