TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 218
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....necessary for adjudication of the aforesaid ground are as follows. 4. The assessee (NNIPL) is a wholly owned subsidiary of Novo Nordisk A/S, Denmark ("NNAS") and is a private limited company incorporated under the Companies Act, 1956, having its registered office in Bangalore. It is primarily engaged in the marketing and distribution of healthcare products, specifically diabetes care products such as insulin formulations/other insulin products. In carrying on its business activities in India, the assessee sources the products from Indian companies/NNAS and markets/ distributes such products in India through wholesale distributor(s). 5. NNAS the parent company of the Assessee has a scheme called NNAS Global Share Programme, 2005 ("the Plan"). As per the Plan the employees of NNAS were entitled to purchase shares of NNAS at a price less than the market price. The shares of NNAS are listed on the Copenhagen Stock Exchange. By a Board resolution dated 10.8.2005, the Board of Directors of NNAS resolved that the employees of foreign affiliates of NNAS would also be entitled to opt to purchase shares of NNAS under the Plan. A copy of the international information memorandum for purchase....
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....n was conceptualised with a view to encouraging stock ownership among NNIPL's employees, to motivate and encourage employees to render services which would contribute to the continued growth and success of the company. Accordingly, since NNIPL has actually incurred the expenses during the subject financial year, the entire amount of ESOP recharge cost amounting to DKK 2,112,796 (Rs 15,191,003) was recognised as employee cost, and claimed as a deductible expenditure in computing the taxable income of NNIPL for the AY 2006-07. 7. The assessee submitted before the AO that the aforesaid expenditure was revenue expenditure wholly and exclusively laid out or expended for the purpose of business or profession of the assessee and should be allowed as deduction u/s. 37(1) of the Act. The assessee also pointed out that under the guidelines prescribed by SEBI (Employees Stock Option Scheme or Employee Stock Purchase Scheme) Guidelines, 1999, expenditure on stock option has to be treated as a form of employee compensation incurred by the company. The assessee pointed out that it had paid NNAS the difference between the price paid by the employees for acquiring the shares of NNAS and the avera....
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....ther, the AO observed that the employees were free to transfer their shares whenever they liked without any lock-in period. The AO thus distinguished the decision relied upon by the assessee. The AO accordingly disallowed the claim of the assessee for deduction on account of ESOP expenses. 9. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(Appeals). The CIT(A) agreed with the submissions of the assessee that the expenditure in question was not a capital expenditure. The CIT(A) also held that liability was not contingent or unascertained. He noticed the following facts as it transpired from the records:- "5.2 From an examination of the facts of the case, I find that the following facts are relevant t a proper appraisal of the issue: a) The ESOP is issued by the foreign parent of the appellant out of its own share-holding b) The appellant is only a conduit for the issue of the ESOPs by the parent with regard to the paperwork, collection of options, providing data for eligibility etc. No direct liability in the form of shareholding obligation in costs accrues to the appellant in the scheme. c) I....
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....he observations of the CIT(A) are also reproduced: "5.4. Thus, the basic issue that is to be considered in this appeal is with regard to the business expediency of the expenditure, ie. its allowability u/s 37(1) of the Act. On this count, I find that the following are the relevant facts of the matter: a) the appellant and its foreign Parent (NNAS) claim to have offered the ESOPs to encourage stock ownership among the appellant's employees and to motivate and encourage them in their performance. b) NNAS, the foreign parent company, issued the ESOP voluntarily at a discounted value without however shouldering the liability for the same, via the mechanism of a "recharge" of the discount obtained from the appellant. c) The appellant has absorbed a liability not arising out of its own regular business, but only to reimburse its parent company in Denmark for the discount which the latter has offered on its own volition. d) in the "International Memorandum" referred to above from the parent company, it is stated under the heading "Tax and accounting treatment in the affiliates" as follows:  ....
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....duction claim of the affiliate. In this view, what is actually happening is that the capital expense of the parent company at Denmark is being cloaked in the garb of the revenue expense claim of the affiliate in India. In these circumstances, the point to be considered is whether such a "reimbursement" made to the parent qualifies to be taken as business "expenditure" at all for the purpose of Sec 37(1) of the Act. In terms of business expediency, I am not convinced that cushioning a legitimate liability of the parent company (a liability which it has voluntarily raised) due to either tax claim considerations as stated, or possibly to the dictates of the parent (or due to both factors) - qualifies the claim of the appellant as "expenditure" laid out wholly and exclusively for the purposes of the business. Moreover, I find that even if for argument's sake alone, the same is considered as a business expenditure, even so it is clearly a related-party transaction which is liable to be hit by the provisions of Sec 40A(2)(b) since there is no justifiable reason why this payment should have to be absorbed by the appellant in India when the largesse and shares involved are those of its par....
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....ssee. The ld. counsel further brought to our notice that the CIT(Appeals) in para 5.7 of his order after making a reference to the decision of the Tribunal in the case of Accenture (supra), held that in that case, the shares in that case were issued to the employees at the behest of the Indian affiliate, whereas in the instant case of the assessee, there is nothing to show that the assessee took initiative to reward its employees with an ESOP rather it was the foreign parent company who took the initiative to issue shares to employees of its affiliates in India. It was pointed out that this observation of the CIT(A) is factually incorrect, because in the case of Accenture (supra), the shares were issued at the behest of the Indian company and not at the instance of the foreign parent company, as has been wrongly understood by the CIT(A) in para 5.7 of his order. 14. It was further submitted that the observations of the CIT(A) that by issue of ESOP, the foreign parent company at Denmark was benefited will be no ground to disallow a legitimate business expenditure of the Assessee which was employee cost of the Assessee. The ld. counsel for the assessee drew our attention to the deci....
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....tion under the Act. It was his submission that no such inference whatsoever had been drawn by the CCIT, pursuant to the assessee filing the required details of ESOP. With regard to the observations of the CIT(Appeals) that capital expenditure of the parent company was being cloaked in the garb of revenue expenditure of the affiliate in India, it was pointed out that there was an actual cash outflow from the assessee to the parent company and that there was no arrangement to pass on the capital expenses of the parent company as revenue expenses of the affiliate in India. The observations of the CIT(A) in this regard are based on surmises and suspicion. 17. The ld. DR relied upon the orders of the revenue authorities. 18. We have 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 expen....
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....xpenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. 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. 20. We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of ....