ESOP cross-charge treated as revenue expenditure, with employee compensation cost held allowable under business expenditure principles.

ESOP cross-charge incurred by an Indian entity for shares granted to employees by a foreign parent was treated as employee compensation cost incurred to secure and retain services during the vesting period, and was held allowable as revenue expenditure under section 37(1). The binding jurisdictional precedent was applied to hold that the discount or cross-charge is expenditure for business purposes and that the liability is ascertained rather than contingent. The fact that the parent issued the shares did not change the character of the payment in the Indian entity's hands, and the pendency of a challenge before the Supreme Court did not displace the jurisdictional High Court ruling, so the disallowance was deleted.

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Issues: (i) Whether the ESOP cross-charge incurred by the Indian entity for shares granted to its employees by the foreign parent company was allowable as a revenue expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The expenditure was treated as employee compensation cost incurred to secure and retain employee services during the vesting period. The binding jurisdictional precedent held that ESOP discount/cross-charge constitutes expenditure for business purposes and that such liability is ascertained rather than contingent. The fact that the parent company issued the shares did not alter the character of the payment in the hands of the Indian entity, and the coordinate bench decisions followed the same view. The pendency of challenge before the Supreme Court did not displace the binding force of the jurisdictional High Court ruling.

Conclusion: The ESOP cross-charge was allowable as revenue expenditure, and the disallowance was deleted in favour of the assessee.

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