2023 (5) TMI 121 - AT - Income Tax

Disallowance of Payment of Employee Stock Option Plan ( ESOP ) expenses - Allowable revenue expenses u/s 37(1) or not? - HELD THAT - On identical facts the Bangalore Bench of the Tribunal in assessee s own case for assessment year 2015-2016 2023 (4) TMI 793 - ITAT BANGALORE had decided the ESOP expenses to be an allowable deduction. The Bangalore Bench of the Tribunal (supra) had followed the Co-ordinate Bench order in the case of Novo Nordisk India P. Ltd. 2013 (11) TMI 218 - ITAT BANGALORE . Thus we hold that the expenditure towards ESOP is an allowable deduction u/s 37 - Decided in favour of assessee.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Disallowance of Employee Stock Option Plan (ESOP) Expenses

Summary:

1. Transfer Pricing Adjustment:
The appellant, a company engaged in business process outsourcing services, filed its return of income for AY 2014-2015. The case was selected for scrutiny and referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of international transactions with its Associate Enterprises (AEs). The TPO proposed a transfer pricing adjustment of Rs. 30,49,62,139, which was incorporated into the draft assessment order (DAO). The Dispute Resolution Panel (DRP) reduced the adjustment to Rs. 19,35,28,445. The appellant later withdrew the grounds relating to the TP adjustment following a Mutual Agreement Procedure (MAP) resolution. Consequently, Grounds 1 to 16 concerning the TP adjustment were dismissed as withdrawn.

2. Disallowance of Employee Stock Option Plan (ESOP) Expenses:
The AO disallowed Rs. 1,07,29,828 claimed as ESOP expenses u/s 37 of the Act, terming it a fictitious cost. The DRP upheld this disallowance, considering the loss on discounted shares as notional and not crystallized. The appellant argued that the ESOP expenses were part of employee compensation and should be allowed as a deduction. The Tribunal noted that the issue was covered in the appellant's favor for AY 2015-2016, where it was decided that ESOP expenses are allowable deductions. The Tribunal followed the coordinate Bench order in Novo Nordisk India P. Ltd. v. DCIT, which held that ESOP expenses are revenue expenditures and should be allowed as deductions under section 37 of the Act. The Tribunal concluded that the expenditure towards ESOP is an allowable deduction u/s 37 of the Act, following the precedent set in the appellant's own case for AY 2015-2016.

Conclusion:
The appeal was partly allowed, with the Tribunal affirming the allowability of ESOP expenses as deductions u/s 37 of the Act. The grounds related to the TP adjustment were dismissed as withdrawn.