ITAT Chennai Allows ESOP Deduction and Deletes TP Adjustment on AE Receivables for Debt-Free Assessee

Background of the Appeal

Trimble Information Technologies India Pvt. Ltd. Vs ITO came up before the ITAT Chennai in IT(TP)A No.50/CHNY/2026 relating to Assessment Year 2022-23. The assessee is a wholly owned subsidiary of Trimble Inc., USA and is engaged in:

  • Software development
  • Application services
  • Internet services
  • IT-enabled services

These services are primarily rendered to its holding company and other group entities abroad.

For AY 2022-23, the assessee filed its return of income on 22.11.2022 declaring total income of Rs.56,29,17,140/-. The case was selected for scrutiny and statutory notices were issued.

Given the existence of international transactions, the Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP). The assessment involved:

  • A minor transfer pricing adjustment on outstanding receivables, and
  • A corporate tax disallowance focused on Employee Stock Option / Employee Stock Purchase Plan (ESOP / ESPP) expenditure claimed under Section 37(1) of the Income Tax Act 1961.

The Dispute Resolution Panel (DRP) granted significant relief on corporate tax additions but sustained the transfer pricing adjustment. The assessee thereafter appealed to the ITAT against the final assessment order passed under Section 144B read with Section 143(3).

Ground No.1 in the appeal was not pressed during hearing and was therefore dismissed as such. The Tribunal then examined two key issues:

  1. Transfer pricing adjustment on notional interest in respect of receivables from Associated Enterprises (AEs); and
  2. Disallowance of ESOP-related expenditure claimed as revenue deduction under Section 37(1).

Issue 1: Notional Interest on Overdue Receivables from AEs

Facts and TPO’s Adjustment

The TPO proposed an upward adjustment of Rs.32,945/- on account of imputed interest on alleged delayed receivables from AEs. In working out this adjustment, the TPO:

  • Considered only a 30-day credit period for AE receivables, and
  • Treated the amount outstanding beyond 30 days as if the assessee had effectively extended interest-free financing to its AEs.

The AO incorporated this transfer pricing adjustment into the draft assessment order.

Assessee’s Contentions Before ITAT

The Authorised Representative (AR) of the assessee advanced the following core submissions:

  • The assessee is a debt-free company; its financial statements show no borrowings outstanding as on 31.03.2022.
  • The contracted credit period with AEs, as per inter-company arrangements, is 90 days, not 30 days.
  • The TPO’s approach of restricting the credit period to 30 days ignores the actual commercial agreement and is not in consonance with judicial precedents.
  • In the assessee’s own case for AY 2020-21 (IT(TP)A No.28/Chny/2024 dated 14.02.2025), a similar adjustment for interest on receivables had already been deleted by the Coordinate Bench on the ground that a debt-free entity should not be saddled with notional interest on trade receivables.

Reliance on Earlier and Coordinate Bench Decisions

The Tribunal reproduced and relied upon the reasoning given in earlier decisions, particularly:

  • M/s. Integra Software Services P. Ltd. — ITA No.736/Chny/2017

  • Temenos India Pvt. Ltd. — IT(TP)A No.32/CHNY/2024

  • Bechtel India Pvt. Ltd. decisions as affirmed by:

    • Delhi High Court — ITA No.379/2016
    • Supreme Court — CC No.4956/2017

From these decisions, key principles emerge:

  1. Revenue cannot rewrite commercial arrangements:

    • Courts and Tribunals have consistently held that the tax authorities cannot dictate how business should be conducted or how much credit period should be allowed, provided transactions are at arm’s length.

  2. Contracted credit period prevails:

    • Where an agreed credit term exists (e.g., 90 or 180 days), receivables within such period cannot automatically be treated as separate financing transactions warranting interest.