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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Shri Siddhartha Nautiyal & Shri Narendra Prasad Sinha
आदेश/ORDER PER : NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:-
This appeal is filed by the Revenue against the order of the ld. Commissioner of Income Tax-11, Ahmedabad (in short CIT(A)) dated 08/08/2023 for the assessment year 2018-19.
The brief facts of the case are that the return of income was filed by the assessee on 30-11-2018 declaring total income of Rs. 1,70,58,29,720/.
Page No. 2 DCIT vs. Astral Limited.
The assessment was completed u/s. 143(3) r.w.s. section 144C(3)/144(B) of the Act on 26-11-2021 at total income of Rs. 1,75,87,35,950/-. In the course of assessment, the Assessing Officer (AO) had made the following additions: - TP Adjustment 26,32,930 Disallowance of ESOP expenses 1,50,21,000 Disallowance u/s 14A r.w. rule 8D 3,52,52,300
Aggrieved with the order, the assessee had filed an appeal before the first appellate authority which has been decided by the ld. CIT(A) vide the impugned order. The Revenue is in appeal us before us.
The Revenue has taken following grounds in this appeal: - “a) Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in restricting the addition 0.20% instead of 0.77% without appreciating the approach adopted by TPO? b) Whether on facts and in the circumstances of the case and in law the Ld CIT(A) has erred in accepting ALP of the assessee determined by ignoring the ratio laid down by the Hon’ble ITAT, Mumbai in the case of Everest Kanto Cylinder Limited (ITA No. 542/Mum/2012) and Nimbus Communication Pvt. Ltd. (34 taxmann.com 299) & Hon’ble ITAT, ‘D’ Bench Ahmedabad in the case of M/s. Mastek Ltd (ITA Nos. 2931/Ahd/2017 & 1074/Ahd/2018)? c) Whether on facts and in the circumstances of the cases and in the Hon’ble ITAT has erred in accepting the ALP of the assessee determined by ignoring the guidelines laid down under the Act and Rules and thereby violating the ratio laid down by the Hon’ble Supreme Court in the case of Sap Labs India Pvt. LID Vs. ITO?” d) In the facts and on the circumstances of the case Ld. CIT(A) erred in directing to delete the addition of Rs.1,50,21,000 account of disallowance of ESOP expenses relied upon decision of Jurisdictional Ahmedabad ITAT in dated 25.01.2023 appellant's own case. The decision of Hon'ble ITAT has already been challenged and appeаl was already filed before Hon'ble Gujarat High Court.
Page No. 3 DCIT vs. Astral Limited. e) In the facts and on the circumstances of the case Ld. CIT(A) erred in directing to delete the addition of Rs 3,52,52,300 on account of disallowance u/s 14A relied upon decision of Jurisdictional Ahmedabad, ITAT dated 25.01.2023 in appellant’s own case. The reason of Hon’ble ITAT has already been challenged and an appeal was already before Hon’ble Gujarat High Court.”
The first three grounds pertain to TP adjustment in respect of guarantee commission. The assessee had provided corporate guarantee to two of its associated enterprises (AEs) namely Astral Pipes Ltd., Kenya and Seal IT Services Ltd., UK. The Assessing Officer relying upon the order of the TPO made arms length price (ALP) adjustment of Rs. 26,32,930 u/s. 92CA @ 0.77% of the loan amount for which guarantee was provided. This adjustment was made for the reason that assessee company did not charge any guarantee fee from its AEs in respect of a corporate guarantee provided. The ld. CIT(A) restricted the TP adjustment @ 0.2% to Rs. 5,71,727/- only. The ld. Departmental Representative submitted that the ld. CIT(A) was not correct in restricting the ALP of corporate guarantee to the rate of 0.2% as against the rate of 0.77% adopted by the TPO. The ld. Authorized Representative on the other hand supported the order of the ld. CIT(A).
We have carefully considered the facts of the case and the rival submissions. The charging of guarantee fee has not been disputed by the assessee. It is found that the request of the assessee to bench-mark the transaction with internal CUP data was accepted by the TPO. The TPO had benchmarked the transactions on the basis of bank guarantee provided by Indusland Bank Ltd to the assessee. It was found that for the guarantee amount of Rs. 1,97,45,068/- total guarantee commission of Rs. 1,02,180.69 Page No. 4 DCIT vs. Astral Limited. was paid. On this basis the rate of guarantee commission was worked out at 0.52% by the TPO. Further, a markup of 0.25% was also applied by the TPO and the ALP rate of guarantee commission was determined by applying the rate of 0.77% (0.52+0.25). The ld. CIT(A) noticed that the guarantee commission of Rs. 1,02,181/- paid by the assessee to Indusland Bank was for a period of 822 days and, therefore, the proportionate rate applicable for 365 days was only 0.2% and not 0.52% as worked out by the TPO. Further, the bench mark of 0.25% as applied by the TPO was also not found correct as the internal CUP was worked by the TPO after considering assessee’s transactions with the third-party bank. Accordingly, the ld. CIT(A) has confirmed the addition to the extent of rate of 0.2% only.
We do not find anything wrong with the order of the ld. CIT(A). The TPO had benchmarked the transaction on the basis of independent third- party transaction of the assessee. However, the TPO did not consider the fact that guarantee commission of Rs. 1,02,181/- was paid for the period from 20th June, 2016 to 19th Sep, 2018. The transaction for one financial year i.e. for 365 days cannot be benchmarked with the rate applicable for 822 days. Therefore, the CIT(A) had rightly worked out the rate applicable to one financial year and restricted the addition by applying the rate of 0.2%. The fact that the rate for one financial year worked out to 0.2% only has not been contested by the Revenue. Further, there was no justification for applying mark up 0.25% when the transaction was bench marked with a third-party comparable transaction. Further, the TPO had also not given any basis for arriving at the mark up for 0.2%. Therefore, the ld. CIT(A) was correct in deleting the mark-up of 0.25% as applied by the TPO, which was Page No. 5 DCIT vs. Astral Limited. without any basis or rationale. Once the corporate guarantee fee is worked out on the basis of third-party prevailing market rate, there is no basis or justification for further mark-up. The decision of the ld. CIT(A) is found to be reasonable and correct and we do not find any infirmity with the same. Therefore, the order of the CIT(A) on this issue is upheld and the ground taken by the revenue is dismissed.
The ground no.-4 pertains to addition of Rs. 1,50,21,000/- on account of ESOP expense. The brief facts of the case pertaining to this ground is that assessee had claimed ESOP expense of Rs. 150.21 lakhs u/s. 37 of the Act. The expense claimed by the assessee was the difference between market value of shares as computed under the guidelines of SEBI and the value at which the shares were issued to the employees. The Assessing Officer treated this expenditure as being capital in nature or being only notional entry and made the disallowance. The ld. CIT(A) has deleted the addition following the decision of the ITAT in assessee’s own case in dated 25-01-2023. The ld. Departmental Representative admitted that this issue was covered by the decision of the ITAT but submitted that the Department had challenged the said decision and the matter was pending before the Hon’ble Gujarat High Court. The ld. Authorized Representative has placed reliance on the order of the ld. CIT(A).
We have heard both the sides and also gone through the order in assessee’s own case cited supra for the assessment year 2016-17, which has been placed before us. We find that the Co-ordinate Bench of this Tribunal Page No. 6 DCIT vs. Astral Limited.
(in which one of us the Judicial Member is party and also the author) has examined and discussed this issue at length. The finding given by the Tribunal in that case is reproduced below: - “8. We have heard the rival contentions and perused the material on record. The issue for consideration before us is that expenses of � 22.65 lakhs were debited to the profit and loss account under the head ESOP expenses, being the difference between the market value of shares as computed under the guidelines of SEBI and the value at which these shares were issued to the employees. The contention of the Department is that no expenditure has been incurred by the company at the time of issuance of shares under the ESOP scheme and the expenditure has not crystallised till the date on which the employee exercises the option and hence any expenditure debited during the vesting period remains contingent in nature. The counsel for the assessee on the other hand contended that the liability had crystallised at the time of issuance of shares itself and only the quantification remained pending at the time of exercise of such option by the assessee. This issue has been discussed at length by the Karnataka High Court in the case of Biocon Ltd. [2020] 121 taxmann.com 351 (Karnataka), wherein the facts were that assessee floated Employees Stock Option Plans (ESOP) and provided shares to its employees at a discount discount. There was difference between grant price to employees and market price as on date of grant of ESOPs. The ESOPs were vested in employee over a period of four years. The deduction of discount on ESOP over vesting period was in accordance with accounting in books of account, which had been prepared in accordance with SEBI Guidelines. The Karnataka High Court held that on exercise of option by an employee, actual amount of benefit that had to be determined was only a quantification of liability, which would take place at a future date. The Court further held that the discount on issue of ESOPs was not a contingent liability but was an ascertained liability. Accordingly, issuance of shares at a discount would be an expenditure incurred for purposes of section 37(1) as primary object of aforesaid exercise was not to waste capital but to earn profits by securing consistent services of employees and therefore, same could not be construed as short receipt of capital. Thus, discount on issue of ESOP was allowable deduction under section 37(1) of the Act. While deciding the issue, the High Court made the following observations: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.
From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition.
Page No. 7 DCIT vs. Astral Limited.
The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
8.1 The Delhi High Court in the case of PVR Ltd. [2022] 145 taxmann.com 331 (Delhi) has held that difference between price at which stock options were offered to employees of assessee- company under ESOP and ESPS and prevailing market price of stock on date of grant of such options was allowable as revenue expenditure. Again, the Delhi High Court in the case of New Delhi Television Ltd. [2018] 99 8.2 taxmann.com 401 (Delhi) has held that Expenditure arising on account of 'Employees' Stock Option Plan (ESOP) is an ascertained liability and hence allowable under section 37(1) of the Act. 8.3 The Madras High Court in the case of PVP Ventures Ltd [2012] 23 taxmann.com 286 (Mad.) held that where assessee allotted shares to its employees under Employees Staff Option Plan and Employee Staff Purchase Scheme Guidelines, 1999, difference between market value of shares and value at which shares were allotted was allowable as revenue expenditure.
8.4 The Delhi ITAT in the case of People Strong HR Services (P.) Ltd. [2022] 134 taxmann.com 351 (Delhi - Trib.) held that discount on shares allotted by assessee to its employee under ESOP Scheme is revenue expenditure allowable under section 37(1) of the Act. In this case, assessee had claimed deduction on account of amount incurred by it on stock option plan extended to its employees under section 37(1) of the Act. The Assessing Officer held that assessee had not paid notional discount on shares issued under ESOP Scheme and had no liability to make such payment and, accordingly, said sum could not be described as expenditure under section 37(1) of the Act. The ITAT held that that the High Court in CIT v. Lemon Tree Hotels Ltd. [IT Appeal No. 107 of 2015, dated 18-8-2015 held that employees' discount represents consideration for services rendered by employees and, hence, it is a deductible business expenditure and it cannot be equated with share premium and it is to be intended towards profit by securing employees' consistent services. Therefore, thus, Commissioner (Appeals) was justified in deleting addition on account of disallowance of ESOP expenses by holding notional discount on shares issued under ESOP scheme as revenue expenditure allowable under section 37(1) of the Act.
8.5 In the case of Cera Sanitaryware Ltd[2016] 68 taxmann.com 433 (Ahmedabad - Trib.), the Ahmedabad ITAT held that Employees' stock option scheme expense is allowable as deduction u/s 37 of the Act. In this case, the assessee-company had implemented employees' stock option scheme. It had offered its shares to its employees at discount and resulting loss was claimed as deduction. The Assessing Officer disallowed said loss. The ITAT held that basically the Assessing Officer was of the view that it is a capital loss. It is not materialized in this year. It would happen only when option is exercised by the employees. All these aspects have been considered by the Special Bench of the Tribunal in Biocon Ltd. v. Dy. CIT [2013] 35 taxmann.com 335/[2014] 114 ITD 21 (Bang.) wherein it has been explained that share premium is a capital receipt and not chargeable to tax in the hands of the company. If a company issues shares to the public or to the existing shareholders at lesser than prevailing premium due to market sentiments or otherwise such share receipts of a premium would be a case of receipt of lower amount on capital amount. As the object of issuing such share at a lower price is nowhere directly connected with the earning of income but when the company undertakes to issue shares to its employees at a discounted premium at a future date the primary object of this exercise is not to raise the share capital but to earn profit by securing the consistent and concentrated efforts of dedicated employees during the vesting period, such discount is construed, both by the employees and the company, as nothing but a part of package of remuneration, a substitute for giving direct incentive in cash for availing of Page No. 8 DCIT vs. Astral Limited. the services of the employees. Therefore, first appellate authority is not justified while upholding the disallowance of the assessee's claim. 8.6 In our considered view, in the light of the facts of the instant case and the consistent position taken by the High Court and the Tribunals on this issue in favour of the assessee, the Ld. CIT(Appeals) has not erred in facts and in law in allowing the appeal of the assessee on this ground.”
10. The ld. CIT(A) has reproduced the order of the Tribunal in entirety for appreciating the facts in right perspective. In view of this order, there is no reason for us to deviate from the findings of the ld. CIT(A) based on the findings of the ITAT in the assessee’s own case cited supra. We, therefore, uphold and confirm the deletion of addition on account of ESOP expenses as made by the ld. CIT(A). The ground taken by the revenue stands rejected.
11. Ground no. 5 pertains to deletion of addition of Rs. 3,52,52,300/- on account of disallowance u/s. 14A of the Act. The assessee had not earned any exempt income during the year from the investment made by it. The Assessing Officer observed that the assessee had not made any disallowance u/s. 14A in his return of income. Accordingly, the Assessing Officer worked out the expenditure incurred in relation to earning dividend income in the manner provided u/s. 14A @ 1% on average investment and made the addition. The ld. CIT(A) deleted the addition for the reason that no exempt income was earned during the year and, therefore, no disallowance u/s. 14A was called for. He also relied upon the decision of the ITAT in the assessee’s own case for ITA 287/Ahd/2020 dated 25-01-2023 in this regard. The Revenue has contested the relief allowed by the ld. CIT(A) for the reason that the decision of the ITAT in was challenged and the matter is pending before the Hon’ble Gujarat High Court.
Page No. 9 DCIT vs. Astral Limited.
We have considered the facts of the case and the submissions made by the two sides. There is no dispute to the fact that no exempt income was earned during the year. Therefore, no addition u/s 14A of the Act was called for as held by the Apex Court and also by the jurisdictional High Court on this issue. We do not find any infirmity with the order of the ld. CIT(A) which is based on the findings of the ITAT in the assessee’s own case for A.Y. 2016-17 cited supra, wherein all the relevant decisions were discussed. The finding on this issue as given by the Co-ordinate Bench in that case was as under: - “13. We have heard the rival contentions and perused the material on record. Admittedly, during the year under consideration, the assessee did not earn any exempt income. 13.1 It is a well-settled law on the subject that no disallowance can be made under section 14A in case the assessee has not earned any exempt income. The Hon'ble Supreme Court in the case of State Bank of Patiala [2018] 99 taxmann.com 286 (SC) held that where High Court took a view that amount of disallowance under section 14A could be restricted to amount of exempt income only, SLP filed against said order was to be dismissed. The Hon'ble Supreme Court in the case of Chettinad Logistics (P.) Ltd.[2018] 95 taxmann.com 250 (SC) dismissed SLP against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. The Gujarat High Court in the case of Dipesh Lalchand Shah [2022] 143 taxmann.com 419 (Gujarat) held that where in relevant assessment year, assessee-individual earned profits from partnership firm and made investments in shares of a company, since its income from partnership was negative and no exempt income was earned, in such case disallowance under section 14A could not be made. In the case of Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat), the Gujarat High Court held that where assessee did not make any claim for exemption of any income from payment of tax, disallowance under section 14A could not be made. The Delhi High Court in the case of Delhi International Airport (P.) Ltd. [2022] 144 taxmann.com 80 (Delhi) held that section 14A would not be applicable if no exempt income was received or receivable during relevant previous year. The Delhi High Court in the case of Amadeus India (P.) Ltd.[2022] 145 taxmann.com 311 (Delhi), held that section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year. The Ahmedabad ITAT in the case of Edelweiss Financial Advisors Ltd. [2021] 124 taxmann.com 361 (Ahmedabad - Trib.) held that disallowance of expenses under section 14A read with rule 8D could not exceed amount of exempted income. The Ahmedabad ITAT in the case of Addlife Investments (P.) Ltd.[2021] 124 taxmann.com 572 (Ahmedabad - Trib.) held that disallowances made under section 14A read with rule 8D could not exceed amount of exempt income earned by assessee during year. In the case of Asian Grantio India Ltd [2020] 113 taxmann.com 445 (Ahmedabad - Trib.), the Ahmedabad ITAT held that Disallowance of expenses under section 14A read with rule 8D of 1962 Rules cannot be made in absence of exempt income.
Page No. 10 DCIT vs. Astral Limited.
13.2 In view of the above decisions, and the facts of the assessee’s case, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in deleting the addition made under section 14A of the Act. 14. In the result, ground number 2 of the Department’s appeal is dismissed.”
The facts in the current year are found to be identical as no exempt income was earned during this year as well. We, therefore, uphold the order of the ld. CIT(A) on this issue and confirm the deletion of Rs. 3,52,52,300/- on account of disallowance u/s. 14A of the Act. The ground taken by the Revenue is rejected.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 04-06-2024