TMI Blog2013 (11) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... undararajan, Jt. CIT(DR) ORDER:- PER : N V Vasudevan This appeal by the assessee is against the order dated 03.10.2011 of the CIT(Appeals)-III, Bangalore relating to assessment year 2006-07. 2. In this appeal, the only grievance of the assessee is against the action of the revenue authorities in disallowing the claim of the assessee for deduction of sum of Rs.1,51,91,003 as expenditure incurred in providing shares of Novo Nordisk A/S Denmark under the Novo Nordisk India Private Limited Employee Stock Purchase Scheme, 2005. ( hereinafter referred to as ESOP ). The further grievance of the assessee is with regard to charging of interest u/s. 234D of the Act. 3. We shall first take up the grievance of the assessee with regard to the disallowance of expenditure incurred on providing shares under the ESOP. The facts necessary for adjudication of the aforesaid ground are as follows. 4. The assessee (NNIPL) is a wholly owned subsidiary of Novo Nordisk A/S, Denmark ( NNAS ) and is a private limited company incorporated under the Companies Act, 1956, having its registered office in Bangalore. It is primarily engaged in the marketing and distribution of healthcare products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain terms and conditions set out in the scheme. A copy of the ESOP is at page-28 to 31 of the Assessee s paper book. For the Assessment Year 2006-07, the assessee filed its return of income on November 29, 2006, reporting an income of Rs 58,399,200. During the FY 2005-06, eligible employees of assessee (NNIPL) were given the option of purchasing shares of its parent company NNAS under the NNAS Global Share Programme, 2005 ( the Plan ). In this regard, 231 employees of the company had applied for purchase of 12,931 shares at the price of DKK 150 per share. Further, as per the Plan, the difference between the purchase price of the shares and the average market price of the shares during the purchase offer period (i.e., DKK 313.39) amounting to DKK 163.39 per share was recharged by NNAS to NNIPL. The Plan was conceptualised with a view to encouraging stock ownership among NNIPL s employees, to motivate and encourage employees to render services which would contribute to the continued growth and success of the company. Accordingly, since NNIPL has actually incurred the expenses during the subject financial year, the entire amount of ESOP recharge cost amounting to DKK 2,112,796 (Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital building of the parent company and therefore there was no expenditure incurred by the assessee in the regular course of its business. On the reliance placed by the assessee on CBDT Circular No.9 of 2007, the AO held that FBT was only taxed from the A.Y. 2007-08 and therefore the Circular referred to by the assessee would be irrelevant for the A.Y. 2006-07. The AO also observed that the shares of NNAS were listed in Copenhagen Stock Exchange, Denmark and not in any Indian Stock Exchange and therefore SEBI guidelines were not applicable to the transactions. The AO distinguished the decision relied on by the assessee in the case of SSI Ltd. (supra) by observing that SSI was a listed company in Indian Stock Exchange and therefore as per SEBI Guidelines, the expenses were debited to the P L account. Further, the AO observed that the employees were free to transfer their shares whenever they liked without any lock-in period. The AO thus distinguished the decision relied upon by the assessee. The AO accordingly disallowed the claim of the assessee for deduction on account of ESOP expenses. 9. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference in price of the shares because a legitimate liability of the parent company would not be expenditure laid out wholly and exclusively for the purposes of the business of the Assessee. d) Even if for argument s sake the expenditure is considered as a business expenditure, 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. e) SEBI guidelines are not applicable because the shares were not issued under any ESOP recognized by SEBI. 11. For the sake of ready reference the observations of the CIT(A) are also reproduced: 5.4. Thus, the basic issue that is to be considered in this appeal is with regard to the business expediency of the expenditure, ie. its allowability u/s 37(1) of the Act. On this count, I find that the following are the relevant facts of the matter: a) the appellant and its foreign Parent (NNAS) claim to have offered the ESOPs to encourage stock ownership among the appellant s employees and to motivate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istrative, internal arrangement. However, the parent company perhaps would not be entitled to deduction of such discount as it would fall clearly in the realm of capital expenditure since its own share capital base is involved. This being the case, I am constrained to view this arrangement as a clever-mechanism to pass on the liability to the affiliate in India (the appellant) who would make the tax deduction claim as an employee expense. The International Memorandum reveals as much. The intention for routing this liability to the appellant is very clear from that document to be to facilitate the tax deduction claim of the affiliate. In this view, what is actually happening is that the capital expense of the parent company at Denmark is being cloaked in the garb of the revenue expense claim of the affiliate in India. In these circumstances, the point to be considered is whether such a reimbursement made to the parent qualifies to be taken as business expenditure at all for the purpose of Sec 37(1) of the Act. In terms of business expediency, I am not convinced that cushioning a legitimate liability of the parent company (a liability which it has voluntarily raised) due to eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard the submissions of the ld. counsel for the assessee and the ld. DR. 13. The ld. counsel for the assessee brought to our notice that the facts of the assessee s case were identical to the facts as it prevailed in the case of DCIT v. Accenture Services Pvt. Ltd., ITA 4540/Mum/2008 for the A.Y. 2002-03, order dated 23.3.2010. In the aforesaid case, the Tribunal considered an identical ESOP whereby the Indian company issued shares of its foreign parent company and claimed the difference of the issue price and the fair market value as an ESOP cost. The Tribunal upheld the claim of the assessee. The ld. counsel further brought to our notice that the CIT(Appeals) in para 5.7 of his order after making a reference to the decision of the Tribunal in the case of Accenture (supra), held that in that case, the shares in that case were issued to the employees at the behest of the Indian affiliate, whereas in the instant case of the assessee, there is nothing to show that the assessee took initiative to reward its employees with an ESOP rather it was the foreign parent company who took the initiative to issue shares to employees of its affiliates in India. It was pointed out that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the aforesaid guidelines and filed the ESOP scheme with the CCIT as early as 05.12.2005. The ld. counsel drew our attention to the observations of the CIT(Appeals) in para 5.6 of his order, whereby the CIT(A) has observed that the arrangement by which the assessee issued the shares at a discount to its employees of the parent company under an ESOP and paid the difference between the issue price and the fair market value of the shares as reimbursement to the parent company was a mechanism to pass on the liability to the Indian company only to enable the Indian company to avail of the tax deduction under the Act. It was his submission that no such inference whatsoever had been drawn by the CCIT, pursuant to the assessee filing the required details of ESOP. With regard to the observations of the CIT(Appeals) that capital expenditure of the parent company was being cloaked in the garb of revenue expenditure of the affiliate in India, it was pointed out that there was an actual cash outflow from the assessee to the parent company and that there was no arrangement to pass on the capital expenses of the parent company as revenue expenses of the affiliate in India. The observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 incurred for the purpose of business of the assessee. 20. We fail to see any ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the employees of the Assessee at the behest of the 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 (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 of rewarding employees of affiliates with its shares being given at a discount and that policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP was at the beh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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