TaxTMI 
TaxTMI 
2023 (4) TMI 793
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....2) was duly served on the assessee. Since the assessee had international transactions with its AE, a reference was made to the TPO to arrive at the arm's length price (ALP) of the international transactions. The TPO arrived at a TP adjustment of Rs.36,79,45,675. The AO passed a draft assessment order and besides the TP adjustment, the AO made an adjustment towards Employee Stock Option Plan [ESOP] for an amount of Rs.1,41,47,125. Aggrieved, the assessee raised objections before the DRP whereby the TP adjustment was reduced to Rs.21,29,68,370 and the ESOP disallowance was sustained. Accordingly, the AO passed the final assessment order against which the assessee is in appeal before the Tribunal. 3. The assessee vide letter dated 3.1.2023 withdrew the grounds relating to TP adjustment pursuant to Mutual Agreement Procedure (MAP) Resolution acceptance by the Competent Authority, copies of which are placed on record. Accordingly, grounds No.1 to 20 raised with regard to TP adjustment are dismissed as withdrawn. Disallowance of ESOP expenses 4. The assessee is contending the disallowance of ESOP expenses through ground Nos.21 to 27 which read as follows:- "Erroneous di....
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.... option ("ESOP") scheme or the restricted stock unit ("RSU") scheme. Under the ESOP scheme, stock options on equity shares of the ultimate holding company i.e., NT Corporation were granted to the employees and Directors of the ultimate holding company, its subsidiaries and affiliates. The equity shares are granted directly by the ultimate holding company to the employee. Accordingly, employees are eligible to participate in the scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The ESOP expenses represents the discount offered to Assessee's employees on issue of shares of its ultimate holding company i.e., NT Corporation, being the difference between the fair market value of shares on the date of grant and the exercise price. The said expense was initially incurred by NT Corporation and was subsequently reimbursed by the assessee to NT Corporation. A sample copy of the debit note raised by NT Corporation on the assessee is available at page 159 of paper book. The assessee claimed the amount reimbursed to NT Corporation as an expenditure in the statement of profit and loss as 'Employee Benefit Expe....
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....s as on the charge of perquisite. The assessee cannot claim ESOP as allowable deduction prior to the date of exercise of option by the employee. * The issue of shares was not crystallized till the date on which the employee exercises the option and hence, any expenditure debited during the vesting period remains contingent in nature. * The assessee was choosing to either receive securities premium of a lower amount or no securities premium when compared to that of which it would have received during a normal course of share issue. There was therefore no expenditure that the Assessee was incurring or laying out. * The ESOP expense even if treated as expenditure was a capital expenditure, securities premium being a capital item. * Expenditure on ESOP recharge was a fictitious cost being discount offered on self-generated asset. * Expenditure that was debited was only notional loss to the holding company. * Expense booked by the assessee and reimbursed to the holding company was a colourable devise for shifting profits from India. 8. The ld. AR submitted that ESOP form parts of the employee's compensation as 'perquisite. It was ....
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....expenditure depends on the number of employees accepting the offer. However, the same does not render the expenditure contingent. * It is a settled principle that the deduction is permissible in respect of an ascertained liability. The provision, which is scientifically or actuarially ascertained, is construed as an accrued liability and deduction will be allowed on the same. * Further, what should be certain is the incurring of the liability and it should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. If the said requirements are satisfied the liability is not a contingent one. * The AO has not raised any point of contention against the expense being wholly and exclusively for the purpose of business and has only contended that it is notional in nature and also that it is on capital account. 9. In view of the above, the ld. AR submitted that ESOP expenditure is an ascertained liability and accordingly, the same should be allowed under section 37 of the Act. 10. The ld. DR relied on the orders of lower authorities. 11. We heard the rival submissions and perused the material on r....
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.... affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure 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 incu....
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....iate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the SUNIL Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture Services (P.) Ltd. (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee's case, as the assessee had on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy o....