2016 (1) TMI 803 - AT - Income Tax

Appeal partly allowed with rejection of certain grounds while acceptance of others

M/s. Tata Consultancy Services Ltd. Versus Addl. Commr. of Income-tax, Range 2 (3), Mumbai.

The appeal was partly allowed. Grounds No.1, 2, 3, and 4(b) were rejected. Grounds No.4(a), 5, and 6(a) were accepted. Ground No.6(b) was not addressed. - ... Employees’ stock option scheme benefit taxability - AO observed that expenditure is directly related to the expansion of the capital base of the company and that therefore, the expenditure incurred on issuing shares to increase the capital by the company would not be allowable as revenue expenditure. - Held that:- The Special Bench in Biocon Limited [2013 (8) TMI 629 - ITAT BANGALORE] has held that the discount on premium under one of the modes, compensating employees for their services is a part of their remuneration and as such, this discount cannot be held to be either a short capital receipt, or a capital expenditure. No decision to the contrary has been placed before us. Besides, the other decisions cited by the assessee are also on similar lines. Therefore, following “Biocon Limited” (supra) and the other case laws cited by the assessee, Ground No.5 is accepted and it is held that the employees’ stock option scheme benefit in question is taxable in the hands of the assessee’s employees as perquisite under section 43(2) of the Act. The payment having been established as salary/employee cost, the same is revenue in nature. This expenditure claimed by the assessee is to be treated as a business expenditure of the assessee - Decided in favour of assessee Set off of loss pertaining to certain STP units, against the taxable business income of the assessee disallowed - Held that:- In “Capgenimi India (P) Limited”, (2011 (5) TMI 509 - ITAT, MUMBAI), a co-ordinate Bench of this Tribunal, through one of us, i.e. the ld. AM, has held that in case of loss of units, eligible for deduction u/s 10A, section 10A is a deduction provision and not an exemption provision after its amendment with effect from the assessment year 2001-02 and that, therefore, the loss from the section 10A unit has to be adjusted against the taxable profits of other units after deduction u/s 10A has been allowed in respect of each eligible unit. The other case laws relied on by the assessee also hold that set off of loss of the eligible unit is allowable against the other taxable income.- Decided in favour of assessee Issues Involved:1. Deduction of taxes paid to the Federal Government overseas under section 40(a)(ii) of the Income Tax Act, 1961.2. Deduction of interest paid for delay in payment of overseas tax under section 40(a)(ii) of the Income Tax Act, 1961.3. Treatment of expenditure on purchase of application software products as capital expenditure.4. Application of Rule 8D read with section 14A of the Income Tax Act, 1961, and allocation of interest expenditure.5. Treatment of expenditure under the Employee Stock Purchase Scheme as capital expenditure.6. Set off of loss pertaining to certain STP units against taxable business income under section 70 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deduction of Taxes Paid to the Federal Government Overseas:The AO disallowed Rs. 216,27,28,117/- representing overseas tax paid, stating these taxes were covered under section 40(a)(ii) of the Income Tax Act. The CIT(A) upheld this disallowance, considering the amended provisions of section 40(a)(ii) as retrospective. The Tribunal referenced a previous decision in the assessee's own case, which was pending appeal in the High Court, but without a stay on the Tribunal's order, the matter stood decided against the assessee. Therefore, Ground No.1 was rejected.2. Deduction of Interest Paid for Delay in Payment of Overseas Tax:The assessee paid Rs. 4,61,683/- as penal interest in the USA for late payment of tax, which the AO disallowed under section 40(a)(ii). The CIT(A) upheld this disallowance. The Tribunal noted that this issue was also decided against the assessee in a previous case. Hence, Ground No.2 was rejected.3. Treatment of Expenditure on Purchase of Application Software Products:The AO treated Rs. 38,59,97,989/- spent on software as capital expenditure, a decision confirmed by the CIT(A) on the grounds that the software was used for more than a year. The assessee accepted the deduction of depreciation to avoid litigation. Thus, Ground No.3 was rejected as infructuous.4. Application of Rule 8D Read with Section 14A:The AO made a disallowance of Rs. 32,24,49,976/- for expenditure incurred to earn exempt income, applying Rule 8D retrospectively. The CIT(A) confirmed this. The Tribunal, referencing the 'Godrej & Boyce Manufacturing Co. Ltd.' case, ruled that Rule 8D is not retrospective and thus not applicable for the year 2005-06. Consequently, the AO was directed to verify and allow the sustained addition of Rs. 17,00,686/- only. Ground No.4(a) was accepted, making Ground No.4(b) infructuous and rejected as such.5. Treatment of Expenditure under the Employee Stock Purchase Scheme:The AO treated Rs. 186.65 crores incurred under the ESPS as capital expenditure, citing Supreme Court rulings in 'Punjab State Industrial Corporation Ltd.' and 'Brook Bond India Ltd.' The CIT(A) upheld this view. However, the Tribunal, referencing the 'Biocon Limited' Special Bench decision, held that the ESPS discount is part of employee remuneration and thus revenue in nature. Therefore, Ground No.5 was accepted.6. Set Off of Loss Pertaining to Certain STP Units:The AO disallowed the set off of Rs. 21,27,69,208/- loss from certain STP units against taxable business income, applying section 14A. The CIT(A) upheld this, treating section 10A as an exemption provision. The Tribunal, referencing 'Hindustan Unilever Ltd.' and other cases, ruled that post-amendment, section 10A is a deduction provision, allowing loss set off against taxable income. Hence, Ground No.6(a) was accepted, making Ground No.6(b) unnecessary to address.Conclusion:The appeal was partly allowed, with Grounds No.1, 2, 3, and 4(b) rejected, and Grounds No.4(a), 5, and 6(a) accepted. Ground No.6(b) was not required to be addressed.