TaxTMI 
TaxTMI 
2016 (5) TMI 536
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....ontrovert the factual matrix. 2.1. We have considered the rival submissions and perused the material available on record. In view of the above, it is noted that the tax effect in the present appeals is below prescribed limit of Rs. 10 lakh for filing the appeal before the Tribunal. 2.2. In view of the fact, that the tax effect in the present appeal is below prescribed monetary limit, as contained in CBDT instruction No.21 of 2015, dated 10/12/2015 (F No.279/Misc./142/2007-IT(PT), applicable with retrospective effect, wherein, the Department was advised/directed by the Board not to file appeal in the cases where the tax effect does not exceed the following monetary limit.:- Sl. No. Appeals in Income -tax matters Monetary Limit (in Rs.) 1. Before ITAT 10,00,000/- 2. U/s 260 A before Hon'ble High Court 20,00,000/- 3. Before Hon'ble Supreme Court 25,00,000/- As per the aforesaid instruction/revised monetary limit, the Department is not to file appeal before the Tribunal, wherein, the tax effect is less than Rs. 10,00,000/-, consequently, the appeals of the Revenue are not maintainable, therefore, the appeals of the Revenue are dism....
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....in, motive and award its employees for their hard work and is akin to the salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hardworking employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted. Further, such shares have not been issued out of the share capital of the appellant and hence cannot be said to be a capital expenditure. I have analysed the decision of SSI Ltd. relied on by the appellant and am of the view that the same is applicable to the appellant's case. As argued by the appellant, such expense is a qualified business expenditure and should be allowable in computing the taxable income of the appellant. This aspect has been upheld in various judicial precedents. Based on the above, I am of the opinion that such expenses qualify as business expenses of the appellant and the appellant should accordingly be given a deduction on this acc....
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....ducts. 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 of employees shares in NNAS as given by NNAS is at page 32 to 37 of the Assessee's paper book. The employees of the Assessee who have opted for acquiring shares of NNAS under ESOP have to give their option to purchase on or before 31.10.3005 and pay the money payable for acquiring the shares to the Assessee. The Assessee will deposit the purchase price so collected from its employees and make a lump sum payment to NNAS on behalf o....
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.... 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 average market price of the shares during the purchase offer period and thus the assessee had actually incurred the expenditure and there has been an actual cash outflow from the assessee towards such expenses and that the expenditure was not of notional cost. The assessee relied on the decision of the Chennai Bench of the Tribunal in the case of SSI Ltd. v. DCIT, 85 TTJ 1049 (Chn), wherein it was held that the discount on ESOP i.e., ....
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....missions 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) It is the foreign parent which has imposed the liability for "recharge" of the discounted portion of the ESOP upon the appellant d) The discounted amount is an expenditure not to meet any outside liability but only a "reimbursement "to the parent company for the amount of shortfall in the latter's books on the discounted issue of ESOPs. 10. The CIT(A) thereafter formulated a question as to whether the claim of the as....
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....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: The total benefit for the employees will - if permitted by local rules - be recharged from Novo Nordisk A/S to the relevant affiliates using the average market price for the period 3 October - 17 October 2005. The recharge will be made in local (convertible) currencies before the 15th of December 2005. The recharge is necessary in most countries to obtain a local deduction for tax purposes." (emphasis is mine). 5.5. From the above it can be seen that the ESOP arrangement was meant to....
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.... 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 parent company at Denmark. This parent company is itself a separate taxable entity and could have set off these expenses against its share premium or other relevant capital account, as per normal accounting principles. In this connection, the reliance on SEBI guidelines by the appellant at para 2.2 of his submission dated 22.11.2010 is completely misplaced since the Indian company had not issued shares under the concerned ESOP at all. 5.7. With regard to the case-laws cited by the appellant, I find that in the Accenture case before 1TAT Mumb....
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....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 decision of the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. v. CIT, 118 ITR 261 (SC), wherein the Hon'ble Apex Court took the view that if the assessee incurred any expenditure in the course of its business, even voluntarily and even without necessity, but if it is incurred for promoting the business and to earn profit, deduction u/s. 37(1) of the Act has to be allowed. The Hon'ble Court further held that the fact that somebody other than the assessee is also benefited by the expenditure, should not come in....
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....rent 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 expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at....
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.... 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 a legitimate business expenditure to the Assessee as laid down by the Hon'ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the....
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....hat policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP was at the behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous. 23. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon'ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in th....
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....ii. Godrej Agrovet Ltd. (ITA No.1629/Mum/2009), which was approved in 934/2011 by Hon'ble High Court. 5.1. On the other hand, the ld. DR, though defended the addition but did not controvert the assertion of the ld. counsel for the assessee. 5.2. We have considered the rival submissions and perused the material available on record. The ld. Assessing Officer disallowed 10% of the tax free income as incurred for earning exempt income by placing reliance upon CBDT Circular no.621 dated 19/12/1991 and explanation (baa) to section 80HHC to make the disallowance by holding that the manpower and administrative machinery was used by the assessee to earn tax free income and accordingly, made disallowance. On appeal, before the Commissioner of Income Tax (Appeal) (as is evident from para 15 of the impugned order), it was claimed that no direct expenses were attributed to earn exempt income. Reliance was also placed upon the Delhi Bench Tribunal decision in Motor and General Finance Ltd. (90 ITD 449) and Maruti Udyog Ltd. 92 ITD 11 and also the Mumbai Bench of the Tribunal in Gherzi Eastern Ltd. 6562/94. We find that in para 16 of the impugned order, there is observation by the Commissio....
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....sent service tax CENVAT credit availed and utilized by the assessee for payment of service tax liability. It was contended that no service tax is unpaid. The ld. counsel place reliance upon the decision in ACIT vs Kaiser Industries Ltd. (ITA No.555/Del/2010), Lloyds Steel Industries Ltd. vs UOI (2005) 183 ELT 351 (Bom.) and CIT vs Noble and Hewitt (I) Pvt. Ltd. (2007) TIOL 570-Del-IT. On the other hand, the ld. DR, defended the addition and place reliance upon the decision of the Commissioner of Income Tax (Appeal). 8.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, before the Assessing Officer, filed summary of payments of service tax and education tax from April 2005 to March 2006 in its service tax return. The ld. Assessing Officer observed that the assessee has actually paid service tax and education cess tax amounting to Rs. 3,23,30,578/- against the total payable amount of Rs. 3,65,80,525/-, accordingly, he brought to tax the difference of Rs. 42,49,947/- u/s 43B of the Act. On appeal, before the Commissioner of Income Tax (Appeal), the assessee took the plea that the differential amount o....