IBM India Private LImited, Bangalore V. Deputy Commissioner Of Income Tax, Circle-3(1)(1), Bangalore

ITA 289/BANG/2021

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8897 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 27-06-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AJAY ROTI
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Initiation of penalty proceedings; Capital expenditure; TDS; Set aside
• Section: 37; 263; 28; 92C; 143(3); 92D; 92B; 10AA; 234B; 37(1); 10B; 43; 13; 119; 22; 101; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 289/Bang/2021 Assessment Year : 2015-16 M/s. IBM India Pvt. Ltd., No. 12, Subramanya Arcade, Bannerghatta Road, Bangalore – 560 029. PAN: AAACI4403L Vs. The Deputy Commissioner of Income-tax, Circle 3 (1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Ajay Roti, CA Revenue by : Shri Pradeep Kumar, CIT DR Date of Hearing : 12-01-2022 Date of Pronouncement : 14-02-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee against the final assessment order dated 30.04.2021 u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act passed by the National Faceless Assessment Centre, Delhi relating to Assessment Year 2015-16 on following grounds of appeal: “The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: 1. Assessment order bad in law 1.1. At the outset, M/s IBM India Private Limited (hereinafter referred to as 'the Appellant' or 'the Company') prays that the order dated April 30. 2021 Page 2 of 26 IT(TP)A No. 289/Bang/2021 received on May 01, 2021. passed under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act. 1961 ('the Act'), by the National e-Assessment Centre ('the NeAC'), be struck down as invalid, as the order is bad in law and on facts. 1.2. The Hon'ble Dispute Resolution Panel ('ORP') has erred in completing the proceedings in undue haste and in violation of the principles of natural justice by not affording an opportunity to the Appellant to furnish additional submissions and documents which are pertinent to the additions made. thereby rendering the impugned order to be bad in law and liable to be quashed. 2. Reliance on the Draft Assessment Order (`DAO') of AY 2009-10 dated October 28, 2013 for making adjustments for AY 2015-16 2.1. The NeAC and the Hon'ble DRP have erred in law and on facts by placing reliance on the DAO dated October 28, 2013 of AY 2009-10. Specifically, the NeAC and Hon'ble DRP have erred: a) In not following the settled legal principle of res judicata not applying to income-tax proceedings; b) In not appreciating the facts that the order on which reliance is placed was a draft assessment order; c) In not appreciating the facts that the DAO dated October 28, 2013 on which the NeAC has placed reliance is non est in law as the same has been set aside by the Hon'ble Karnataka High Court ('Hon'ble KHC') vide its order dated July 18, 2016; and d) In placing reliance on the DAO dated October 28. 2013 of AY 2009-10 without taking cognizance of the submissions/ arguments put forth during the assessment proceedings of AY- 2015-16. 3. Denial of relief under section 10AA of the Act 3.1. The NeAC and the Hon'ble DRP have erred in law and on facts in denying the relief claimed by the Appellant under section 10AA of the Act of INR 481,61,98,708. 3.2. The NeAC has erred in law and on facts by holding that the Appellant could not substantiate its claim of manufacture and export of computer software from eligible units in Special Economic Zone ('SEZ'). The NeAC and the Hon'ble DRP have erred on facts in concluding that since Document of Understandings/ Statement of Works are not registered with the SEZ Page 3 of 26 IT(TP)A No. 289/Bang/2021 authorities. the requirements of section 10AA of the Act are not met. 3.3. The NeAC has erred in law and on facts by concluding that the Appellant had made contrary submissions in connection to transmission or export of computer software outside India from its SEZ units without taking cognizance of the submissions made by the Appellant. 3.4. The NeAC and the Hon'ble DRP have erred in law and on facts by concluding that the various obligations and procedures prescribed under the SEZ schemes and regulations have not been adhered to and that for claiming benefit under section 10AA of the Act, the same has to be complied with. 3.5. The NeAC and the Hon'ble DRP have erred in law and on facts in holding that the undertakings were not independent and that they were formed by the splitting up and reconstruction of business already in existence. 3.6. The NeAC has erred in law and on facts in holding that the unit wise P&L account submitted by the Appellant in relation to the eligible units was not a reliable document for allowing claim under section 10AA of the Act. The NeAC has erred in law and on facts by not taking cognizance of the judicial precedent in the Appellant's own case, wherein the manner of determining profits eligible for tax holiday by the Appellant has been held to be accurate/ appropriate. 3.7. The NeAC and Hon'ble DRP have erred on facts by relying on his analysis of Inter Company Agreements ('ICA') even though the Appellant has not submitted any ICA with the learned Jurisdictional Assessing Officer. Bangalore ('JA0')/ NeAC during the course of the assessment proceedings for the subject AY. 3.8. The Hon'ble DRP has erred on facts by concluding that the Appellant failed to match the accounting invoices with the SOFTEX forms without taking cognizance of the submissions made by the Appellant during the assessment proceedings for the subject AY. 3.9. The Hon'ble DRP has erred on facts by concluding that the Appellant failed to produce the relevant documents and cogent evidences in support of its claim, and has failed to prove receipt of sale proceeds of computer software exported out of India is being brought into India without taking cognizance of the submissions made by the Appellant before the Hon'ble DRP. and with the learned JAO during the DRP proceedings for the subject AY. Page 4 of 26 IT(TP)A No. 289/Bang/2021 3.10 The NeAC and the Hon'ble DRP have erred on facts by concluding that the Appellant failed to produce the relevant documents citing voluminous data without taking cognizance of the various submissions made by the Appellant before the Hon'ble DRP, and with the learned JAO during the DRP proceedings for the subject AY. 3.11 The NeAC/ learned JAO and the Hon'ble DRP have erred on facts and on law in not providing the Appellant a copy of the remand report furnished by the learned JAO to the Hon'ble DRP on February 19. 2021. 3.12 The Honble DRP has erred on facts and on law in passing the directions in undue haste without awaiting a report from the learned JAO in connection to the reconciliation of receipts as per SOFTEX and FIRC provided to the learned JAO during the remand proceedings after February 19, 2021. 3.13. The NeAC and the Hon'ble DRP have erred in law and on facts in not taking cognizance of the DRP directions and final assessment order of AY 2006-07 wherein after examining the facts, relief had been granted. 3.14. The NeAC and the Hon'ble DRP have erred in law and on facts in not taking cognizance of the jurisdictional Hon'ble ITAT's decision in the Appellant's own case in AY 2013-14 where in the various above aspects have been held in favour of the Appellant. 4. Disallowance under section 40(a) of the Act in respect of payments to non-resident Associated Enterprises (`AEs') and Non-AEs. 4.1. The NeAC and the Hon'ble DRP have erred in law and on facts in disallowing payments made by the Appellant to its AEs amounting to INR 357.65.81.295 under section 40(a) of the Act by concluding that the certificates issued by the Chartered Accountant (*CA') are not reliable. 4.2. The NeAC and the Hon'ble DRP have erred on facts in disallowing the foreign payments made during the year on which tax is not deducted by not considering the evidence submitted by the Appellant. 4.3. The Hon'ble DRP has erred in concluding, based on surmises and conjectures and in undue haste, that all foreign payments (including assignee payments) on which taxes have not been deducted needs to be disallowed without giving the Appellant an opportunity to furnish further details/ supportings, thereby violating the principles of natural justice. Page 5 of 26 IT(TP)A No. 289/Bang/2021 4.4. The Hon'ble DRP has specifically erred on facts and in law in not considering our submissions for additional evidence filed before the Hon'ble DRP on reimbursement of immigration charges and the back-to- back invoices for such reimbursement, details/ break up of reimbursements, sample copies of agreements/ purchase orders, etc. and concluding that the Appellant has not furnished evidences. 4.5. The NeAC has erred on facts and in law in not appreciating that certain sums paid are mere reimbursements and hence the Appellant was not required to deduct tax at source on such payments. 4.6. The NeAC has erred in law and on facts in placing reliance on the sworn statement of the CA issuing Form 15CBs which does not pertain to the current year to hold that the certificates issued by the CA are not reliable and disallowing the amount for the current year. 5. Disallowance of claim made under section 40(a) of the Act pertaining to AY 2014-15 5.1. The NeAC and the Hon'ble DRP have erred on facts and in law in disallowing a sum of INR 35.63,42,098 claimed under section 40(a) of the Act, holding the same was disallowed under section 37 of the Act in AY 2014-15. 5.2. Without prejudice to the above, the NeAC and the Hon'ble DRP have erred in failing to appreciate that as a consequence of the said disallowance of the amount in AY 2014-15 under section 37(1) of the Act. the Appellant is to be allowed a deduction in the current AY, since the reversal of provision has been credited to profit and loss account. 6. Disallowance of amounts under section 37(1) which have been disallowed suo moto by the Appellant under section 40(a) of the Act 6.1. The NeAC and the Hon'ble DRP have erred on facts and in law in holding that a sum of INR 8,72,52.388 disallowed by the Appellant under section 40(a) of the Act should be disallowed under section 37(1) of the Act. 6.2. The NeAC has erred in law and on facts by not appreciating that the basis of year-end provisions, as furnished by the Appellant. demonstrate that the same are for liabilities which have arisen/ been incurred, and therefore, the same cannot be disallowed by under section 37(1) of the Act. Page 6 of 26 IT(TP)A No. 289/Bang/2021 6.3. The NeAC has erred in treating the amount of INR 8.72,52,388. which was suo moto disallowed by the Appellant under section 40(a) of the Act, as unexplained without appreciating the submissions made by the Appellant. 7. Disallowance of Employee Stock Option Plan (`ESOP) expenses 7.1. The NeAC and the Hon'ble DRP have erred on facts by disallowing the said ESOP expenses separately even when the same was disallowed as a part of amount disallowed under payments made to AEs (Ground No. 4), leading to double disallowance of the same expense. 7.2. The NeAC and the Hon'ble DRP have erred on facts and in law in disallowing a sum of INR 68,00.00,000 claimed by the Appellant to keep the issue alive as SLP is pending against the Delhi High Court decision in the case of Lemon Tree Hotels. 7.3. The NeAC and the Hon'ble DRP have erred on facts and in law in disallowing the said expense without giving cognizance to the facts of the Appellant and the various judicial precedents relied on by the Appellant. 7.4. The Hon'ble DRP has erred on facts and in law in holding that ESOP/ Employee Share Based Plan (`ESBP') expense does not satisfy conditions of section 37(1) of the Act. 7.5. The Hon'ble DRP has erred on facts and in law in concluding that ESOP/ ESBP expense relates to issue of shares and therefore is capital in nature. 7.6. The Hon'ble DRP has erred on facts and in law in holding that if security premium is not taxable as capital receipt, then short collection of security premium is to be considered as capital outlay. and that shares allotted to garner and secure the services, knowledge and knowhow continuously for enduring benefit of the assessee. 7.7. The NeAC and Hon'ble DRP have erred on facts in not taking cognizance of the submissions by the Appellant that in the Advance Pricing Agreement entered into by the Appellant and the CBDT, ESOP expense has been considered as Operating cost. The NeAC and the Hon'ble DRP have erred on facts and in law in considering the same as capital in nature, as this would amount to the two arms of government treating the same transaction differently. Page 7 of 26 IT(TP)A No. 289/Bang/2021 8. Assessment and reference to the Assistant Commissioner of Income-tax - Transfer Pricing — 1(3)(2) (`the then learned TPO') are bad in law 8.1. The final assessment order issued by the NeAC is bad on facts and in law and is in violation of the principles of natural justice. 8.2. The learned JAO erred in making a reference to the then learned TPO, inter-alia. since he did not record an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 8.3. On the facts and in the circumstances of the case and in law, the Additional Commissioner of Income-tax — Transfer Pricing — 1(1), 1(2) & 1(3) ('learned TPO') / NeAC/ learned JAO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 9. Determination of arm's length price in respect of purported Advertisement, Marketing and Promotional (`AMP') function 9.1. The learned TPO/ learned JAO erred on facts and in law, while failing to appreciate the fact that the AMP expenses incurred by the Appellant were in respect of its own business requirements and all the benefits resulting from such expenditure accrued to the Appellant and benefit to AE if any is purely incidental. The Hon'ble DRP / NeAC erred in upholding the same. 9.2. The learned TPO/ learned JAO erred on facts and in law, in holding AMP expenditure of the Appellant as an international transaction under section 92B of the Act and assuming jurisdiction to determine the arm's length price thereof, when such expenditure represents only transactions undertaken with independent third parties. The Hon'ble DRP / NeAC erred in upholding the same. 9.3. Without prejudice to Objection in Ground No. 9.2 above, the learned TPO/ learned JAO erred on facts and in law by not identifying the AE which was the beneficiary of the AMP function performed by the Appellant. Further, the learned TPO/ learned JAO erred in presuming that the compensation for AMP function (if any), should be separately paid by the beneficiary to the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. Page 8 of 26 IT(TP)A No. 289/Bang/2021 9.4. Without prejudice to Objection in Ground No. 9.2 above, the learned TPO/ learned JAO erred on facts and in law, while failing to appreciate that there was no agreement or arrangement between the AE and the Appellant for brand promotion. The Hon'ble DRP / NeAC erred in upholding the same. 9.5. The learned TPO/ learned JAO also erred on facts and in law, in invoking the provisions of section 92F(v) of the Act by surmising that the Appellant and its AE acted in concert. The Hon'ble DRP / NeAC erred in upholding the same. 9.6. The learned TPO/ learned JAO erred on facts and in law in applying the Other method (which is similar to bright line test). which is not a method prescribed under section 92C of the Act read with Rule 10B of the Income-tax Rules. 1962 ('the Rules . ), and therefore, acted beyond the jurisdiction as prescribed under the provisions of the Act and the Rules. The Hon'ble DRP / NeAC erred in upholding the same. 9.7. The learned TPO/ learned JAO also erred on facts and in law, in presuming that the Appellant has incurred 'excessive expenditure' as part of its AMP function of promoting 'brand' of the AE. In this regard, the learned TPO/ learned JAO erred in questioning the commercial expediency of the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10. Without prejudice to Objection in Ground No. 9 above, the learned TPO/ learned JAO erred in selecting functionally dissimilar companies while determining the arm's length price for the alleged AMP function performed by the Appellant. The learned TPO/ learned JAO further erred in not taking cognizance of the intensity of AMP functions undertaken by respective comparable companies selected vis a vis the alleged AMP function performed by the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10.1. The learned TPO/ learned JAO erred in selecting Goldmine Advertising Ltd. without establishing functional similarity between the Appellant and the aforementioned company in relation to the alleged AMP function performed by the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10.2. The learned TPO/ learned JAO erred in selecting Pressman Advertising Ltd. without establishing functional similarity between the Appellant and the aforementioned company in relation to the alleged Page 9 of 26 IT(TP)A No. 289/Bang/2021 AMP function performed by the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10.3. The learned TPO/ learned JAO erred in selecting Concept Public Relations India Limited without establishing functional similarity between the Appellant and the aforementioned company in relation to the alleged AMP function performed by the Appellant. The Hon'ble DRP / NeAC erred in upholding the same. 10.4. The learned TPO/ learned JAO erred in selecting Killick Agencies & Mktg. Ltd. without establishing functional similarity between the Appellant and the aforementioned company in relation to the alleged AMP function performed by the Appellant. The Honble DRP / NeAC erred in upholding the same. 10.5. Without prejudice to grounds mentioned above, the learned TPO/ learned JAO erred in law and on facts in not allowing appropriate adjustments under Rule 10B of the Rules to account for. inter alia. differences in (a) accounting practices. (b) depreciation adjustment, (c) marketing expenditure. (d) research and development expenditure (e) working capital and (f) risk profile between the Appellant and the companies identified by the learned TPO/ learned JAO. The Hon'ble DRP NeAC erred in upholding the same. 10.6. Without prejudice to the grounds mentioned above, the learned TPO / learned AO erred in law in not granting the variation as per proviso to section 92C(2) of the Act. The Hon'ble DRP erred in upholding the same. 11. Without prejudice to the grounds mentioned above, the learned TPO / NeAC erred in not giving effect to the directions issued by the Hon'ble DRP 11.1. The learned TPO erred in not excluding warranty expenses amounting to INR 6,21,97,811 from the total AMP expenses - the Hon'ble DRP directed the learned TPO not to consider the same as brand promotion activities. The NeAC erred in upholding the same. 11.2. The learned TPO erred in not rectifying the cost plus mark-up of Pressman Advertising Ltd. the Hon'ble DRP directed the Ld. TPO to consider the rectified cost plus mark up as furnished by the Appellant. The NeAC erred in upholding the same. 12. The Hon'ble DRP has erred in law and on facts in not taking cognizance of the objections Page 10 of 26 IT(TP)A No. 289/Bang/2021 filed by the Appellant in relation to the draft assessment order issued by the learned JAO / transfer pricing order issued by the learned TPO and confirming the draft assessment order. 13. Non grant of credit for entire Tax Deducted at Source (`TDS') 13.1. The NeAC has erred in law and on f acts in not granting credit for the entire TDS of INR 554.53.87.685 claimed in the return of income. 14. Short grant of Foreign Tax Credit (`FTC') 14.1. The NeAC has erred in law and on facts in restricting the credit of FTC to INR 74,69,20,665 as against INR 85.25,08,406 claimed in the modified return of income. 14.2. Without prejudice to the above, the NeAC has erred in law and on facts in not granting foreign tax credit for the full amount of foreign taxes paid, disregarding that relief for tax holiday claim under section 10AA of the Act was fully denied. 15. Non grant of credit for Self-Assessment Tax paid 15.1. The NeAC has erred in law and on facts in not granted for the Self-Assessment Tax credit amounting to INR 11.41.57,197 claimed by the Appellant in its modified return of income. 16. Initiation of Penalty Proceedings 16.1. The NeAC has erred in initiating penalty proceedings under section 270A of the Act. 17. Other grounds 17.1. The NeAC has erred in law and on facts in levying interest of INR 638,31,67,815 under section 234B of the Act. 18. Relief 18.1. The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto. 18.2. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise. any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.” Page 11 of 26 IT(TP)A No. 289/Bang/2021 2. Brief facts of the case are as under: Assessee is a company, engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipments and export of software services to associated enterprises. At the outset, the Ld.AR submitted that all the issues raised in the present appeals are covered by the decision of Coordinate Bench of this Tribunal in assessee's own case for Assessment Year 2013-14 in IT(TP)A No. 725/Bang/2018 dated 31.07.2020. The Ld.AR has filed a chart, wherein the relevant observations of the Tribunal have been highlighted vis-à-vis the grounds raised in the present appeals and that the issues that are common may be considered identically. The Ld.DR did not raise any objection in respect of the same. 3. It has been submitted that Ground No. 1 is general in nature and therefore do not require any adjudication. 4. Ground No. 2- It has been submitted that this ground was rejected by this Tribunal for Assessment Year 2013-14 by observing as under: “4.4.5 We note that, this Tribunal for assessment year 2008-09(supra), dealt with all objections raised by authorities below, which are common for year under consideration to deny deduction u/s.10AA. Ld.AO for year under consideration, has referred to final assessment order passed for AY:2008-09. Therefore, in our view, it will be a futile exercise to set aside the issue to Ld.AO for fresh decision as suggested by both sides, when the issue stands squarely covered order of this Tribunal in great detail, for AY:2008-09 (supra). Accordingly this objection raised by assessee stands rejected.” Respectfully following the above view, this ground raised by assessee in both the appeals stands dismissed. Page 12 of 26 IT(TP)A No. 289/Bang/2021 5. Ground No. 3 – It is submitted that, this Tribunal in Assessment Year 2013-14 had examined the various aspects of the relief claimed u/s. 10AA of the Act and held it in favour of assessee, subject to the proceeds having been brought into India in convertible foreign exchange. It is submitted that this Tribunal remanded only one aspect to the DRP i.e. to verify whether the sale proceeds have been brought into India in convertible foreign exchange by IBM India. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. This Tribunal observed and held as under. “D.9.4. Respectfully following the same, we remand this issue to DRP to verify receipts if sale proceeds of computer software exported out of India, being brought into India in convertible foreign exchange. DRP is at liberty to examine whether, convertible foreign exchange brought into India represents consideration received for export of computer software. Accordingly, this objection is remanded to DRP.” “6.11. As observed in detail by coordinate bench of Pune Tribunal, following ratio laid down therein, we hold that assessee is eligible to claim deduction under section 10AA, on incremental income arisen pursuant to APA dated 29/12/2016. We direct DRP to grant deduction under section 10AA of the Act, to the extent of sale proceeds received from export of software services, brought into India in convertible foreign exchange within stipulated period. Accordingly, this issue is set aside to DRP for verification verify and to allow claim of assessee as directed hereinabove, r.w., our observations in para D.9.4 hereinabove.” Page 13 of 26 IT(TP)A No. 289/Bang/2021 Respectfully following the same this ground stands remanded as indicated hereinabove. 6. Ground No. 4 – The Ld.AR submitted that this issue is disallowance of payments to AEs and third party u/s. 40(a) is towards payments to IBM Singapore for shrink wrapped software. This issue has been considered by Coordinate Bench of this Tribunal for Assessment Year 2013-14. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. This Tribunal in assessee’s own case observed as under: “8.7.6. Ld.Counsel, however submitted that voluminous details were submitted by assessee, which has not been considered by Ld.AO, while passing impugned order. We have perused observations of this Tribunal for assessment year 2008-09 wherein, Hon'ble Bench remanded the issue to DRP for fresh consideration and decision. Respectfully, following the same, we remand the issue to DRP with similar direction to consider the claim of assessee in light of evidences filed, after affording opportunity of being heard in accordance with law. Assessee is directed to file invoices raised in support of payments made by assessee to relevant parties. Assessee is at liberty to file all relevant details/evidences to substantiate its claim. DRP is then directed to verify nature of payment in the light of invoices filed by assessee. DRP is also directed to analyse payment made to nonresidents on which tax has not been deducted at source in light of Explanation 2 to section 195. DRP shall grant proper opportunity of being heard to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes.” Respectfully following the above, we remand the issue back to DRP. The DRP is also directed to verify the details filed by applying the principles laid down by Hon’ble Supreme Court in Page 14 of 26 IT(TP)A No. 289/Bang/2021 case of Engineering Analysis Centre of Excellence (P.) Ltd. reported in (2021) 432 ITR 471. Accordingly this ground raised by assessee stands allowed for statistical purposes. 7. Ground Nos. 5 & 6 is in respect of disallowance under section 37(1) in respect of amounts that was suo moto disallowed by assessee u/s. 40(a). We have perused the submissions advanced by both sides in the light of records placed before us. This issue has been considered by this Tribunal in Assessment Year 2013-14 as under: “7.14.6.DRP shall then verify the detaild filed by assessee, in respect of disallowances made under section 40 (a) for non-deduction of TDS: I. DRP shall verify the nature of provisions created by assessee in preceding year (AY:2012-13), and year under consideration that is disallowed under section 40 (a) of the Act. II. DRP shall verify if, TDS applies on amounts mentioned in provision account vis-a-vis the vendor invoice, and that, if, TDS has been complied with in accordance with the relevant provision in the year under consideration; III. DRP shall verify if any vendor have provided for a ‘NIL’ withholding/lower withholding certificate from the Department as per section 197 of the Act. IV. DRP shall verify there is any vendor invoice on which TDS provision doesn’t apply. 7.15. Base on above discussions and observation for relevant year, respectfully following the view taken by Hon’b1e Bench for AY:2008-09, we set aside for these issue to DRP for fresh consideration. Needless to say that, proper opportunity of being heard must be granted to assessee and these issues must be decided having regard to evidences/documents filed by assessee, in accordance with law. We also direct DRP to consider the alternate submission advanced by Ld. Counsel of allowing the claim of assessee to the extent the payments are mapped with the provisions, invoices and TDS made and deposited with the Government. Page 15 of 26 IT(TP)A No. 289/Bang/2021 Accordingly, we aside Ground 4 & 9 back to DRP.” Respectfully following the above, we set aside this issue back to the DRP. Accordingly this ground raised by assessee stands allowed for statistical purposes. 8. Ground No.7 Ld.AR submitted that under the Employee Share Based Plan ('ESBP') of IBM US, identified employees of IBM India who were eligible for stock options. As per the arrangement, the cost incurred by IBM US under ESBP is cross charged to IBM India. The cost incurred by IBM US is the difference between the market value of shares on the date of issue of shares to the employees of IBM India and the actual grant price. The assessee recorded such cost as expense in the books of accounts. It is submitted that the cost incurred by IBM India in relation to ESBP are employee related costs, and these expenses are incurred at the behest of IBM India to retain, motivate and award its employees. It is thus submitted that the ESBP costs are deductible as business expenditures. Reliance is placed on various decisions in favour of the assessee in this regard. 9. The AR relied on following decisions in support of the claim:  DCIT vs. Accenture Services (P) Ltd. in ITA No. 4540/M/2008  Novo Nordisk India (P.) Ltd. vs. DCIT reported in [2017] 42 taxmann.com 168 (Bangalore Trib.)  CIT, LTU vs. Biocon Ltd. reported in [2020] 121 taxmann.com 351 (Karnataka)  Apollo Tyres Ltd. vs. CIT reported in [2002] 122 Taxman 562 (SC) Page 16 of 26 IT(TP)A No. 289/Bang/2021 On the contrary, the Ld.DR relied on orders passed by authorities below. The Ld.AR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in light of records placed before us. The Ld.AR submitted that, as per the APA, the operating expenses in relation to the export services include the ESBP cross charges and therefore, it was submitted that, if one arm of the Government accepted the transactions, the other arm of the Government must also respect the same. The revenue authorities however disallowed the amount under the ESOP and also disallowed as a part of disallowance of payments to AEs thereby leading to a double disallowance of the same expense. 10. The issue of deductibility of ESOP expense issue is covered in favour of the assessee by following judicial precedents of various High court / Tribunals, including Special Bench:  Delhi High Court – Pr. CIT v. Lemon Tree Hotels (P.) Ltd. reported in (2019) 104 taxmann.com 26 (Delhi) SLP granted by SC reported in (2019) 104 taxmann.com 27 (SC) “1. .............................. since the ITAT followed the previous judgments in CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) the expenditure had to be allowed. ........................... 2. Although the Revenue urges that in terms of Circular No. 9 of 2007, the expenditure ought not to be allowed given that actual expenditure towards acquisition of shares, and not mere allotment of shares by the employer can be considered as a permissible deduction, this Court is of the opinion that such an argument is untenable; that was the rationale of disallowance in this case. What the Revenue urges essentially is that the unless the employer/assessee acquires the shares from a third party, it cannot claim any deduction and that expenditure claimed for allotment or issue of ESOP is merely notional. This Court is of the opinion that such an argument ignores the realities of functioning of commercial entities who would then be asked to purchase shares from market place or third party at prevailing rates instead of allotting them. 3. For above reasons, no question of law arises.” Page 17 of 26 IT(TP)A No. 289/Bang/2021  Hon’ble Delhi High Court – Pr. CIT v. New Delhi Television Ltd. reported in (2018) 99 taxmann.com 401 (Delhi)  Hon’ble Madras High Court – CIT v. M/s PVP Ventures Limited reported in (2012) 23 taxmann.com 286 (Mad.) “11. .............. On the issue of expenditure of Rs. 66.82 lakhs towards the issue of shares to the employees stock option is concerned, the Tribunal pointed out that the shares were issued to the employees only for the interest of the business of the assessee to induce employees to work in the best interest of the assessee. The allotment of shares was done by the assessee in strict compliance with SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the profit and loss . . . the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by the SEBI and the entire employees stock option plan was governed by the guidelines issued by the SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI Guidelines, there could be no interference in the relief granted by the assessing authority for the expenditure arising on account of the employees’ stock option plan. This expenditure incurred as per the SEBI Guidelines and granted by the Officer could not be considered as erroneous one calling for the exercise of jurisdiction under section 263 of the Act.”  Bangalore Special Bench – M/s Biocon Ltd. v. DCIT [2013] 35 taxmann.com 335 (Bangalore – Trib.) (SB) “9.2.6 It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out- and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. ............................ The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the Page 18 of 26 IT(TP)A No. 289/Bang/2021 form of issuing shares at a discounted premium is adopted. 9.2.7. ..................................................................... it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. Sub-section (2) of section 43 defines “paid” to mean: “actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ‘profits and gains of business or profession’.” When we read the definition of the word “paid” u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions. ....................................................................................... by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act 9.3.6 ........................if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. 10.8 Reverting to the questions of ‘when’ and ‘how much’ of deduction for discount on options is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd.’s case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. 12.2 It would be imperative to highlight certain points having bearing on the issue which have come to our notice during the course of hearing. The AO is directed to look, inter alia, into these aspects in quantifying the amount of eligible deduction. a. The assessee-company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of option as reduced by the price at which option is given to the employees. However, presently there is no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a subsequent year. On a pointed query, the ld. AR furnished the details of such claim by showing that it granted 71,510 options with discount of Rs. 909 per option making total discount at Rs. 6.50 crore. He stated that the face value of shares is at Rs. 10 against which the deduction for discounted premium over the vesting period has been claimed at Rs. 909, meaning thereby that the market price of the share on the date of grant of option was taken at Rs. 919. No material worth the name has been placed on record to indicate as to how a share with face value of Rs. 10 has been valued at Rs. 919 for claiming deduction towards discount at Rs. 909 per share. This aspect of valuation of shares at Rs. 919 per share needs to be examined by the Assessing Officer. Page 19 of 26 IT(TP)A No. 289/Bang/2021 b. We have held above that the deduction of the discounted premium is to be claimed over the vesting period.................................................... The way in which the assessee has claimed deduction runs contrary even to the SEBI Guidelines, which also provide for deduction on straight line basis. The manner of the assessee’s claiming deduction has resulted in needlessly increasing the amount of deduction for the first year at the cost of deduction for the subsequent three years. It needs to be set right by apportioning the total amount of the discounted premium evenly over the vesting period of four years.” To summarize, Special Bench held that discount on the issue of ESOPs cannot be inter-alia treated as capital expenditure and held that being part of package of remuneration to employees, the obligation incurred for issuing shares to employees at a discounted price at a future date in lieu of their services, is an allowable deduction under section 37(1) of the Act. The Hon’ble Tribunal further held that incurring liabilities towards the discounted premium, which is compensation to employees, is directly linked with the span of services put in by each employee and liability to issue stock options at discount is incurred during the vesting period and the amount of deduction is to be calculated as per the terms of the ESOP scheme, hence the discount was deductible over the vesting period. Further the Special Bench pointed out that the liability for discounts which arose or were incurred during the vesting period required adjustment due to the fact that the actual discount could only be determined at market price when the employees exercise their options. The assessee should make a suitable downward or upward adjustment at that time. 11. Before coordinate bench of this Tribunal in case of Novo Nordisk India (P.) Ltd. v. DCIT reported in (2014) 42 taxmann.com 168 similar issue arose on identical facts like that of assessee. This Tribunal relied on (i) Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) and (ii) Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836/30 Taxman 467 (Kar.) The Tribunal held that the expenditure in question was wholly and exclusively used for the purpose of the business of the assessee and motivated its workforce and allowed the deduction u/s 37(1) of the Act. Respectfully following the above view, we direct to grant deduction to assessee on ESPO expenses in accordance with law, based on the principles laid down in the decision referred hereinabove. Page 20 of 26 IT(TP)A No. 289/Bang/2021 Accordingly this ground raised by assessee stands allowed. 12. Ground No.8-12: AMP Adjustment The Ld.TPO observed that for distribution segment associate has also carried out advertisement, marketing and sales promotion activities. The learned TPO was of the view that a sissy needs to become adequately compensated for such additional functions undertaken by it and therefore separately benchmarked the AMP functions. The Ld.AO thus proposed adjustment to by estimating the expenditure at 0.63% of the sales based on the comparables selected by the Ld.TPO. The Ld.TPO observed that assessee had spent 5.91% on the gross sale and therefore the excess expenditure incurred was held to be related to non-routine AMP which was attributed to the development of intangibles owned by AE. The DRP upheld the actions of Ld.TPO and the Ld.AO while passing the impugned order made addition towards the AMP spending the hands of assessing. Aggrieved by the order of Ld.AO, assessee is in appeal before us. 13. The Ld.AR submitted that the AMP spent was to enhance the market share of assessee’s brand in India. It has been submitted that the expenses pertain to respective business segment of assessee, and cannot be attributed only towards export and distribution segment, as has been done by the revenue authorities. 14. The Ld.AR relying on following decisions submitted that incurring of AMP expenses does not constitute an international transaction: Page 21 of 26 IT(TP)A No. 289/Bang/2021 Acer India Private Limited in IT (TP) a number 27/B/2017 Essilor India Private Limited in IT (TP) to number 29/the/2014 and 227/B/2015 DCI to versus Nike India Private Limited in IT (TP) a number 232/B/2014 Himalaya drug company vs. DCI reported in (2020) 119 taxmann.com 421 On the contrary, the Ld.DR of revenue relied on the orders of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 15. We refer to para 101 of the decision of the Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India P. Ltd. v. CIT, 374 ITR 118 wherein the Hon'ble Court held that, once the TPO accepts and adopts TNM Method and then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would Page 22 of 26 IT(TP)A No. 289/Bang/2021 result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transac’s tion that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. Section 92B defines ‘international transaction’ as under: Meaning of international transaction. 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 anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes ‘of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to’ the relevant Page 23 of 26 IT(TP)A No. 289/Bang/2021 transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.” 16. Thus, under Section 92B(1) an ‘international transaction’ means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the – benefit, service or facility provided or to be provided to one or more of such enterprises. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of assessee is “any other transaction having a bearing” on its “profits, incomes or losses”, for a ‘transaction’ there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the ‘includes’ part of clause (c), the Revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or’ ‘understanding’ between assessee and its AE, whereby assessee is obliged to spend excessively on AMP in order to promote the brand of AE in India. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) Page 24 of 26 IT(TP)A No. 289/Bang/2021 to Section 92B are described as an ‘International transaction’. This might be only an illustrative list, but significantly’ it does not list AMP spending as one such transaction. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the – burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An ‘assumed’ price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. 17. Be that as it may, we find that the DRP categorically observed that assessee has not furnished any documents to substantiate the argument of their existing no arrangement between assessee and the AE towards the brand promotion, which is beneficial to the AE. It is also observed by the DRP that assessee has not established that the AMP spend pertained to other segments also. Accordingly, in the interest of justice, we remand this issue to the Ld.AO/TPO to verify the aspect based on the documents/evidences submitted by the assessee. In the event the it is found that the expenditure is factored in net cost for computing margin, no separate adjustment needs to be made. Accordingly, this ground of appeal stands allowed for statistical purposes. Page 25 of 26 IT(TP)A No. 289/Bang/2021 18. Ground no.13 is in respect of TDS credit not granted to assessee and Ground No. 15 is on non granting of credit for SA Tax. We direct the Ld.AO to grant the credit for TDS deducted and SA Tax on verification in accordance with law. Accordingly, this Grounds 13 & 15 raised by assessee stands allowed for statistical purposes. 19. Ground no.14 is an alternate plea raised by assessee against the claim raised in Ground no.3. As we have remanded this issue to the Ld.AO with a direction to consider the claim of assessee in accordance with law. This ground need not be adjudicated at this stage. 20. Grounds 16-17 are consequential in nature and does not require adjudication. In the result, appeal by the assessee stands allowed as indicated hereinabove. Order pronounced in the open court on 14 th February, 2022. Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 14 th February, 2022. /MS / Page 26 of 26 IT(TP)A No. 289/Bang/2021 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore