TaxTMI 
TaxTMI 
2022 (11) TMI 1050
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.... 1.2. The NFAC and Honorable DRP have erred in law, in disregarding 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, submit....
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....t's case. 1.13. The NFAC has erred in law and on facts, in disregarding that the remittance towards ESOP cross charges is not taxable under the provisions 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 ....
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....between the Taxpayer and the Revenue would not amount to under- reporting of income. c) The NFAC failed to appreciate the fact that the additions made in the assessment are on items, which are sub-judice, and hence, no penalty can be levied on such contentious 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 th....
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....rket. 2.8 A.R's submissions on ESPP scheme :- * The ESPP scheme provide an opportunity for Employees of HPISO to purchase share of Ultimate Holding Company at defined concessional price and thereby to have an additional incentive. * Employees' are eligible to participate in this scheme and option is given 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. ....
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....dered as a part of salary Income for the employees based on perquisite valuation rules. * HPE global ESIP plan document along with sample RSU Grant agreement and Stock Option Award Agreement are enclosed as Annexure 3, Annexure 4A and 4B respectively. Additionally, the cross-reimbursements agreement enclosed as Annexure 2, shall apply in respect of cross charges of expenses by Ultimate Holding Company to HPISO. ESOP schemes - Administration and Management 2.10 Ld. 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 ....
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....es and the reasons for which provisions of TDS under section 195 of the Act are not applicable. ESOP cross-charges are deductible under Section 37(1) of the Act 2.15 Ld. A.R. submitted that as indicated earlier, the ESOP cross-charges represents the actual expenditure incurred by the Company in respect of its employees, who form part of the Company's business and are involved in carrying out day-today business operations/management. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for 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 co....
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....lows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the Id. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. 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." 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) (M....
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....ure is coming into existence. The decisions referred above also emphasize the said fact that expenditure incurred is in the nature of revenue expenditure. 2.26 Accordingly, Ld. A.R. submitted that said expense should be deductible in the hands of the employer. Additionally, Ld. A.R. submitted that the treatment cannot be different in the hands of the employee and in the hands of employer. Share based compensation under ESOP schemes is taxable in the hands of employees as "perquisite" under Salary income and TDS provision are applicable on such payment. 2.27 In view of the above, he submitted that the incurrence of expenditure towards ESOP for employees is a clear and explicit expenditure 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-charg....
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....on of tax in respect of "any amount" referred to in the specified provisions........ ......The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225 (SC) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the Income-tax Act." 2.31 The above view has also been upheld by various other courts - − Principal Commissioner of Income 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 co....
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.... 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 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 emp....
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.... 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 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 reg....
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....ich 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 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 deduc....
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....ing the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and 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 r....
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....ee has raised an additional ground of claim of deduction on payment towards leave encashment of INR 4.39,31,243. The assessee also relied on the decision of Calcutta High Court in case of Exide Industries v. Union of India [20071 (164 taxman 91. However, the claim of accrual for leave encashment for above years was disallowed during assessment proceedings which were appealed by the company. Meanwhile, the Hon'ble Supreme Court vide order dated 24.04.2020 reversing the decision of Calcutta High Court held that leave encashment claim has to be made in accordance with the provisions of section 430 on actual payment basis and not an accrual basis. However, the claim of accrual for leave encashment for above years was disallowed during assessment proceedings which has been appealed by the company. A summary or the appeal proceedings is as under : * For AY 2011-12, Tribunal has remanded the proceedings to AO directing 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 pendi....
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....d no merit in the objection raised. 6.2 The Apex Court upholding the constitutional validity of sec. 43B (f) reversed the judgment of the Calcutta HC in Exide Industries Ltd. The Hon'ble Court remarked that 'the broad objective of enacting Section 43B concerning specified deductions referred to therein was to protect larger public interest primarily of revenue including welfare of the employees and Clause (f) fit into that scheme and shared sufficient nexus with the broad objective?' Hence, the intention of the legislature is very clear that the leave encashment not paid during the relevant previous year shall not be allowable. Even the assessee makes payment in subsequent years it defeats the purpose and intent of the provisions of the section 43B (f) of the Act. 6.3 At this juncture, it is appropriate to note the observations made in the Interim order passed by Hon'ble Apex Court, wherein, it has been held as follows: "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 ....
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....g)/2018 respectively to decide the issue based on the outcome of the Hon'ble Supreme Court's decision in the case of Exide Industries. 22. Subsequently on 24 April 2020, the Hon'ble Supreme Court vide Civil Appeal 3545/2009 overruled the decision of Calcutta High Court in the case of Exide Industries and upheld the constitutional validity for deduction of leave encashment on payment basis under section 43B(f) of the Act. In view of the Hon'ble Supreme Court decision, the deduction on account of provision for leave encashment cannot be sustained. However, the assessee wants to raise additional grounds of appeal for allowing the deduction under section 43B(f) of the Act on the payments made towards leave encashment in AY 2014-15 which has not been claimed in the Return of Income for the year. 23. We have considered the submissions of the parties and are of the view that in the light of the decision of the Hon'ble Supreme Court in the case of Exide Industries (supra), the assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Taking into consideration the circumstances under which the assessee did not claim a s....