TMI Blog2016 (5) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 2,50,887/- is reduced to ₹ 2 lakh, thus, this ground of the assessee is partly allowed. Difference between service tax payable and the service tax paid - disallowance u/s 43B - Held that:- We find that section 43(2) define certain terms relevant to income from profit & gains of business or profession and sub-section (2) speaks about the word “paid” which means actually paid or incurred according to method of accounting. Whereas, section 43B starts with non-obstante clause and permits the deduction of any sum payable by way of tax, duty, cess or fee, by whatever name called, in the year in which the sum is actually paid. Therefore, it can be said that adjustment, if any made, is as good as duty paid and it amounts to actual payment. If the payment has been made/adjusted before due date of filing of return u/s 139(1) of the Act. Identical ratio was laid down by Hon’ble High Court of Bombay in Lloyds Steels India Ltd. vs UOI [2001 (2) TMI 150 - HIGH COURT OF JUDICATURE AT BOMBAY ] holding that utilizing CENVAT credit to pay duty on clearance of final product is as good as making payment by debiting current account. Considering these decisions, the ld. Assessing Officer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, wherein, the tax effect is less than ₹ 10,00,000/-, consequently, the appeals of the Revenue are not maintainable, therefore, the appeals of the Revenue are dismissed as not maintainable. Finally, the appeals of the Revenue are dismissed as not maintainable. 3. Now, we shall take up appeal of the assessee for A.Y. 2004-05 (ITA No.1416/Mum/2008), wherein, first ground raised by the assessee pertains to interest income from debentures/REC bonds, which was treated as income from other sources amounting to ₹ 1,14,03,249/-. The ld. counsel for the assessee did not press this ground to which the ld. DR also has no objection, therefore, this ground of the assessee is dismissed as not pressed. 4. The next ground pertains to addition of ₹ 5,12,333/- being the disallowance of Employees Stock Option Plan (ESOP) expenses. The crux of argument on behalf of the assessee is that the impugned issue is covered by the decision of the Tribunal in the case of DCIT vs Accenture Services Pvt. Ltd. (2010) TIOL 409-ITAT-Mumbai, for which our attention was invited to page 12 (para-19 of the paper book). This factual matrix was not controverted by the ld. DR. 4.1. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on the above, I am of the opinion that such expenses qualify as business expenses of the appellant and the appellant should accordingly be given a deduction on this account. Accordingly I hereby delete the addition made by the AO on ground No. 9. 19. We have heard the learned representatives of the parties and perused the record. The CIT(A) has given a categorical finding after examining the relevant material and submission of the assessee that shares were allotted to its employees and not to the employees of the parent company. The expenses incurred by the assessee to motivate and award its employees for their hard work, which amounts salary cost of the assessee company. The expenditure incurred by the assessee for the purpose of business on employees is allowable expenses. The CIT(A) has examined the entire scheme and found that such expenses are business expenses and should be allowable as deduction. Since there is no contrary material to the findings of the CIT(A), in the light of that we confirm the order of CIT(A) on this issue. 4.2. Our view further find support from the decision in Novo Nordisk India Pvt. Ltd. vs DCIT (ITA No.1275/Bang/2011) order dated 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiring the shares to the Assessee. The Assessee will deposit the purchase price so collected from its employees and make a lump sum payment to NNAS on behalf of the employees. NNAS will allot shares during January-February, 2006. The employees will not be entitled to sell the shares so allotted till the end of 2008. The Memorandum further sets out the tax and accounting treatment in the affiliates and it reads thus: Tax and accounting treatment in the affiliates The total benefit for the employees will if permitted by local rules be recharged from Novo Nordisk A/S to the relevant affiliates using the average market price for the period 3rd October, - 17the October, 2005. The recharge will be made in local (convertible) currencies before the 15th of December, 2005. The recharge is necessary in most countries to obtain a local deduction for tax purposes. In some countries it might be necessary to get an approval from the Central Bank, to be able to pay the recharge. In other countries it is impossible, due to legal restrictions, to accept a recharge. 6. The Assessee framed Novo Nordisk India Private Limited Employee Stock Purchase Scheme, 2005. ( hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Chennai Bench of the Tribunal in the case of SSI Ltd. v. DCIT, 85 TTJ 1049 (Chn), wherein it was held that the discount on ESOP i.e., the difference between the market value of the shares and the price at which the shares have been given to the employees has to be allowed as an expenditure. The assessee also brought to the notice of the AO, CBDT Circular No.9 of 2007 dated 20.12.07 which was issued in relation to fringe benefit tax in which in answer to Question No.16, the Board has clarified that the difference between the market price and exercise price arising on account of shares allotted or transferred under ESOP is allowable as deduction in calculating the taxable income of the employer. 8. The AO, however, did not agree with the submissions made on behalf of the assessee. In this regard, the AO considered NNIPL Employee Stock Purchase Scheme, 2005 in which under clause (4) there was a lock-in period provided during which the shares cannot be sold or transferred by the employee. The lock-in period was three years. The AO was of the view that because of the lock-in period, it was a capital expenditure. The second reason given by the AO for not accepting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks on the discounted issue of ESOPs. 10. The CIT(A) thereafter formulated a question as to whether the claim of the assessee for deduction has to be considered as allowable u/s. 37(1) of the Act. The CIT(A) s reasons may be summed up thus: a) The parent company at Denmark has handed over a benefit out of its own stock holding (no new shares are floated for the ESOP), and in the fitness of normal accounting principles, it should bear the liability for the discount instead of passing on this liability to the appellant by a purely administrative, internal arrangement. 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. b) The arrangement between the Assessee and NNAS was a clevermechanism to pass on the liability of NNAS to the affiliate in India (the assessee) who would make the tax deduction claim as an employee expense. The intention for routing this liability to the assessee is to facilitate the tax deduction claim of the affiliate. A capital expenditure of the parent company at Denmark is being cloaked in the garb of the revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine). 5.5. From the above it can be seen that the ESOP arrangement was meant to achieve several objectives simultaneously. Not only were the employees to be motivated and encouraged, the foreign parent company NNAS was simultaneously covering the losses arising from its largesse by a mechanism of a recharge from the appellant. At the same time, this was done with the express intention of using the recharge as a means to obtain tax deduction for the appellant in its own country of location. 5.6. There could be propped an argument that the ESOPs are actually in the form of an enhanced employee compensation and welfare plan and are incurred to help the appellant carry on his business. To this extent, the expenses incurred by the appellant could qualify as extended expenses on payroll or employee costs or as a staff welfare measure. However, it is the intention behind the arrangement, and the consequential mechanism adopted to work that intention, that weakens the appellant s case drastically. The parent company at Denmark has handed over a benefit out of its own stock holding (no new shares are floated for the ESOP), and in the fitness of normal accounting principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws cited by the appellant, I find that in the Accenture case before 1TAT Mumbai [ITA No. 4540/M/08], there are material differences in the facts of that case and the one before us. In the Accenture case, the shares were clearly stated by the CIT(A) to be allotted to the employees of the affiliate by the parent company at the behest of the affiliate. So in a way, the liability has been invited by the affiliate onto itself. There is no such initiative from the present appellant which is recorded in the Memorandum of Purchase, rather it only mentions that the Board of Directors of the parent company took this decision to allot ESOPs of B shares out of its own stock holding. Hence, the basic anomaly of the appellant s intention in donning this liability which belongs to its parent prevails. However, this issue is in any case distinct in the appellant s circumstances since whatever be the administrative arrangement, the expenditure is not justifiable as it does not pertain to the appellant and any perceived benefits are also not limited to it alone, but are extendable to the entire group headed by the parent company at Denmark, of which the appellant is only a contributing part. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is also benefited by the expenditure, should not come in the way of expenditure being allowed as deduction. 15. Our attention was also drawn to the decision of the Hon ble Karnataka High Court in the case of Mysore Kirloskar Ltd., 166 ITR 836 (Kar), wherein following the Hon ble Supreme Court decision in the case of Sassoon J. David Co. (P) Ltd. (supra), the Hon ble Karnataka High Court held that the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed as deduction u/s. 37(1) of the Act. 16. Our attention was also drawn to the Direct Tax Notification No.323 dated 11.10.2011, which was a notification issued in exercise of powers conferred u/s. 17(2) of the Act. The Central Government in the aforesaid Notification has specified the guidelines which need to be followed when shares are allotted under an ESOP scheme. In clause (6) of the aforesaid guidelines, the Central Govt. has laid down that where shares of a parent company are issued under an ESOP, the company issuing ESOP has to give the required particulars to the Chief Commissioner of Income-tax ( CCIT ) with an Engl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed ₹ 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deduction. 26. In view of the decision on merits, the ground relating to charging of interest u/s. 234D of the Act is only academic. 27. In the result, the appeal of the assessee is allowed. In the present appeal also, the ld. counsel for the assessee claimed that the facts are identical, which were not controverted by the ld. DR. Thus, considering the facts and the aforementioned decision of the Tribunal and also in the absence of any contrary facts brought to our knowledge by either side and more specifically the Revenue, since, the shares were allotted to the employees and the expenses were incurred by the assessee to motivate the employees, therefore, the expenses were incurred for business purposes. It is noted that the Bangalore Bench of the Tribunal in the aforesaid order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vation by the Commissioner of Income Tax (Appeal) that it is true that Assessing Officer has made adhoc disallowance which is not justified. It is necessary to evolve a system or basis for making disallowance u/s 14A . The Commissioner of Income Tax (Appeal) adopted 1.92%, which is to be applied to administrative expenses. We find that in the case of Tata Consulting Engineers Ltd., the expenses were disallowed to 1%, whereas, in Godrez Agrovet Ltd.(ITA No.1629/Mum/2009, ITA No.1613/Mum/2011 and 4897/Mum/2012), the disallowance was made to 2%. Considering the material available on record, we upheld the disallowance to 1.5% of the exempt income, thus, the Assessing Officer is directed accordingly. 6. Now, we shall take up ITA No.861/Mum/2010 for A.Y. 2005-06, wherein, first ground raised by the assessee pertains to interest income from REC bonds, which was treated as income from other sources. This ground was not pressed by the ld. counsel for the assessee, therefore, dismissed as not pressed. 7. The next ground raised by the assessee pertains to disallowance of ₹ 2,50,887/- on account of entertainment expenses. The crux of argument on behalf of the assessee is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee took the plea that the differential amount of ₹ 42,49,957/- is a deemed payment under the service tax credit rules 2002. This explanation of the assessee could not find favour with the Commissioner of Income Tax (Appeal) as he observed that the assessee has wrongly interpreted CENVAT Credit scheme and the claimed deduction cannot be allowed for the deemed payment u/s 43B of the Act, when actual payment has not been made by the assessee. The assessee is in appeal before this Tribunal. The assessee has relied upon certain case laws for its claim. We find that section 43(2) define certain terms relevant to income from profit gains of business or profession and sub-section (2) speaks about the word paid which means actually paid or incurred according to method of accounting. Whereas, section 43B starts with non-obstante clause and permits the deduction of any sum payable by way of tax, duty, cess or fee, by whatever name called, in the year in which the sum is actually paid. Therefore, it can be said that adjustment, if any made, is as good as duty paid and it amounts to actual payment. If the payment has been made/adjusted before due date of filing of return u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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