TMI Blog2016 (1) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... the incurrence of such expenditure and also show that the expenditure was not claimed twice, i.e., both by the assessee as well as by its holding company. Disallowance of portion of salary paid to deputed employees - assessee explained that cost of all the employees which were deputed to serve the assessee were either booked under "8036" or under "Voith" and that debit notes raised by the assessee combined the expenses towards employees having either of the two codes- Held that:- We find considerable force in the submissions of the assessee. In fact, the Commissioner of Income Tax (Appeals) initially agreed to the extent where the payments made to the deputed employees where the cost centre is shown as "voith" is to be allowed. The question now is whether cost centre "voith" and "8036" are one and the same or not. For this limited purpose of examining as to whether "voith" and "8036" are one and the same, we remit this issue to the file of the Assessing Officer to find out whether these two cost centres are one and the same and if they are one and the same, no disallowance towards reimbursement by the company to the parent company on account of deputed employees shall be made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and hence allowable under section 37(1) of the Act. 3. Brief facts are that assessee is a subsidiary of L T Ltd. During this assessment year, the parent company had deputed 13 of its employees to the assessee company and deputed employees were working for the assessee company. The cost of the employees have to be reimbursed by the assessee to the parent company. During the assessment year under consideration, the parent company has allotted eshares to the deputed employees of the assessee company under stock option scheme. The Assessing Officer disallowed the amount of ₹ 35,28,333/- being ESOP charges on the ground that assessee has not allotted the shares to its deputed employees and the expenditure claimed pertaining to L T Ltd. and it is a notional expenditure. On appeal, the Commissioner of Income Tax (Appeals) sustained the disallowance accepting the view of the Assessing Officer. 4. At the outset, counsel for the assessee submits that an identical issue came up for consideration before the Bangalore bench of the Tribunal in the case of L T Valdel Engineering P.Ltd. in ITA No.506 to 508 and 518 to 520/Bang/2014 dated 29.06.2015 which is a subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench by order dated 29.06.2015 considering the submissions of both the parties and evidences on record held as under:- 27. Vide its grounds 5 and 6 for A. Y. 2008-09 and grounds 6 and 7 for A. Ys. 2009-10 and 2010-00 assessee assails disallowance of debit notes raised by its parent company for defraying the ESOP charges of employees deputed by it. Amount disallowed was of ₹ 2,70,99,347/- for A. Y.2008-09 ₹ 5,27,68,682/- for A. Y. 2009-10 and ₹ 2,48,75,779/- for A. Y. 2010-11. 28. Facts apropos are that assessee had debited the above amounts under the head 'professional charges. Assessee was a subsidiary of L T Ltd which had deputed certain employees of it to the assessee. AO required from the assessee details of the payments made by it to the employeessent by L T Ltd, on deputation. In so far as the amounts paid to these employees in relation to allotment of shares under ESOP scheme, the AO was of the opinion that assessee had no such contractual obligation and assessee was unable to provide any contract between it and its holding company, for supporting such payments. Though the assessee claimed that payments were effected based on debit notes r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments effected by the assessee to L T Ltd, its holding company were based on debit notes placed at paper book pages 111 to 123. As per the Ld. AR assessee was obliged to reimburse the claims made by L T since the employees debuted by L T were working for the ssessee. Assessee was supposed to reimburse the holding company on cost to cost basis. It had produced a letter from L T Ltd, placed at page124 which would show that the payments were reimbursement of cost incurred by L T Ltd. As per the Ld. AR, L T Ltd, had shown such receipts from the assessee as a part of its income. Discount in the value of shares under an ESOP scheme was held to be allowable by the Special Bench in the case of Biocon Ltd, (supra), over the period of vesting. When the employees were being used by the assessee for its own business, the benefit of the ESOP which would have otherwise been that of the holding company was actually enjoyed by the assessee. According to him, nature of such expenditure was not doubted, but a disallowance was made on an erroneous reasoning that it was a capital outgo. 32. Per contra, Ld. DR strongly supporting the order of CIT (A) submitted that on mere debit notes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No doubt before the CIT (A), it had produced a letter dt 13.12.2012 from L T Ltd, which stated as under : To whomsoever It may Concern This is to confirm that Larsen Toubro Limited has deputed its employees to L T - Valdel Engineering Limited on cost- recovery basis. The amortized ESOP costs of such employees are being recovered on a quarterly basis. For the Financial Year 2007-08 an amount of ₹ 29,397,155/- has been recovered and the same has been treated as Other income in the books of Larsen Toubro Limited and has also been offered to tax. For Larsen Toubro Limited Sd/- Arun Kirtania Deputy General Manager Absence of a written contract by itself might not be fatal to the claim of an expenditure especially when such expenditure is based on an understanding between a holding company and a subsidiary company,but nevertheless, it is the duty of the assessee to show that what has been reimbursed as amortised ESOP cost by its holding company were actually charged by such holding company in its P L account as expenditure and the reimbursements made by the assessee were shown as a part of its income. Assessee has to demonstrate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this amount ₹ 1,10,31,518/- was incurred towards deputed employees and remaining amount of ₹ 1,28,07,828/- was incurred towards assessee's own employees. The Assessing Officer disallowed ₹ 1,10,31,518/- by erroneously assuming that ₹ 1,28,07,828/- represented total salary cost paid towards both deputed as well as own employees of the assessee and expenditure to the extent of ₹ 1,10,31,518/- was inflated through invoices. The Commissioner of Income Tax (Appeals) in his order accepted the fact that amount paid to L T of ₹ 1,10,31,518/- as salary of deputed employees is over and above ₹ 1,28,07,828/- which was paid towards salary of own employees of the assessee and that it was not an inflated claim of expenditure. However, having said that the Commissioner of Income Tax (Appeals) held that invoices bearing cost centre Voith should only be allowed and balance invoices bearing cost centre 8036 did not pertain to assessee's business and hence should be disallowed. While doing so, the Commissioner of Income Tax (Appeals) disregarded letter dated 3rd February 2014 signed by Mr. UD Patil, Manager Accounts of L T issued on the letterhead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine whether the cost centre Voith and also 8036 are one and the same and in which case expenditure has to be allowed, the Departmental Representative has no objection for verification. 12. Heard both sides. Perused orders of lower authorities. On hearing both the parties, we find considerable force in the submissions of the assessee. In fact, the Commissioner of Income Tax (Appeals) initially agreed to the extent where the payments made to the deputed employees where the cost centre is shown as voith is to be allowed. The question now is whether cost centre voith and 8036 are one and the same or not. For this limited purpose of examining as to whether voith and 8036 are one and the same, we remit this issue to the file of the Assessing Officer to find out whether these two cost centres are one and the same and if they are one and the same, no disallowance towards reimbursement by the company to the parent company on account of deputed employees shall be made. The Assessing Officer may call for details and decide the issue accordingly after providing adequate opportunity of being heard to the assessee. 13. The last issue in the appeal of the assessee is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en given for invoking the provisions of section 14A of the Act by the Assessing Officer. 18. The Hon'ble Supreme Court in the case of CIT Vs. Walfort Share Stock Brokers P. Ltd. (326 ITR 1) held as under:- .....For attracting Section 14A there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked. 19. The Punjab Haryana High Court in the case of CIT Vs. Hero Cycles Ltd.(supra) held as under:- The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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