TaxTMI 
TaxTMI 
TaxTMI 
2022 (11) TMI 1050
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....ing the decision of the jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.), and Bangalore Tribunal in the case of Northern Operating Services Private Limited [IT(TP)A No.759/Bang/2017] and Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. 1.3. The NFAC and Honorable DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense. Whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the Appellant, which is wholly and exclusively used for the purpose of business in India. 1.4. The NFAC and Honorable DRP have erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees. 1.5. The NFAC and Honorable DRP have erred in law and on facts, in disregarding the sample debit note / invoices, full employee listing, sample Form 16 copies, submitted during the DRP proceedings by the Appellant. 1.6. The NFAC and Honorable DRP have erre....
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....ovisions of India- USA Double Taxation Avoidance Agreement. The NFAC has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and same is also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company thereby resulting in double taxation of same amount. 1.15. The NFAC has erred in law and on facts by contradicting its own statement by stating that in one hand there is an element of income included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand the learned AO states that the said expenditure is notional/fictitious in nature. 2. Claim towards payment of leave encashment of INR 4,39,31,243 2.1. The NFAC and DRP have erred in law and on facts, in not granting deduction in respect of amount paid towards leave encashment of INR 4,39,31,243 during the AY 2017-18 under the provision of section 43B(f) of the Act after denial of Appellant's claim of provision for leave encashment on accrual basis for AY 2011-12, AY 2012-13 and AY 2013-14. 2.2. The NFAC and DRP have erred in....
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....us adjustments." 2. In Ground Nos.1.1 & 1.9 the assessee has raised following grounds:- "1.1 The NFAC and Honorable DRP have erred in law and on facts, in disallowing the expenditure on ESOP of INR 41,93,89,636 under section 37 of the Act without appreciating the submissions furnished by the Appellant. 1.9 The NFAC has erred in law and on facts by disregarding that the ESOP expenditure is liable to withholding tax under section 192 of the Act as 'perquisite' in the hands of the employees, and appropriate taxes were deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the honorable AO and DRP." 2.1 The Ld. A.R. submitted that during the assessment proceedings for the subject AY 2016-17, the Learned AO had sought certain details in respect of Employee Stock Option Plan ("ESOP") cross-charges incurred by the Company, based on the disclosures made in the financial statements. During the proceedings, the AO had specifically sought responses to following questions: "A. Expenses incurred on remittance made to non-residents and whether section 195 of the Act, has been complied with? B. In respect of ESOP cross-charges incurred by th....
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.... to the employees to purchase defined number of shares at concessional price by way of exercising the options. The difference between the purchase price and market price of shares is cross-charged by the Ultimate holding Company to HPISO. * In this regard, Ld. A.R. has referred to copy of the cost reimbursement agreement entered by the Company with the Ultimate Holding Company. Para 2.3(b) of the agreement provides that the said expenses shall be that of HPISO as the same is incurred in respect of shares granted to the employees of HPISO. Accordingly, the same is considered as expenses relating to HPISO's employees and debited to profit and loss account of HPISO. Further, such cross charges are considered as a part of salary income of the concerned employees of HPISO, based on perquisite valuation rules and accordingly taxed in their hands. * The stock options vest to employees and become exercisable according to the vesting schedule. * Illustration/Mechanism Particulars Refer Amount Market Price A 30 Exercise Price/Purchase price for the employee B 20 No of shares allotted C 1500 ESOP expenses cross-charged to HPISO 15,000 [1500*(30-20)] He submitt....
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....d. A.R submitted that as explained in the earlier paragraphs, the shares pertaining to Ultimate Holding Company are granted to eligible employees of HPISO under the above ESOP schemes. In this regard, Ld. A.R. submitted the following- * The ESOP schemes are managed and administered by the Ultimate Holding Company for all the employees across HPE group entities. * Employees of the Company are eligible to participate in these ESOP schemes, and accordingly, shares are granted based on their performance and certain other parameters. * HPISO recommends the list of eligible employees to the ESOP Committee, based on employee performance and the other parameters. * Ultimate Holding Company's responsibility is limited to grant of these shares to employees of HPISO as the shares are listed in stock exchange in USA. HPISO will handle all the paperwork, collection of options, providing eligible list of employees with number of shares to be granted, perquisite computation for the employees, TDS computation on perquisite and remittance thereof, etc. as the actual beneficiary of such shares are the employees of HPISO. 2.11 In connection with the above, Ld. A.R. submitted that the dif....
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....or deduction under section 37 of the Act. 2.16 These expenses are nothing but compensation paid to employees of HPISO and accordingly, taxed in the hands of employees as 'Perquisites'. The disallowance of these expenses under section 37 of the Act would imply the compensation paid to its employees is not allowable under section 37 of the Act. 2.17 Provision of section 37(1) of the Act inter alia provides that "any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, not being in the nature of capital expenditure or personal expenses, shall be eligible for deduction in computation of total income". In the subject case, Ld. A.R. submitted as under: * The ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company's business operations. The scheme is designed primarily to incentivise and for retaining the employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. * Further, the share based compensation under the ESOP scheme is construed both by the employees and the Company as a pa....
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....es cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted." 2.18 In addition to the above, he stated that various Courts have also upheld deductibility of ESOP expenses in the following cases: ING Vysya Bank Ltd. Vs: ACIT [2014] 39 ITR(T) 250 (Bangalore ITAT) Sterlite Technologies Ltd (ITA No.4841/Mum/2013) (Mumbai ITAT) CERA Sanitaryware Ltd (ITA No.2817/Ahd/2011) (Ahmedabad ITAT) Aditya Birla Nuvo Ltd (ITA No.3178/M/2012) (Mumbai ITAT) − HDFC Bank Ltd (ITA No.374/Mum/2012) (Mumbai ITAT) − Inox Leisure Ltd (ITA Nos.374 & 523/AHD/2012) (Ahmedabad ITAT) − Korn Ferry International Pvt Ltd (ITAs No.5152/Mum/2012) (Mumbai ITAT) Sandvik Asia Pvt Ltd (ITA Nos.1841 & 1842/PN/2012) (Pune ITAT) Religare Commodities Limited (ITA No.2283/Del/2013 and ITA No.3634/Del/2014)(Delhi ITAT) − DCIT vs Kotak Mahindra (IT APPEAL NO. 698 (MUM.) OF 2016)(Mumbai ITAT) − CIT v. Lemon Tree Hotels Ltd. [IT Appeal No. 107 of 2015, dated 18-8-2015] − CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 ....
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....penditure incurred for the employees and directly affects the performance of employees, which in-turn is critical for the Company's business and its long-term growth. Accordingly, we wish to submit that the expenditure incurred is deductible under section 37(1) of the Act. 2.28 While the learned AO failed to evaluate the facts of the case and made an unwarranted disallowance by wrongful application of section 37(1) of the Act. The learned AO had also erred in stating that the subject cross-charges were subject to withholding under Section 195 of the Act. In the paragraphs below, the Company submitted its contention against the application of section 195 of the Act. Provisions of section 195 of the Act shall not apply 2.29 At the outset, Ld. A.R. reiterated that the Company has deducted appropriate TDS under section 192 of the Act in respect of share based compensation under ESOP schemes, as 'perquisites' under section 17 of the Act. Accordingly, it is submitted that the ESOP cross charges are subject to TDS provisions under section 192 of the Act and the same is in accordance with the Circular No. 17/2014 issued by the Central Board of Direct taxes for computation of....
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....ome Tax vs Nova Technocast (P.) Ltd [2018] 94 taxmann.com 322 (Gujarat HC) − Commissioner of Income-tax vs Prism Cement Unit [2015] 61 taxmann.com 273 (Madhya Pradesh HC) − Commissioner of Income-tax -IV vs Himalya International Ltd. [2014] 51 taxmann.com 213 (Delhi HC) − Indo Overseas Films vs Income Tax Officer, International Taxation [2017] 81 taxmann.com 378 (Chennai - Trib.) 2.32 While the AO has considered the decision of GE India Technology Cen.(P.). Ltd in the DAO but without examining the facts of the case, has proceeded to conclude that ESOP cross charge is in the nature of income and are taxable under the Act. 2.33 The Ld. A.R. stated that the learned AO has neither examined nor has given any factual finding as to how the element of income is embedded in the reimbursement of ESOP cross charges. The AO has failed to take cognizance of the fact that the reimbursements are made on cost-to-cost basis. The AO has also made references to various other provisions of the Act without analyzing whether the ESOP cross-charges includes any income element, which is taxable under the Act. 2.34 Further, the case laws relied upon by the Learned AO are very dif....
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....held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares....
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....rice at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not t....
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....a of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction." 4.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 dated 27.09.2022 has held as under:- "20. We have heard rival submissions and perused the material on record. In assessee's group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee's group case, reads as follows:- "20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for considerat ion before the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was ....
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....nd Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible." 21. In view of the above judgement of Hon'ble Karnataka High Court in the case of Biocon Ltd., we are in agreement with the contention of assessee's counsel in principle on this issue. However, we make it clear that the AO has to verify whether the said amount has been subject to TDS in the assessment year under consideration u/s 192/195 of the Act as argued by the Ld. A.R. before us. Accordingly, this issue is remitted to AO for fresh consideration in the light of above." 21. The assessee has raised grounds with regard to the issue that the assessee is not liable for TDS u/s 195 of the I.T.Act (refer grounds 2.9 to 2.15). We are of the view that these grounds need not be adjudicated, since, on perusal of the final assessment, it is clear that the disallowance of ESOP expenses has made under the provisions o....
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....ng to consider the claim basis the decision of Supreme Court in the case of Exide Industries as referred above. The remand proceedings Is currently pending before the Jurisdictional assessing officer. * For AY 2012-13, the company has opted to close the pending appeal under the Vivad se Vishwas Act, 2020 and has accordingly filed Its Form 1, Form 2 and Forma for the same. The company is currently awaiting the receipt of Form 5. * For AY 2013-14. the company has filed an appeal before the ITAT on 21.12.2017. which Is pending for its pronouncement. 6.1 In this regard, the allowability of certain payments on actual basis u/s 43B depends from the payment of such sums in the previous year in which such sum Is actually paid. Here the previous year means the year preceding to the relevant assessment year i.e., in this case for the A.Y. 2011-12, 2012-13 and 2013-14 the previous years would be 2010-11, 2011-12 and 2012-13. In other words, the assessee in order to claim the deduction of leave encashment, the amounts should have been paid in the previous year's AY 2011-12, 2012-13 and AY 2013-14 to claim deduction for the AYs 2011-12, 2012-13 and 2013-14. Alternatively, as per the provis....
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....ws: "We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax if section 43B(f) is on the statute book but as the same time it would be entitled to make a claim in its returns." 6.4 Thus, even as per the interim order the section 43B(f) was deemed to be on the statute book. The tax payers should have made the payments as per the section and claimed the same on payment basis as the Hon'ble Apex Court has not stayed the operations of the section. 6.5 The AO is therefore justified in not allowing any claim that was not claimed in return of income. 7. The Ld. D.R. relied on the order of Ld. DRP. 8. We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before this Tribunal in ITA No.3379/Bang/2018 dated 23.8.2021 in the case of M/s. Global e-Business Operations (P) Ltd., wherein held as under:- "20. As far as ground No.15 is concerned, the facts are that during the Financial Year ("FY") 2013-14 the assessee had made payment towards leave encashment of INR 4,50,79,000 and the same was disclosed as part of Clause 26 of Tax Audit Report ("TAR") filed in Form 3CD for the said....