M/s. TE Connectivity Services India Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle-7(1)(1), Bangalore

ITTPA 921/BANG/2022

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The case involves TE Connectivity Services India Pvt. Ltd., which appealed against the assessment order for the assessment year 2018-19, which included significant transfer pricing adjustments and disallowances related to interest on CCDs and expenses on ESOPs. The primary issues revolved around the selection of comparable companies for transfer pricing, the treatment of CCDs as equity rather than debt, and the nature of expenses related to ESOPs. The Tribunal examined these issues in the context of previous rulings and the specific provisions of the Income Tax Act, 1961, and relevant accounting standards.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 124392 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 26 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 18-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 06-12-2022
• Assessment Year: misc
• Appeal Filed On: 22-09-2022
• Other Referred Cases: Dell International Services India (P) Ltd. Vs. DGIT, Sysarris Software Pvt. Ltd. Vs. DCIT, Pentair Water India Pvt. Ltd. Vs. CIT, CAE Flight Training (I) Pvt. Ltd. Vs. ACIT, Biocon Ltd. Vs. ACIT, M/s. Summit Developments Private Limited Vs. DCIT
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Question of law; Date of conversion; Notional interest; Capital receipt; Revenue expenditure; Capital expenditure; TDS
• Section: 143(3); 92D; 142(1); 234B; 36 (1) (iii); 37(1); 144C; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No.921/Bang/2022 Assessment year : 2018-19 TE Connectivity Services India Pvt. Ltd., 59/2 1st Floor Gurudas Heritage, Block-b, 100 Feet Ring Road, Banashankari 2nd Stage, Bengaluru - 560 070. PAN – AAFCT 3474 R Vs. The Dy. Commissioner of Income Tax, Circle-7(1)(1), Bengaluru. APPELLANT RESPONDENT Assessee by : Ms. Amulya, C.A Revenue by : Shri Manjunath Karkihalli, CIT (DR) Date of hearing : 07.12.2022 Date of Pronouncement : 19.12.2022 O R D E R Per Laxmi Prasad Sahu, Accountant Member : This appeal filed by the assessee is against the order passed on 29/07/2022 u/s 143(3) r.w.s 144(1) and 144B of the Act on the following grounds of appeal. “General Grounds 1.1. The lower authorities erred in framing an assessment which, suffers from legal defects such as being passed in violation of the IT(TP)A No.921/Bang/2022 Page 2 of 27 principles of natural justice, principles of judicial discipline, and the provisions of the Income Tax Act, 1961 ('the Act'), and which is devoid of merits, is contrary to facts and circumstances of the case and the applicable law and has been passed without adequate inquiries and as such is liable to be quashed. 1.2. The lower authorities erred in not accepting the TP Study/economic analysis undertaken by the Appellant in accordance with the provisions of the Income-tax Act, 1961 ('the Act') read with the Income-tax Rules, 1962 ('the Rules'), and adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, application of filters, functional and economic analysis, selection of comparable companies, computation of profit margins of the Appellant and of the comparable companies, allowance of appropriate adjustments, and inappropriate consideration of the information, arguments and evidence provided by the Appellant. 2. Transfer Pricing adjustment in respect of income from ITeS Services 2.1. The lower authorities erred in making a transfer pricing adjustment of INR 5,52,68,016/-, in relation to the Appellant's international transaction of rendering Information Technology enabled Services ('ITeS'). 2.2. The lower authorities erred in re-computing the Appellant's operating margin earned from rendering of ITeS, by erroneously classifying various items of income and expenditure as operating / non-operating in nature. 2.3. The lower authorities, has erred, in law and in facts, by erroneously adding back the Restricted stock/ unit's recharge amounting to INR 1,946,923 and Employee stock purchase plan amounting to INR 414,837 twice in the cost base of the appellant for the purpose of computing operating costs and in doing so not computed the tested party's margin as per the directions of the Hon'ble DRP. 2.4. The lower authorities erred in determining the operating margin earned from by the comparable companies, from rendering of ITeS, by erroneously classifying various items of income and expenditure as operating / non-operating in nature. 2.5. The lower authorities erred in adopting a differential treatment in classifying various items of income and expenditure, as operating / non-operating, between the Appellant and Comparable Companies, in computing the operating margins for benchmarking. IT(TP)A No.921/Bang/2022 Page 3 of 27 2.6. On the facts and in circumstances of the case, the Learned Panel/Learned AO erred in not consistently considering the correct margin computation of the comparable companies as directed by the Hon'ble Dispute Resolution Panel and as submitted by the appellant during the assessment proceedings. 2.7. The lower authorities erred in including various companies that are not comparable to the Appellant, and in rejecting various comparable companies identified by the Appellant, based on unreasonable comparability criteria, for determining the ALP of its ITeS services. 2.8. Without prejudice, the lower authorities erred in including companies having a high turnover of more than INR 200 Crores in the benchmarking analysis undertaken for determining the ALP of its ITeS Services. 2.9. The lower authorities erred in not providing working capital adjustment claimed by the Appellant, in determining the ALP of its ITeS services. 2.10. The lower authorities erred in not providing 'risk adjustment', while considering full-fledged entrepreneurial companies for benchmarking the Appellant's margins, without appreciating its economic characterization as a 'limited risk' bearing entity. 3. Disallowance of Interest Expenditure on Compulsorily Convertible Debentures ("CCDs") 3.1. The lower authorities erred in disallowing interest expenditure of INR 4,50,64,500/-, incurred and actually paid by the Appellant during the Impugned AY, on the CCDs issued by it, disregarding the fact that the same was paid after duly deducting the applicable taxes at source. 3.2. The lower authorities erred in exceeding their jurisdiction and recharacterizing the CCDs issued by the Appellant as equity and thereby denying deduction claimed towards the corresponding interest. 3.3. The lower authorities erred in disallowing the said interest expenditure, which was accounted in accordance with the applicable Indian Accounting Standards, notified under the Companies (Indian Accounting Standards) Rules, 2015, disregarding the settled position of law that accounting treatment is not a decisive factor for claiming deduction under the Income Tax Act, 1961. 4. Disallowance of cost incurred towards Restricted Stock Units ('RSU') IT(TP)A No.921/Bang/2022 Page 4 of 27 .i. The lower authorities erred in disallowing the expenditure of INR 19,48,423/- incurred by the Appellant, towards the cost of RSU allotted to its employees, by its ultimate holding Company, TE Connectivity Limited, Switzerland. 4.2. The lower authorities erred in not following the binding judicial precedents on the allowability of RSU Costs, including the decision of the Jurisdictional Karnataka High Court, in the case of Biocon Ltd. [121 taxmann.com 3511. 4.. The lower authorities erred in alleging that the said expenditure is notional in nature, without appreciating that the corresponding cost of the RSU allotted to the Appellant's employees was cross charged to it, by its ultimate holding company. 4.4. The lower authorities erred in alleging that the expenditure incurred towards the said RSU is capital in nature, ignoring the fact that the same is in the nature of remuneration to the Appellant's employees. 5. Erroneous Computation of Interest The Ld. AO erred determining the levy of interest under section 234B of the Act. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.” 2. The brief facts of the case are that the assessee company was incorporated on May 2018 as wholly owned subsidiary of Tyco Electronics Singapore Pvt. Ltd. The assessee filed return of income on 29/11/2018 declaring Nil income. The case was selected for scrutiny and statutory notices were issued to the assessee. From the documents submitted, it was observed that the assessee has entered into international transactions with its associated enterprises during the year under consideration, therefore, reference was made to the TPO after obtaining necessary approval from the concerned Pr.CIT for determination of arms length price u/s 92CA of the Act in relation to the international transactions carried out by the assessee. The assessee company is engaged in IT(TP)A No.921/Bang/2022 Page 5 of 27 providing shared services in the area of information technology, finance back – office, Human resource, customer support for TE group. For such services, the assessee is being compensated cost plus mark-up basis. As per TP documentation, it was observed that the following international transactions were carried out by the assessee with its AEs, which is as under:- IT(TP)A No.921/Bang/2022 Page 6 of 27 3. The financial results are as under:- 4. From the documents maintained u/s 92D of the Act, the TPO observed that the assessee had selected 19 comparables in respect of ITeS and applied TNMM as most appropriate method. The IT(TP)A No.921/Bang/2022 Page 7 of 27 assessee had selected comparables engaged in the same industry vertical as taxpayer. The TPO issued show cause notice. The operating profit to operating cost ratio was taken as the PLI in TNMM analysis. The TPO rejected the TP study and applied international filters. 1) Use of current year data wherever available 2) Companies having different financial year ending [i.e not March 31st 2018] or data of the company which does not fall within 12 months period, i.e 01/04/2017 to 31/03/2018 were rejected. 3) Companies whose income was less than 1 crore were excluded. 4) Companies whose ITES income is less than 75% of its total operating revenue were excluded 5) Companies who have more than 25% related party transactions were excluded 6) Companies who have export service income less than 75% of the sales were excluded 7) Companies with employee cost less than 25% of the turnover were excluded. 8) Companies having persistent loss were excluded. 5. Applying the above filers, the TPO accepted the following companies. IT(TP)A No.921/Bang/2022 Page 8 of 27 1. Access Healthcare Services Pvt. Ltd. 2. Tech Mahindra Business Services Ltd., 3. CES Ltd. 4. Jindal Intellicom Ltd. 5. Ultramarine & Pigments Ltd. 6. The TPO also applied fresh search and selected some new companies. Finally, the TPO selected 17 comparables and calculated median @ 26.34%. Accordingly, he made adjustment of Rs.8,55,63,608/- and passed order on 27/07/2021. 7. The AO passed Draft Assessment order incorporating the adjustment made u/s 92CA of the Act by the TPO and against which, the assessee filed objections before the DRP. The DRP gave marginal relief and accordingly, the AO passed final assessment order on 29/07/2022, the adjustment for international transactions with its AE was restricted to Rs.5,52,68,016/-, the disallowance of interest on CCD was made for Rs. 4,50,64,500/- and disallowance of actual ESOP cost recharge was made at Rs.19,48,423/-, which was disputed before us also by taking the grounds of appeal as quoted above. 8. The ld.AR filed written synopsis, which are as under:- “I. BACKGROUND 1. The issues arising for consideration under the present appeal pertain to the following adjustments made by the Ld. Assessing Officer ("Ld. AO"), in the final order of assessment dated July 29, 2022 ("Impugned Order"), passed under section IT(TP)A No.921/Bang/2022 Page 9 of 27 143(3) read with sections 144C(13) and 144B of the Income Tax Act, 1961 ("the Act") for Assessment Year 2018-19 ("ImpugnedAY") [Pg. 6 of the Order/ Pg. 10 of-Appeal Set]: 1.1. Transfer Pricing ("TP") adjustment: Upward margin adjustment proposed by the Ld. Transfer Pricing Officer ("Ld. TPO"), in respect of the international transaction of 'Provision of Information-Technology enabled Services' ("MS') by the Appellant to its overseas Associated Enterprises ("AE") amounting to INR 5,52,68,016 [INR 5.53 Crores]. 1.2. Interest on Compulsory Convertible Debentures ('CCD'): Disallowance of actual interest on CCD amounting to INR 4,50,64,500 [INR 4.51 Crores] computed as per the Indian Accounting Standards ("IND AS") upon recharacterizing the same and alleging that the said CCDs are in the nature of equity. 1.3. Employee Stock Option Plan: Disallowance of actual Restrictive Stock Options ("RSU") cost recharge made to the Holding Company, on account of allotment of shares of the Holding Company to the employees of the Appellant i.e., Employee Stock Option Plan ("ESOP") expenditure amounting to INR 19,48,423 [INR 0.19 Crores]. 2. The Appellant submits that all the disputed issues under the present appeal are similar in substance to the adjustments made in the case of the Appellant for the earlier year, i.e., AY20I7-18. The said issues were dealt with in detail by this Hon'ble Tribunal, in IT(TP)A Nos. 191/Bang/2022. This Hon'ble Tribunal disposed of the said appeal in favour of the Appellant vide Order dated 1610912022. 3. In light of the above, all the disputed issues under the present appeal are therefore covered by the Orders of this Hon'ble Tribunal, in its own case,forAY2017-18. II. GROUNDS OF APPEAL BEFORE THIS HON'BLE TRIBUNAL 4. The Appellant submits that the grounds of appeal No. 2.2 to 2.7 will become academic in nature, if the decision of this Hon'ble Tribunal for AY 2017-18 is followed and applied for the Impugned AY. The Appellant therefore submits herein, its contentions, only with respect to the following grounds: 4.1. Exclusion of Companies having a high turnover, of more than INR 200 Crores (Ground No. 2.1 and 2.8) 4.2. Disallowance of Interest on CCD (Ground No. 3.1 to 3.3) 4.3. Disallowance of actual RSU cost recharge made to the holding company on account of allotment of its share to the employees of the company (i.e., ESOP expenditure) (Ground No. 4.1 to 4.4) 5. Ground No. 1.1 and 1.2 are general grounds, and ground no. 5 is in relation to the computation of interest under section 234B of the Act, which is consequential in nature. III. APPELLANT'S SUBMISSIONS 6. Transfer pricing adjustment - Exclusion of companies having a high Turnover Of more than INR 200 Crores (Ground No. 2.1 and 2.8) 6.1. The Appellant humbly submits that the Ld. TPO has applied a lower turnover filter of INR 1 Crore, however, did not consider an upper limit of turnover filter. It is a well-settled principle that an upper limit of turnover filter ought to be applied for comparability analysis for the purpose of benchmarking. It has been held in various judicial precedents that Companies with a huge turnover of multiple times the turnover of the taxpayer or with a turnover of more than INR 200 Crores, ought to excluded in the selection of comparable companies for benchmarking as such companies cannot be equated to the small players on account several differentiating factors due to the differences in their size and scale of operations, that have a direct impact on the profitability. IT(TP)A No.921/Bang/2022 Page 10 of 27 6.2. The above position was accepted by this Hon'ble Tribunal in the Appellant's own case for AY2017-18 [Refer 148 of the Paperbook], following its decision in the Appellant's own case for AY 2016-17, wherein this Hon'ble Tribunal directed the exclusion of 3 companies in view of their high turnover of more than INR 200 Grores [Pg. 7 to 11 of the Order / Pg. 154 to 158 of the Paperbook]. The relevant extracts of the said order are reproduced below: "ii. We have considered the rival submissions. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITATBangalore Benches in favour of the assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DGIT (2018) 89 Taxmann.com 44 (Ban g-Trib) order dated 13-10.2017, took note of the decision of the ITATBangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Ban galore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, heldthat there were contrary views on the issue and hence the view favourable to the assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): 12. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Ban glore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:... 13. In view of the aforesaid discussion, we hold that the following 3 companies whose turnover is more than Rs. 200 Crores as listed in the chart below should be excluded front the list of the comparable companies. (Emphasis Supplied) 6.3. The Appellant submits that the above decision of this Hon'ble Tribunal squarely applies to its appeal for the Impugned AY. The Appellant therefore submits that the following 7 companies, whose turnover is higher than INR 200 Crores, ought to be excluded from the final set of comparable companies adopted for benchmarking, given that the turnover of the Appellant for the corresponding period is only INR 73.58 Crores (refer Pg. 5of Paperbook). IT(TP)A No.921/Bang/2022 Page 11 of 27 6.4. Upon exclusion of the above-listed 7 companies from the final set of comparables, the ALP of the margin on ITeS seivices would be 12.22% to 23.54% with a median of 18.72%, and the Appellant's margin is 13.18% as determined by the Ld. TPO will be within the sasid range, and hence the ALP adjustment made by the Ld. TPO shall not sustain. Hence, it is humbly prayed before Your Honours that the 7 comparable companies be excluded by following the order of this Hon'ble Tribunal in the Appellant's own case. 7. Disallowance of interest on CCD (Ground No. 3.1 to 3.3) 7.1. During the FY 2015-16, the Appellant issued 6,50,00,000 CCDs of INR 10 each in favour of Tyco Electronic Singapore Pte Ltd ("TE Singapore") by way of rights issue in the ratio of 6505 CCDs for every 1 fully paid-up equity share (refer Note under Schedule 10 in Pg. 20 and Pg. 188 of Paperbook). The CCDs are subject to simple interest of 3 months MIBOR+ 150 basis points, capped to 9.75% per annum. 7.2. The CCDs will automatically be converted into 0.1 equity share of the company in one single tranche upon completion of four years and six months from the date of allotment. The equity shares of the company issued upon conversion of the CCDs will rank pari pasu with the existing equity shares of the company. The CCDs will not carry any voting right until its conversion into equity shares. (Pg. 189 of Paperbook) 7.3. During the preceding AY 2016-17, the Appellant incurred interest expense of INR 4.53 Crores. The same was charged to P&L account and claimed as well as allowed as deduction in computing total income. The interest payable during the Impugned AY on these CCDs is INR 6,11,15,550 i.e., INR 6.11 Crores. However, the deduction of INR 1,60,51,050 (INR 1.61 Crores) has only been allowed and remaining amount of INR 4,50,04,500 (INR 4.50 Crores) has been disallowed. This disallowance is because of a difference in the accounting treatment as a consequence of implementation of Indian Accounting Standards ("IND AS"). IND AS 109 read with IND AS 32 and 107 prescribe a fair value accounting for CCDs. 7.4. In the light of above, the effect of accounting can be explained by the following summary entry, 7.5. As the amount charged to P&L was a lower sum, the remaining amount of INR 4.50 Crores was claimed as deduction by the Appellant as a separate line item in its computation of income (refer Pg. 25 of Paperbook). The Ld. DRP contended that Reserve Bank of India ("RBI") has treated CCDs as equity and since conversion is compulsory, it shall be treated as equity rather than debt. 7.6. It is the humble submission of the Appellant that this issue is squarely covered by the order of the Hon'ble Jurisdiction ITAT in the Appellant's own caseforAv2017-18. Since the facts of the Impugned AY are similar and identical to the facts of AY 2017-18, it is humbly prayed by the Appellant that the appeal be allowed in the favour of the appellant. The relevant extracts of the order are reproduced below [Pg. 20 - 25 of the Order / Pg. 167- 172 of the Paperbook]: "22. We have carefully considered the rival submissions. The first aspect which needs to be considered is as to whether the revenue authorities were justified in treating the CCDs as Equity and disallowing claim for deduction of interest paid on CGD's. We are of the view that CGDs till such time they are converted into equity are in the nature of loans and therefore any interest paid on borrowings for the IT(TP)A No.921/Bang/2022 Page 12 of 27 purpose of business has to be allowed as a deduction u/s. 36(1)(iii) of the Act. In this regard, we find that the ITAT Bangalore 4' Bench in the case of AGIT v. M/s. CAE Flight Training (I) Pvt. Ltd. in IT(TP)A No.2060/Ban g/2o16 dated 25.7.2017 has exhaustively dealt with the issue and addressed all the issues raised by the DRP in it's directions. The DRP has disregarded the said decision on the ground that facts in the aforesaid case were that the CCD holders prior to conversion into equity shares did not have voting rights and dividend payout. From the offer letter dated 26.6.2015 copy of which is at page 358 of the assessee's paper book it is clear that the CCD in the case of the Assessee did not have voting rights prior to its conversion into equity nor were dividend payable on the CGD's and only interest at 9.75% p.a was payable. Therefore the very basis on which the DRP distinguished the decision in the case of CAE Flight Training (supra) is unsustainable. The issue for consideration in the aforesaid case of CAE Flight Training (supra)decided by the Bangalore Bench was with regard to the interest paid on CCDs. The contention of the revenue was that though the nomenclature CCD is used, yet they are in the nature of equity. The revenue sought to raise the above contention on the basis of the Thin Capitalisation rule which was not applicable for the assessment year which was under consideration before the Tribunal. Even for the present appeal which relates to AY20I718, thing capitalization rules laid down in Sec.94B of the Act are not applicable and those provisions are applicable only from 1.4.2018 i.e.,from AY2018-19 onwards. The Tribunal firstly held in the case of CAE Flight Training (1) Pvt. Ltd. (supra) that Thin Capitalisation principle was not applicable till such time those principles were recognised by way of statutory provisions. Thereafter, the Tribunal examined whether the question, interest paid on CCDs should be allowed as a deduction. The Tribunal held as follows:- 23. In the light of the aforesaid decision of the Tribunal which addresses all the issues raised by the DRP, we are of the view that the disallowance of interest expenses cannot be sustained on the basis that CCDs were in the nature of equity. The Tribunal has ruled that the definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible foreign currency. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during preconversion period or regarding payment of dividend on such convertible debentures during precon version period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. The same principle will apply to the other corporate laws cited by the DRP in its directions. 24. On the question whether on the basis of book entries by which the interest was not debited in the profit and loss account but claimed in the computation of income, the disallowance can be sustained. On this aspect, the law is well settled and laid down by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC), wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. It is undisputed that the assessee has deducted TDS on the entire interest expenditure. The assessee while benchmarking interest payment to Associated Enterprise for the purpose of Sec.92 of the Act has benchmarked the entire interest amount of Rs.6.o9 Crores. Thus, looked atfrom any perspective, the claim of the assessee for deduction of the sum of Rs.4,53,11,205 deserves to be accepted. The disallowance of the said sum of interest expenses and the consequent addition to the total income is therefore deleted. The relevant ground of appeal of the assessee i.e., Ground No.io is accordingly allowed." IT(TP)A No.921/Bang/2022 Page 13 of 27 7.7. On the lines of above stated regulations embodied in IND AS, the total interest outflow has been computed at INR 6.11 Crores. This is the amount which is actually payable and paid to debenture holders. Please refer Pg. 91 to 112 of Paperbook being relevant Form 15CB executed in relation to the payment of the said interest. 7.8. Based on these documents it is evident that the actual interest expenditure is INR 6.11 Crores. The fact that an amount of INR 4.50 Crores (claimed in ROI, refer computation of income in Pg. 28 of Paperbook) is not recognized as interest expense in the financial statements on does not alter the fact that actual interest outflow of INR 6.11 Crores. Accordingly, the entries passed in the books of accounts reflect the fair value accounting of CCD liability as per Ind AS treatment. The Appellant has deducted TDS on the entire interest expenditure of INR 6.11 Crores which can be verified from Form 15CB placed at Pg. 91 to 112 of Paperbook. 7.9. The Appellant in order to establish whether interest paid on CCD for the impugned AY is at ALP or not for transfer pricing purposes, has undertaken benchmarking on the entire interest amount of INR 6.11 Crores which is evident from Pg. 60 of Paperbook. 7.10. The Appellant further made a suo-moto disallowance of the prescribed portion of the said interest, under section 94B of the Act, which is applicable from the Impugned AY, as discussed in the order of this Hon'ble Tribunal in the Appellant's case for AY 2017-18. Once this disallowance is prescribed under the Act to address the thin-capitalisation issue, the Ld. TPO shall not make a transfer pricing adjustment for addressing the same issue. This position was upheld by this Hon'ble Tribunal in the case of M/s.Summit Developments Private Limited in IT(TP)A No.794/Bang/2022 for the same AY, i.e., AY 2018-19 [Pg. 182 of the Paperbook]. 8. Disallowance of actual ESOP cost recharge (Ground No, 4.1 to 4.4) 8.1. The Appellant submits that it has a share option plan scheme for its executives and senior employees. These options are given by the ultimate holding company i.e., TE Connectivity Limited, Switzerland ("TEL"), to the employees of TECSIPL. The stock option plan granted to the employees during the current period is Restrictive Stock Options ("RSU"), which are assessed, managed and administered by the ultimate holding company. Kindly refer to the disclosure in the Note 30 'Share-based payment arrangements' to the financial statements at [Pg. 22 of Paperbook]. 8.2. During the relevant FY 2017-18, the Appellant has debited an amount of INR 19,48,423 (INR 19.48 Lakhs) in the profit & loss account pertaining to costs relating to 326 shares vested during the year under consideration. The entire amount is cross charged to the Appellant by the ultimate holding company, as the RSUs are allotted at free of cost to the employees of the Appellant. 8.3. The Ld. AO contended that the Appellant is receiving short receipt of capital and claim is thus inadmissible, ESOP expenditure being a capital expenditure. Ld. DRP also upheld the contentions of the Ld. AO and contended that since similar issues on ESOP are pending before the Hon'ble Supreme Court, the addition is upheld just to keep the issue alive. 8.4. It is the humble submission of the Appellant that this issue is squarely covered by the order of the Hon'ble Jurisdiction ITAT in the Appellant's own case for AY2017-18. Since the facts of the Impugned AY are similar and identical to the facts of AY 2017-18, it is humbly prayed by the Appellant that the appeal be allowed in the favour of the appellant. The relevant extracts are reproduced below [Pg. 29 - 30 of the Order / Pg. 176 - 177 of the Paperbook]: "30. We have carefully considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the IT(TP)A No.921/Bang/2022 Page 14 of 27 assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. In ITA No.248/Bang/2olo, A.Y. 2004-05 and other connected appeals, by order dated 16.o7.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that 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 form of issuing shares at a discounted premium is adopted. The said decision has been upheld by the Hon'ble Karnataka High court in the case of BIOCON Ltd. (supra). Therefore the issue in so far as this Bench of ITAT is concerned is concluded by the decision of the Hon'ble Jurisdictional High Court. Pendency of identical issue before the Hon'ble Supreme Court cannot be the basis not to follow decision of jurisdictional High Court. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. We therefore hold that the claim of the assessee has to be allowed. Grd.No.ii is accordingly allowed." 8.5. In light of the above, the said adjustment for the Impugned AY ought to be deleted.” 9. The ld.AR submitted that this issue is squarely covered in favour of the assessee in assessee’s own case for the assessment year 2017-18 in ITA No.191/Bang/2021 vide order dated 16/09/2022. 10. The ld.DR relied on the order of the lower authorities and submitted that high turnover cannot be criteria to reject a company as a comparable company, if the said company is functionally comparable and passes the filters applied by the TPO. IT(TP)A No.921/Bang/2022 Page 15 of 27 11. After hearing both the parties and perusing the entire material on records and having gone through the orders of lower authorizes, we note that coordinate bench of the Tribunal had decided the all three issues in assessee’s own case. In case of the international transactions with its AEs for selection of comparable companies by accepting that the turnover of the comparable companies, which is more than 200/- crores, should be excluded by following the decision cited supra, the relevant part is as under:- 11. We have considered the rival submissions. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): “41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies IT(TP)A No.921/Bang/2022 Page 16 of 27 which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.” 42. The Assessee’s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon’ble High Courts of Bombay and Delhi and both are nonjurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference.” 12. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: “17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the IT(TP)A No.921/Bang/2022 Page 17 of 27 first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).” 13. In view of the aforesaid discussion, we hold that the following 3 companies whose turnover is more than Rs.200 Crores as listed in the chart below should be excluded from the list of the comparable companies. 1. Tech Mahindra Business Services Ltd. 2. Infosys BPM Ltd. 3. SPI Technologies India Pvt Ltd. 12. Respectfully following the above judgment, we also direct the AO/TPO/DRP to exclude the comparable companies whose turnover is more than Rs.200/- crores as raised by the ld.AR of the assessee in his written synopsis cited supra. We further note that from the comparables selected by the assessee, the TPO has considered above noted five companies, whose turnover is also to be examined because the assessee has not submitted the same, therefore, this issue is remitted back to the file of the TPO/AO for verifying the turnovers and if the TPO finds from the final set of comparables ( even in case of companies accepted by the TPO of IT(TP)A No.921/Bang/2022 Page 18 of 27 five companies noted supra) from the assessee’s comparables that whose turnover is more than Rs.200/- crores, then in final set of comparables, it is to be excluded. Since we have accepted the ground No. 2.1 and 2.8 raised by the assessee, the ground No. 2.2 to 2.7 becomes academic in nature and does not require any adjudication. Accordingly, the ground No. 2.1 and 2.8 are allowed for statistical purposes. 13. The next issue is in respect of disallowance of interest expenditure on compulsory convertible debentures raised in ground Nos. 3.1 to 3.3 . The AO observed as under:- “4. Further, vide questionnaire issued alongwith notice u/s 142(1) of the Act on 28.12.2020, the assessee was asked to furnish detailed copy of account/calculations regarding the amount of Rs. 4,30,68,889/- claimed as deduction under the head any other amount allowable as deduction. In response, the assessee has furnished a reply on 11 .01 .2021. The said reply has been perused. So far as Notional interest income on CCD liability recognized in the statement of profit & loss as per lndAS amounting to Rs. 4,50,64,500/- is concerned, the assessee has stated that the fair value adjustments comprising of finance cost and interest income has to be debited and credited to profit & loss account respectively, and therefore, the interest income amounting to Rs. 4.50,64,500/- has been credited in the statement of profit & loss. Further, it has also been explained that the notional income/expense is recognized merely for a better presentation of the transaction and not related to the substance as envisaged in ICDS I as the same does not reflect real income/expense. 4.2 The reply/explanation submitted by the assessee has been perused and considered but is not found acceptable. Compulsory Convertible Debentures (CCD) are purely a method for raising capital and when debentures are converted into equity shares, it increases the capital base. Non-convertible Debenture cannot be converted into equity shares of issuing company, instead the debenture holders receive period interest payment and get back their principal at the maturity date like most bondholders. Since the assessee has received interest, as admitted by it, which is credited to profit & loss account statement and subsequently reducing the said amount of interest by stating it as notional interest, cannot be accepted. Accordingly, the amount of interest to the tune of Rs. 4,50,64,500/- reduced in the computation of income is not permitted under the provisions of law and the same was accordingly disallowed while issuing the draft order u/s 144C of the Act. It is pertinent to mention here that against the aforementioned disallowance of Rs. 4,50,64,500/-, the assessee also filed objection before the Hon'ble DRP-2, Bengaluru who, vide its order supra, rejected the objection by observing that the action of treating CCD's as equity is upheld. Accordingly, the disallowance of Rs. 4,50,64,500/- IT(TP)A No.921/Bang/2022 Page 19 of 27 is hereby made and added to the total income of the assessee. I am satisfied that the assessee has under “reported its income to the tune of Rs. 4,50,64,500/-, hence penalty proceedings u/s 270A of the Act for under-reporting of income is being initiated separately. (Addition: Rs. 4,50,64,500/-)” 13.1 The AR has filed written synopsis noted supra and submitted that the issue is squarely covered in assessee’s own case for the assessment year 2017-18. 13.2 The ld.DR relied on the order of the lower authorities. 13.3 Considering the rival submissions and perusing the records, we note that the similar issue has been decided by the co-ordinate bench of the Tribunal in assessee’s own case, the relevant part is under:- 21.We have heard the rival submissions. Learned Counsel for the assessee reiterated submissions made before the revenue authorities. It was submitted that it has been judicially a well settled proposition that CCDs constitute debt and interest payable thereon is a deductible expenditure till the time the same are converted into equity. In this regard, reliance was placed on the decision of the Coordinate Bench of this Tribunal for A.Ys. 2009-10 to 2013-14 in the case of M/s. CAE Flight Training (India) Pvt. Ltd. in ITA No. 2006/Bang/2017, IT(TP)A Nos. 63 & 84/Bang/2015, 599, 2060 & 2178/Bang/2016 & C.O. Nos. 83/Bang/2017 & 09/Bang/2018 by order dated 25/07/2019. Besides the above, reliance was also placed on the following decisions laying down proposition that a debt can never be characterized as equity/capital viz., Embassy One Developers Pvt. Ltd., ITA No.2239 & 2240/Bang/2018 order dated 26.11.2020 and IMS Health Analytics Services Pvt. Ltd. ITA No.1549/Bang/2019 order dated 19.6.2020. It was submitted that the law is well settled that income tax is leviable on real income. Real income can be ascertained by deducting real expenditure. It was reiterated that the real expenditure was INR 6.09 Crores and not merely INR 1.56 Crores, the former has to be allowed as a deduction irrespective of the fact that the amount charged to P&L is only INR 1.56 Crores. It was submitted that accounting entries are not determinative for tax liability and only real income can be taxed. Reference was made to the decision of the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC), wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. For the proposition only real income is taxable, the learned counsel for the assessee relied on the decision of Hon’ble Supreme Court in the case of Shoorji Vallabhdas & Co. 46 ITR 144 (SC), wherein the Hon’ble Court held that if income does not result at all, there cannot be IT(TP)A No.921/Bang/2022 Page 20 of 27 a tax, even though in bookkeeping, an entry is made about a hypothetical income, which does not materialise. It was submitted that the assessee is entitled to deduction of entire amount of interest expense being INR 6.11 Crores. The learned DR reiterated the stand of the DRP and the reasoning given by the DRP. 22. We have carefully considered the rival submissions. The first aspect which needs to be considered is as to whether the revenue authorities were justified in treating the CCDs as Equity and disallowing claim for deduction of interest paid on CCD’s. We are of the view that CCDs till such time they are converted into equity are in the nature of loans and therefore any interest paid on borrowings for the purpose of business has to be allowed as a deduction u/s. 36(1)(iii) of the Act. In this regard, we find that the ITAT Bangalore 'A' Bench in the case of ACIT v. M/s. CAE Flight Training (I) Pvt. Ltd. in IT(TP)A No.2060/Bang/2016 dated 25.7.2017 has exhaustively dealt with the issue and addressed all the issues raised by the DRP in it’s directions. The DRP has disregarded the said decision on the ground that facts in the aforesaid case were that the CCD holders prior to conversion into equity shares did not have voting rights and dividend payout. From the offer letter dated 26.6.2015 copy of which is at page 358 of the assessee’s paper book it is clear that the CCD in the case of the Assessee did not have voting rights prior to its conversion into equity nor were dividend payable on the CCD’s and only interest at 9.75% p.a was payable. Therefore the very basis on which the DRP distinguished the decision in the case of CAE Flight Training (supra) is unsustainable. The issue for consideration in the aforesaid case of CAE Flight Training (supra)decided by the Bangalore Bench was with regard to the interest paid on CCDs. The contention of the revenue was that though the nomenclature CCD is used, yet they are in the nature of equity. The revenue sought to raise the above contention on the basis of the Thin Capitalisation rule which was not applicable for the assessment year which was under consideration before the Tribunal. Even for the present appeal which relates to AY 2017- 18, thing capitalization rules laid down in Sec.94B of the Act are not applicable and those provisions are applicable only from 1.4.2018 i.e., from AY 2018-19 onwards. The Tribunal firstly held in the case of CAE Flight Training (I) Pvt. Ltd. (supra) that Thin Capitalisation principle was not applicable till such time those principles were recognised by way of statutory provisions. Thereafter, the Tribunal examined whether the question, interest paid on CCDs should be allowed as a deduction. The Tribunal held as follows:- "23. As per above paras of this tribunal order, it comes out that even if Thin capitalization Principle is on Statute book of the other country, no disallowance can be made in India by applying this Principle. To this extent, we uphold the finding of CIT (A) by respectfully following this tribunal order. But the issue still remains because, the objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009 - 10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs IT(TP)A No.921/Bang/2022 Page 21 of 27 before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided. 24. After examining the applicability of the Tribunal order rendered in the case of Besix Kier Dabhol, SA vs. DDIT (supra), we now examine the applicability of the decision of Special Bench of the Tribunal rendered in the case of Ashima Syntex Ltd. Vs. ACIT as reported in 100 ITD 247 (Ahd.) (SB) on which reliance has been placed by ld. DR of revenue in the written submissions filed by him as reproduced above. From the facts noted by the Tribunal in this case, it is seen that in that case the assessee issued convertible debentures for subscription at the rate of Rs. 75 per debenture and these were in two parts; Part-A of Rs. 35 to be compulsorily converted into one equity share of the face value of Rs. 10 each at a premium of Rs. 25 per share on the date of allotment of the debenture and Part-B of Rs. 40 to be compulsorily converted into one equity share of the face value of Rs. 10 each at a premium of Rs. 30 per share on the expiry of 15 months from the date of allotment of the debenture. Part-B debenture was to carry an interest at the rate of Rs. 14 per annum till the date of conversion payable half yearly on 30th June and 31st December each year and on conversion. The issue in dispute in that case was regarding the allowability of expenses incurred on issue of such debentures and the issue in that case was not of interest on debentures before its conversion as in the present case. This is also an important aspect of the matter of that case that one part of the debenture was to be converted on the date of allotment of debenture itself, second part of the debenture has to be converted only on expiry of 15 months from the date of allotment of debenture and under these facts, it was held by Special Bench of the Tribunal in that case that the expenses incurred on issue of such debentures has to be considered as expenses incurred for issue of shares because it was found that first part of the debentures was to be converted into shares on the date of allotment itself and the second part was to be converted after expiry of 15 months from the date of allotment of debenture and therefore it was held that expenses incurred were actually incurred for issue of shares and not issue of debentures. In the present case, the issue is not regarding expenses incurred on issue of shares. In the present case, the dispute is regarding interest on CCDs for a period before conversion. Hence in our considered opinion, this decision of special bench of the Tribunal is not applicable in the facts of present case because the issue in dispute is different. In that case the issue in dispute is regarding expenditure incurred on issue of convertibles whereas in the present case the issue is regarding allowability of interest ITA No.1549/Bang/2019 expenditure on convertible debentures for the pre-conversion period. Hence we hold that the revenue does not find any support from this decision of Special Bench of the Tribunal in that case. 25. Apart from relying on this decision of Special Bench of the Tribunal, the ld. DR of revenue in written submissions as reproduced above has mainly reiterated the same arguments which are adopted by the TPO in its order i.e. regarding RBI Master Circular on Foreign Investment in India dated 02.07.2007 and 01.07.2008. We would like to observe that such circular in the context of FDI policy of RBI is in a different context i.e. regarding future re-payment obligations in convertible foreign currency and to have control over such future repayment obligations, the RBI is exercising strict and control so that such future re-payment obligations does not go beyond a point and since in the case of fully IT(TP)A No.921/Bang/2022 Page 22 of 27 convertible debentures, there is no future repayment obligation, the same was considered as equity for the purpose of FDI policy. In our considered opinion, any definition of any term is to be considered keeping in mind the context in which such definition was given. This definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible foreign currency. In our considered opinion, such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during preconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. If you ask a question as to whether dividend can be paid on such convertible debentures in a period before the date of conversion or whether such holders of convertible debentures can be granted voting rights at par with voting rights of share holders during pre-conversion period, the answer will be a big NO. On the same analogy, in our considered opinion, the answer of this question is also a big NO as to whether interest paid on convertible debentures for pre- conversion period can be said to be interest on equity and interest on debentures allowable u/s. 36(1)(iii) of the IT Act." 23. In the light of the aforesaid decision of the Tribunal which addresses all the issues raised by the DRP, we are of the view that the disallowance of interest expenses cannot be sustained on the basis that CCDs were in the nature of equity. The Tribunal has ruled that the definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future re-payment obligations in convertible foreign currency. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during preconversion period or regarding payment of dividend on such convertible debentures during preconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. The same principle will apply to the other corporate laws cited by the DRP in its directions. 24. On the question whether on the basis of book entries by which the interest was not debited in the profit and loss account but claimed in the computation of income, the disallowance can be sustained. On this aspect, the law is well settled and laid down by the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC), wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. It is undisputed that the assessee has deducted TDS on the entire interest expenditure. The assessee while benchmarking interest payment to Associated Enterprise for the purpose of Sec.92 of the Act has benchmarked the entire interest amount of Rs.6.09 Crores. Thus, looked at from any perspective, the claim of the assessee for deduction of the sum of Rs.4,53,11,205 deserves to be accepted. The disallowance of the said sum of interest expenses and the consequent addition to the total income is therefore deleted. The relevant ground of appeal of the assessee i.e., Ground No.10 is accordingly allowed. 13.4 Respectfully following the decision of the coordinate bench in the assessee’s own case cited supra, the ground Nos. 3.1 to 3.3 are allowed. IT(TP)A No.921/Bang/2022 Page 23 of 27 14. The next issue in ground No. 4.1 to 4.4 is in respect of ESOP, the AO observed as under:- “5. Further, with regard to the share based payments debited to profit & loss account, and the actual payment of Rs. 19,48,423/- made during the year, it has been stated by the assessee that it is mandatory for the company to charge off the expense on a graded vesting option of the Employees Stock Option Plan (ESOP). Further it has been stated that the company has recognized the expenses over the vesting period from the transition date for such plans alongwith a corresponding impact on equity, and therefore the company has, accordingly, accrued ESOP expenses upon vesting in accordance with the methodology specified under Ind AS, and the same being in the nature of actual expenses, has been claimed as deduction u/s 37 while computing the taxable income. 5.2 The reply furnished by the assessee has been perused but is not found acceptable for the reasons discussed hereinafter. At the outset, it may be stated that there is no specific section, under which ESOP expenditure is allowable, in the Act. The only provision where a company can claim the expenditure is section 37 of the Act. Hence, it is pertinent to test the conditions mentioned in section 37 in order to conclude whether the afore-said expenditure is allowable or not. Section 37 of the Act allows an assessee to claim expenditure if it fulfills the following conditions: i) It should be expenditure ii) It should not be dealt with in section 30 to 36 iii) It should not be capital expenditure or personal expenses of the assessee and it should be incurred or laid out wholly and exclusively for the purpose of business or profession. What is allowable u/s 37 is any expenditure not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee. Such expenditure should be wholly and exclusively for the purpose of business. Thus the pre-requisite is that the assessee should have incurred expenditure. The company is choosing to either receive securities premium of a lower amount or no securities premium when compared to that of which it would have received during a normal course of share issue. Hence, there is no expenditure that the assessee company is incurring or laying out. It is settled principle of law that a benefit or income foregone cannot be considered as expenditure. Therefore, the claim of the assessee is not allowable. The ESOP expenses, even if treated for argument sake, as expenditure, the same is a capital expenditure and is thus inadmissible as per the provisions of law. The Hon'ble ITAT, Delhi in the case of ACIT vs. Ranbaxy Laboratories ITA No. 2613 & 3871 has held that the ESOP expenses debited to profit & loss account is notional in nature as the assessee has neither laid out nor expended any amount while choosing to receive lesser securities premium. Alternatively, since the receipt of securities premium is not chargeable to tax being a capital receipt, any short collection of securities premium should also be considered as capital outlay and cannot be allowed as expenditure. Accordingly, the deduction claimed in respect of the expenses under ESOP amounting to Rs. 19,48,423/- is disallowed and added back to the total income of the assessee. U" IT(TP)A No.921/Bang/2022 Page 24 of 27 It is pertinent to mention here that against the aforementioned addition of Rs. 19,48,423/-, the assessee also filed objection before the Honble DRP-2, Bengaluru who, vide its order supra, upheld the aforesaid addition, however, further also directed not to enforce the recovery of the demand arising out of this addition. Accordingly, the addition of Rs. 19,48,423/- is hereby made and added to the total income of the assessee. I am satisfied that the assessee has under reported its income to the tune of Rs. 19,48,423/-, hence penalty proceedings u/s 270A of the Act for under-reporting of income is being initiated separately. (Addition: Rs. 19,48,423/-)” 14.1 The ld.DR relied on the order of the lower authorities. 14.2 The ld. AR reiterated in his written synopsis cited supra:- 14.3 Considering the rival submissions and perusing the records, we note that the similar issue has been decided by the coordinate bench of the Tribunal in assessee’s own case cited supra for the assessment year 2017-18, the relevant part is under:- 28. We have heard the rival submissions. The learned counsel for the assessee submitted that the assessee had incurred expense by way of payment to its parent company which has in-turn issued shares to the employees of the assessee. He placed reliance on decision of the decision of the Hon’ble Jurisdictional Karnataka High Court decision in the case of Biocon Ltd. 430 ITR 151(Karn.) which upheld the decision rendered by the Jurisdictional Special Bench1 in the case of BIOCON 25 ITR (Tribunal) SB Bangalore. The Hon’ble High Court had observed that: “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 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.” (Emphasis Supplied) Further, the same reasoning has been adopted in the following decisions rendered by various other High Courts/Tribunal, viz., 1. Forum PVP Ventures Ltd. 23 Taxmann.com 286 (Mad) High Court, Madras, 2. Lemon Tree Hotels Ltd 2015 (11 TMI 40 (Delhi) High Court, Delhi IT(TP)A No.921/Bang/2022 Page 25 of 27 3.Novo Nordisk India Private Limited 63 SOT 242 (Trib.-Bang) Tribunal, Bangalore 29. Learned DR, however, placed reliance on the directions of the DRP in which the DRP referred to the fact that there was a view expressed in some decisions that ESOP expenses are not allowable as deduction. The decisions referred to in this regard were that of the Delhi ITAT in the case of ACIT Vs. Ranbaxy Laboratories ITA No 2613 & 3871 wherein it was held that the ESOP expense debited to P&L is notional in nature since the assessee has neither laid out or expended any amount while choosing to receive no/ lesser securities premium. Accordingly, the Hon'ble ITAT took the view that the receipt of securities premium being a capital receipt is not chargeable to tax, and in same breath, it observed that any short collection of securities premium should also be considered as a capital outlay and not allowable as expenditure relying on Eimco K.C.P Ltd Vs CIT 159 CTR 137 (Supreme Court) and CIT Vs. Reinz Talbros Pvt Ltd 252 ITR 637 (Delhi HC). The above views of Hon'ble Delhi ITAT in the case of Ranbaxy (supra) were also followed subsequently by the Hon'ble Hyderabad ITAT in the case of Medha Servo Drivers Limited ITA No 1114n-1yd/2008, the Hon'ble Mumbai Tribunal in the cases of DCIT Vs Blow Plast Limited ITA No 512/Mum/2009; Mahindra & Mahindra Vs DCIT ITA No 8597/Mum/2010; M/s VIP Industries Vs DCIT ITA No 7242/Mum/2008. 30. We have carefully considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that 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 form of issuing shares at a discounted premium is adopted. The said decision has been upheld by the Hon’ble Karnataka High Court in the case of BIOCON Ltd. (supra). Therefore the issue in so far as this Bench of ITAT is concerned is concluded by the decision of the Hon’ble Jurisdictional High Court. Pendency of identical issue before the Hon’ble Supreme Court cannot be the basis not to follow decision of jurisdictional High Court. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. We therefore hold that the claim of the assessee has to be allowed. Grd.No.11 is accordingly allowed. 14.4 Respectfully following the decision of the coordinate bench in the assessee’s own case cited supra, the ground No. 4.1 to 4.4 are allowed. IT(TP)A No.921/Bang/2022 Page 26 of 27 15. In the result, the appeal of assessee is partly allowed for statistical purposes. Order pronounced in court on 19th day of December, 2022 Sd/- Sd/- (George George K) (LAXMI PRASAD SAHU) Judicial Member Accountant Member Bangalore, Dated, 19th December, 2022 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore. IT(TP)A No.921/Bang/2022 Page 27 of 27 1. Date of Dictation .......................................... 2. Date on which the typed draft is placed before the dictating Member ......................... 3. Date on which the approved draft comes to Sr.P.S ................................... 4. Date on which the fair order is placed before the dictating Member .................... 5. Date on which the fair order comes back to the Sr. P.S. ....................... 6. Date of uploading the order on website................................... 7. If not uploaded, furnish the reason for doing so ................................ 8. Date on which the file goes to the Bench Clerk ....................... 9. Date on which order goes for Xerox & endorsement.......................................... 10. Date on which the file goes to the Head Clerk ......................... 11. The date on which the file goes to the Assistant Registrar for signature on the order ..................................... 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ............................... 13. Date of Despatch of Order. .....................................................