UNILEVER INDUSTRIES PRIVATE LTD, MUMBAI V. ACIT RANGE 1(3)(1), MUMBAI

ITA 1015/MUM/2021

AI Insights

Unilever Industries Pvt Ltd appealed against the order passed under sections 143(3) and 144C(13) read with sections 143(3A) and 143(3B) of the Income Tax Act, 1961, which was based on the directions of the Dispute Resolution Panel (DRP). The appeal primarily contested the transfer pricing adjustments and certain corporate tax issues, including the disallowance of unrealized foreign exchange loss and expenses related to the Employee Share Option Scheme (ESOP). The Tribunal's decision addressed these issues, focusing on the nature of the expenditures and the applicability of relevant legal provisions and judicial precedents.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 299639 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 14-12-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 01-06-2021
• Other Referred Cases: CIT Vs. Woodward Governor India (P) Ltd., CIT(LTU) Vs M/s Biocon Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Revenue expenditure; TDS
• Section: 37; 92C; 143(3); 142(1); 115JB; 37(1); 201; 144C; 143(2); 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER & SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No. 1015/Mum/2021 (A.Y: 2016-17) Unilever Industries Pvt Ltd., Unilever House, BD Sawant Marg, Chakala, Andheri (E), Mumbai -400099. Vs. ACIT, Range – 1(3)(1) Room no 504, 5 Floor, Aayakar Bhavan, M.K.Road, Mumbai-400020 ./ज आइआर ./PAN/GIR No. : AAACU0791P Appellant .. Respondent Appellant by : Ms.Jasmin Amalsadvala & Mr.Hiten Chande.AR Respondent by : Mr. Jayant Jhaveri.DR Date of Hearing 15.12.2022 Date of Pronouncement 02.01.2023 आद श / O R D E R PER PAVAN KUMAR GADALE JM: The assessee has filed the appeal against the order passed u/s 143(3) & U/sec144C(13) r.w.s 143(3A) & 143(3B) of the Income Tax Act, 1961 passed in pursuance to the directions of the Dispute Resolution Panel (DRP) order u/s 144C(5) of the Act dated 26.02.2021.The assessee has raised the following grounds of appeal. ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 2 - GENERAL: 1. On the facts and in the circumstances of the case and in law, the learned AO/ Assistant Commissioner of Income-tax (Transfer Pricing) -4(2)(2) ("TPO") subsequent to the directions issued by the Hon'ble DRP has erred in assessing the total income at Rs. 152,67,16,425 as against returned income of Rs. 116,80,08,280 computed by the Appellant. 2. PARTI-TRANSFER PRICING ADJUSTMENTS: Transfer pricing ('TP') adjustment on account of benchmarking and allocation of royalty in respect of provision of scientific and technical services ('Contract R&D') On the basis of Benchmarking: 3. On the facts and in the circumstances of the case and in law, the learned AO/ TPO erred in making a TP adjustment of Rs. 9,38,84,840/- to the arm's length price of the international transaction relating to scientific and technical services for contract R&D activity recovered by the appellant. 2.1 Without prejudice to the other grounds, the learned AO/TPO/DRP erred in disregarding a functionally comparable company merely because it had incurred Losses. They failed to appreciate that the Appellant has followed a structured benchmarking methodology in selecting comparables and benchmarking the transaction and which has been applied consistently. ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 3 - 2.2 The Ld. AO/TPO/DRP erred in holding that, for calculating the operating margins of the Appellant, bought-in-costs is not to be excluded from the operating revenues and operating costs. They failed to appreciate that, such bought-in- costs are pass through in nature and therefore, no mark-up ought to be charged on the same. Further, the Ld. AO/TPO/DRP has rejected the exclusion of service tax provision from the operating cost for the purpose of calculation of margins. 2.3 The Ld. AO/TPO erred in not providing any opportunity to the Appellant nor issued any show cause notice indicating the rejection of such comparable and giving the Appellant any opportunity to contend against the rejection of the comparable. Further, the Ld. AO/TPO also did not provide any opportunity to the Appellant for excluding the pass-through expenses from the operating revenue and operating cost as stated in Ground 2.2 above. 2.4 Without prejudice, the learned AO/TPO erred in not following DRP direction in toto. The learned AO/TPO failed to appreciate that the DRP has held that, the Appellant can be taken either as contract service provider or partner/owner of the intangible / patents but not both at the same time. 2.5 They failed to appreciate that the DRP has categorically held that, the transaction of scientific and technical services earning cost plus mark-up fee should not be separately benchmarked. Such transaction is to be ignored as the DRP has held that the Appellant is part owner of the patent and is entitled to the share of royalty. 2.6 The learned AO/TPO failed to appreciate that, as per the DRP directions, arm's length price of contract R&D transaction to be determined protectively, as the ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 4 - ownership right in patents is being contested by the Appellant. 2.7 On the facts and in the circumstances of the case and in law, the learned AO/TPO erred in passing the order giving effect to the order of DRP without granting opportunity to the Appellant. 2.8 The Appellant prays that, the TP adjustment of Rs. 9,38,84,840/- made in respect of Contract R&D by benchmarking cost plus mark-up fee be deleted and the book value of the said transactions be held to be the arm's length price of the transactions. Allocation of Royalty: 3. On the facts and in the circumstances of the case and in law, the learned AO/ TPO / DRP erred in holding that the Appellant has performed significant functions when providing scientific and technical services to Unilever and accordingly, should be entitled to a share in the royalty earned by Unilever amounting to Rs. 98, 10,00,000/-. 3.1 On the facts and in the circumstances of the case and in law, the learned AO/ TPO / DRP failed to appreciate that the Appellant is engaged into 'contract research services' and is bearing limited risk and therefore ought to have held the cost plus mark-up received by the Appellant is at arm's length. 3.2 The Appellant prays that the book value of the said transactions be held to be the arm's length price of the transactions, and the adjustment on account of allocation of royalty be deleted. Provision of Support services. 4.1 On the facts and circumstance of the case and in law, the Ld. AO/TPO/DRP erred in holding that, for ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 5 - calculating the operating margins of the Appellant, bought-in-costs is not to be excluded from the operating revenues and operating costs. They failed to appreciate that, such bought-in-costs are pass through in nature and therefore, no mark-up ought to be charged on the same. Conditions mentioned in Section 92C(3) not satisfied 5. On the facts and in the circumstances of the case and in law, the learned AO/TPO/DRP erred in arriving at the arm's length price of the international transactions without appreciating the fact that none of the conditions set out in Section 92C (3) of the Act are satisfied. Part II - CORPORATE TAX GROUNDS: Disallowance u/s 37(1) of Unrealised foreign exchange loss: 6. The learned AO/DRP erred in disallowing unrealized exchange loss of Rs. 2,78,362/- debited to the profit and loss account. 6.1 The learned AO/DRP erred in holding that the unrealized foreign exchange loss of Rs. 2,78,362/- is merely an accounting entry in the books and is contingent in nature and therefore can't be allowed. 6.2 They failed to appreciate that, as per the mercantile basis of accounting followed by the appellant and applicable accounting standard, the Appellant is required to mark to market its monetary items on accrual basis. Such loss incurred on mark to market of the monetary items on the closing balance sheet date ought to have been allowed as deduction. Disallowance in respect of the employee share option scheme expense: ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 6 - 7. The learned AO/DRP erred in disallowing employee share option scheme expenses of Rs. 30,41,00,000 debited to the profit and loss account under employee benefit expense.. 7.1 The learned AO/DRP erred in holding that the expenditure on employee share option scheme are contingent, notional and capital in nature. 7.2 They failed to appreciate that, as per the mercantile basis of accounting followed by the Appellant and applicable accounting standard; Appellant is required to account for all its expense on accrual basis. 7.3 They failed to appreciate that, these expenses are incurred for incentivizing, encouraging and retaining employees for smooth functioning of the business and therefore are revenue in nature and allowable u/s 37(1) of the Act. Deduction in respect of Education Cess: 8. That based on the facts and in the circumstances of the case and in law. Education Cess on income tax levied for AY 2016-17 ought to be allowed as a deduction under the head income from business and profession. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal. 2. At the time of hearing, the Ld.AR submitted that the Grounds of appeal no 1 to 5 are in respect of transfer pricing adjustment issues and the assessee has filed a dated 21.06.2022 intimating the ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 7 - conclusion of Advance Pricing Agreement(APA) and withdrawal of Grounds of appeal in case of transfer pricing adjustment, and the ground of appeal no.8 is not pressed by the Ld.AR. Accordingly, the grounds of appeal no 1 to 5 & 8 are withdrawn and are dismissed. 3. The Brief facts of the case are that the assessee company is engaged in the business of providing research and technology services to group companies. The assessee has filed the return of income for the A.Y 2016-17 on 30.11.2016 disclosing a total income of Rs.116,80,08,280/- and under the provisions of section 115JB of the Act Book Profit worked out to Rs.128,54,54,042/-.Subsequently the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act along with questionnaire was issued. Whereas the case was selected for complete scrutiny under e-assessment scheme 2019 on the fallowing issues as under: i. Whether double taxation relief (and income) has been shown correctly in the return income. ii. Whether refund claim is justified. ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 8 - iii. Whether value of international transactions are correctly shown in Form 3CEB and return of income. iv. Whether sales turnover/receipts has been correctly offered for tax. v. Whether deduction under Chapter VIA has been claimed correctly. vi. Whether deduction claimed on account of loss from currency fluctuations is admissible. vii. Whether value of international transactions in services have been correctly shown in Form 3CEB and return of income. viii. Whether deduction claimed on account of other expenses is admissible. ix. Whether outward foreign remittance is from disclosed sources and appropriate withholding and reporting obligations have been complied with. 4. The Assessing Officer (AO) on perusal of the facts and information found that the assessee has entered into international transactions with Associated Enterprises (AE) during the said financial year and has referred the matter to Transfer Pricing Officer (TPO) to determine the Arms length Price (ALP) with the prior approval of the Pr.CIT. Whereas the TPO has passed the order u/s 92CA(3) of the Act dated 31.10.2019 with a transfer pricing adjustment of ALP ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 9 - of Rs.156,10,51,345/- in respect of international transactions entered referred at Para 3 of the order as under: 3. Subsequently, order dated 31.10.2019 u/s 92CA (3) of the I.T. Act, passed by the JCIT(TP)-4(2), Mumbai, has been received wherein total adjustment of Rs. 156,10,51,345/- was made to the value of international transactions entered by the assessee in respect of following issues: Sl No Transaction Adjustment (Rs.) 1. Scientific and technical services – R&D benchmarking following TNMM 9,38,84,840/- 2. Enterprise support service 48,61,66,505/- 3 Share in Royalty Income From AE 98,10,00,000/- Total 156,10,51,345/- 5. Subsequently, the AO has passed Draft assessment order u/s 144C of the Act with a transfer pricing adjustment of Rs. 156,10,51,345/-. Aggrieved by the draft assessment order, the assessee has filed objections before the DRP. Whereas the DRP has passed the directions u/s 144C(5) of the Act on 26.02.2021 with proposed adjustment to the earlier TP adjustments and the DRP has noted that the DRP ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 10 - directions are binding on the AO/TPO u/s 144C(10) of the Act. The AO/TPO has considered the DRP directions and revised the transfer pricing adjustments dealt at Page 3 Para 6 of the order as under: 6. After receipt of DRP directions, TPO passed order giving effect to DRP directions on 25.03.2021 vide No. DCIT(TP)-4(2)(1)/DRP-OGE/Unilever industries/AY16- 17/2020-21. The revised transfer pricing adjustments as after giving effect to DRP directions are summarized as below. Sl No Transaction Adjustment (Rs.) Adjustments after giving effect to the DRP 1. Scientific and technical services – R&D benchmarking following TNMM 9,38,84,840/- 5,43,29,788/- 2. Enterprise support service 48,61,66,505/- 0 3 Share in Royalty Income From AE 98,10,00,000/- 0 Total 156,10,51,345/- 5,43,29,788/- 6. Further the AO has dealt on the corporate tax issues and made disallowance of unrealized foreign exchange loss as the assessee has claimed an amount of Rs.2,78,362/- in the A.Y 2016-17 on account of ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 11 - foreign exchange loss / translation loss ( unrealized loss). The Assessee has filed the reply on 06.12.2019 referred at Para 7.3 of the order and the AO has not considered the assessee’s submissions and made addition of Rs. 2,72,362/-. Similarly the AO on second disputed issue, found that the assessee has debited/claimed in the profit and loss account ESOP expenses of Rs.30,41,00,000/-,and the A.O. required the asssessee to explain the nature of ESOP expenditure and the TDS deducted. In response the assessee has filed a letter on 06.12.2019 referred at 8.2 of the order. Finally the AO has dealt on the provisions of the Act, judicial decisions, ESOP Scheme, and came to conclusion that the ESOP expenses cannot be allowed and the DRP has also rejected the objections of the assessee on this disputed issue and made addition observing at Page 9 Para 8.17 to 8.19 of the order as under: 8.17 Hence, the contention of the assessee of claiming ESOP expenses during the year is rejected. In view of the fact, that the expenditure has not been crystallized in the previous year, and the said expenditure is contingent, notional and more over capital in nature, the claim of the assessee company merits only rejection. ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 12 - 8.18 The hon. DRP has also rejected the objection no 6 raised by assessee on this issue and upheld the addition. 8.19 Hence, the claim of the assessee of 'Employees Share Option Scheme' (ESOP) Expense of Rs. 30,41,00,000/- is hereby disallowed and added to the income of the assessee. 7. Finally the AO has assessed the total income of Rs. 152,67,16,425/- and as per the provisions of book profit u/s 115JB of the Act of Rs.128,54,54,042/- and passed the order u/s 143(3) r.w.s 144C(13)r.w.s 143(3A) & 143(3B) of the Act dated 30.03.2021. Aggrieved by the final assessment order, the assessee has filed an appeal before the Hon’ble Tribunal. 8. At the time of hearing the Ld. AR submitted that the A.O./DRP has erred in confirming the disallowance of foreign exchange loss, whereas the loss is in the nature of revenue expenditure and relied on the judicial decision of CIT Vs. Woodward Governer India (P) Ltd., [2009] 179 taxman 326 (SC). In respect of ESOP expenses claimed, the Ld. AR submitted that it is a revenue expenditure has to be allowed u/sec37(1) of the Act and relied on the decision of CIT(LTU) Vs M/s Biocon Ltd. The Ld.AR ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 13 - has substantiated the submissions with the factual paper book, judicial decisions and prayed for allowing the appeal. Contra, the Ld. DR relied on the order of the Assessing Officer. 9. We heard the rival submissions and perused the material on record. The Ld. AR’s grievance is in respect of disallowance of foreign exchange loss by the AO and confirmed by the DRP. The Ld. AR has emphasized on the facts that it is a allowable loss and relied on the decision of CIT Vs. Woodward Governor India (P) Ltd., [2009] 179 taxman 326 (SC)Held as under: Section 37(1), read with section 145, of the Income-tax Act, 1961 - Business expenditure - Allowablilty of - Assessment year 1998-99 - Whether expression 'expenditure' as used in section 37 may, in circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from pocket of assessee - Held, yes - Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) - Held, yes - Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 14 - reflect true and correct profits - Held, yes - Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - Held, yes II. Section 43A of the Income-tax Act, 1961 - Foreign currency, rate of exchange, change in - - Assessment year 1998-99 - Whether amendment to section 43A by Finance Act, 2002 with effect from 1-4-2003 is amendatory and not clarificatory - Held, yes - Whether under unamended section 43A, 'actual payment' was not a condition precedent for making necessary adjustment in carrying cost of fixed asset acquired in foreign currency - Held, yes - Whether therefore, prior to amendment to section 43A, assessee was entitled to adjust actual cost of imported assets acquired in foreign currency on account of fluctuation in rate of exchange at each balance-sheet date, pending actual payment of varied liability - Held, yes Accordingly we found the facts enumerated from the submissions and applicability of Ratio of the decision cannot be overlooked. Accordingly we direct the Assessing officer to delete the addition of foreign exchange loss. ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 15 - 10. The Ld.AR has made elaborate submissions on the ESOP scheme & expenditure and provisions of law on the allowability of claim. We found that the Honble High Court of Karnataka in the case of CIT(LTU) VS M/S Biocon Ltd in ITA.No.653 of 2013 dated11-11- 2020 has observed as under: 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. 10. 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 ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 16 - 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 paragraph 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 fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999- 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 17 - recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT, (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are ans wered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 11. We find the facts of the present case are similar in respect of claim of ESOP Expenses and we follow the ratio of judicial decision and direct the assessing ITA No. 1015/Mum/2021 Unilever Industries Pvt Ltd, Mumbai. - 18 - officer to delete the addition and allow the grounds of appeal in favour of the assessee. 12. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 02.01.2023. Sd/- Sd/- (PRASHANT MAHARISHI) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 02.01.2023 KRK, PS /Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. आ र आ / The CIT(A) 4. आ र आ ( ) / Concerned CIT 5. "#$ % & &' , आ र ) र*, हमद द / DR, ITAT, Mumbai 6. % -. / 0 / Guard file. ान ु सार/ BY ORDER, " & //True Copy// 1. ( Asst. Registrar) ITAT, Mumbai