The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that the Arm’s Length Price of the Employee Stock Option Plan (ESOP) expenses could not be taken as “NIL” for determining transfer pricing.
The assessee, Booking.com India Support & Marketing Services Private Limited, after filing the return of income, had its case selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the assessee had entered into international transactions with its Associated Enterprises (AEs).
Accordingly, a reference was made to the TPO for the determination of the Arm’s-Length Price (ALP) of the international transactions. The TPO passed an order by determining the ALP of the ESOP expenses as ‘Nil’ using the Comparable Uncontrolled Price (CUP) Method. The assessee filed objections before the DRP against the aforesaid transfer pricing adjustment. However, the DRP declined to interfere and rejected the objections. Accordingly, the Assessing Officer passed the Final Assessment Order, making a transfer pricing addition of INR 24,97,737/-.
Aggrieved by the order, the assessee filed an appeal before the tribunal. During the proceedings, the tribunal observed that the Booking.com group’s ultimate holding company, Booking Holdings Inc., had established equity compensation plans, as incentives and rewards to entice employees and executives to contribute to the group’s long-term success.
Furthermore, in the books of accounts, INR 73,71,854 was recorded as having accrued as ESOP expenses in relation to the charge for RSUs, of which INR 47,18,775 corresponded to unvested grant charges. As a result, it was seen that the amount was disallowed in the return of income. Then deduction was claimed for the balance amount of INR 26,53,078/- remitted to the AEs during the relevant previous year.
Moreover, the ESOP expenses so remitted to the AE were debited to the profit and loss account as part of employee benefit expenses and treated as part of operating cost. The ESOP expenditures of INR 26,53,078 were recovered by the assessee as remuneration for services together with a margin of 5% thereon, since the assessee was paid at cost plus a markup of 5%.
It was also found that the TPO determined the ALP of ESOP Expenses at ‘Nil’ without appreciating that the assessee had been invoiced for the cost of ESOP expenses. Hence, the bench concluded that the Assessing Officer and the TPO had failed to appreciate that the expenses for which a deduction has been claimed by the assessee pertain to RSUs granted in 2015 and exercised in the FY 2017-18.
Furthermore, it provided Employee Stock Option Plans (ESOPs) in the form of Restricted Stock Units (RSUs) and Performance Share Units (PSUs) to those eligible under the equity compensation plan for its group entity. After considering the facts submitted and circumstances, the two-member bench of S. Rifaur Rahman (Accountant Member) and Rahul Chaudhary (Judicial Member) held that the ALP of the ESOP Expenses cannot be taken as ‘Nil’.
Ajit Kumar Jain appeared for the assessee and Ajit Pal Singh Daia appeared for the revenue.
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