TMI Blog2022 (11) TMI 1050X X X X Extracts X X X X X X X X Extracts X X X X ..... by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act - 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. No basis for the observation that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;the Act' for short]. The assessee has raised following grounds of appeal:- GROUNDS OF APPEAL 1. Erroneous disallowance with respect to expenditure on ESOP under section 37 of the Act INR 41,93,89,636 1.1. The NFAC and Honorable DRP have erred in law and on facts, in disallowing the expenditure on ESOP of INR 41,93,89,636 under section 37 of the Act without appreciating the submissions furnished by the Appellant. 1.2. The NFAC and Honorable DRP have erred in law, in disregarding the decision of the jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.), and Bangalore Tribunal in the case of Northern Operating Services Private Limited [IT(TP)A No.759/Bang/2017] and Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. 1.3. The NFAC and Honorable DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense. Whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the Appellant, which is wholly and exclusively used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 195 of the Act are not applicable to such remittances. 1.12. The NFAC has erred in law and on facts by relying on decision of Danfoss Industries P Ltd (2004) 268 ITR 1 pronounced by the Hon ble Authority for Advance Ruling ( AAR ). The transaction covered by the said decision is very different on facts as compared to that of the Appellant. Hence, the ruling cannot be applied in the Appellant s case. 1.13. The NFAC has erred in law and on facts, in disregarding that the remittance towards ESOP cross charges is not taxable under the provisions of India- USA Double Taxation Avoidance Agreement. The NFAC has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and same is also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company thereby resulting in double taxation of same amount. 1.15. The NFAC has erred in law and on facts by contradicting its own statement by stating that in one hand there is an element of income included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed income instead of considering the returned income thereby levying an excess interest of INR 31,47,067. 4 Penalty proceedings under section 270A of the Act a) The NFAC has erred in initiating penalty proceedings under section 270A of the Act. b) The NFAC failed to appreciate the that a mere difference of opinion between the Taxpayer and the Revenue would not amount to under- reporting of income. c) The NFAC failed to appreciate the fact that the additions made in the assessment are on items, which are sub-judice, and hence, no penalty can be levied on such contentious adjustments. 2. In Ground Nos.1.1 1.9 the assessee has raised following grounds:- 1.1 The NFAC and Honorable DRP have erred in law and on facts, in disallowing the expenditure on ESOP of INR 41,93,89,636 under section 37 of the Act without appreciating the submissions furnished by the Appellant. 1.9 The NFAC has erred in law and on facts by disregarding that the ESOP expenditure is liable to withholding tax under section 192 of the Act as perquisite in the hands of the employees, and appropriate taxes were deducted and remitted by the Appellant, which is evidenced by sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that as explained in the notes to accounts, under the ESOP schemes the employees are eligible to purchase/get the shares of Ultimate Holding Company (through ESPP/ESIP scheme). The shares of ultimate Holding Company are issued under these schemes, as HPISO is not a listed entity and its shares are not traded in open market. 2.8 A.R s submissions on ESPP scheme :- The ESPP scheme provide an opportunity for Employees of HPISO to purchase share of Ultimate Holding Company at defined concessional price and thereby to have an additional incentive. Employees' are eligible to participate in this scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The difference between the purchase price and market price of shares is cross-charged by the Ultimate holding Company to HPISO. In this regard, Ld. A.R. has referred to copy of the cost reimbursement agreement entered by the Company with the Ultimate Holding Company. Para 2.3(b) of the agreement provides that the said expenses shall be that of HPISO as the same is incurred in respect of shares granted to the employees of HPISO. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 32 35 Exercise Price/Purchase price for the employee B - - - No of shares allotted C 500 500 500 ESOP expenses cross-charged to HPISO 15,000 [500*30] 16,000 [500*32] 17,500 [500*35] The cost of such shares granted by the Ultimate Holding Company, to the eligible employees of HPISO under this scheme are cross-charged to HPISO by Ultimate Holding Company. The cross-charged amount is the expense incurred by HPISO and debited to its Profit and Loss account under the head Employee benefit expenses. The ESOP expenses in hands of HPISO is considered as a part of salary Income for the employees based on perquisite valuation rules. HPE global ESIP plan document along with sample RSU Grant agreement and Stock Option Award Agreement are enclosed as Annexure 3, Annexure 4A and 4B respectively. Additionally, the cross-reimbursements agreement enclosed as Annexure 2, shall apply in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Copy of the cost reimbursement agreement (enclosed as Annexure 2); Sample Form 16 evidencing that ESOP considered as taxable perquisite in the hands of the employees and included in their taxable salary and deduction of TDS on the taxable salary including the ESOP perquisite value as granted to the employees ESPP scheme document, ESIP scheme document and sample RSU agreement are enclosed as Annexure 1, Annexure 3 and Annexure 4A respectively. 2.13 From the above, it is evident that the ESOP charges incurred by the Company represents actual expenditure and therefore question of the same being notional in nature, as alleged by the learned AO, does not arise in the subject case. 2.14 Ld. A.R. in the paragraphs below provided detailed submission on the deductibility of ESOP charges and the reasons for which provisions of TDS under section 195 of the Act are not applicable. ESOP cross-charges are deductible under Section 37(1) of the Act 2.15 Ld. A.R. submitted that as indicated earlier, the ESOP cross-charges represents the actual expenditure incurred by the Company in respect of its employees, who form part of the Company's business and are involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a healthy work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon'ble Supreme Court in the case of Sassoon J.David (supra) In addition, Ld. A.R. placed reliance on the decision of the Bangalore ITAT (Special Bench) in the case of Biocon Ltd. Vs. DCIT [2013] 25 ITR(T) 602, wherein the Tribunal has held as under It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the Id. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred in the subject case is towards employees of the Company, the question of the same being in nature of 'personal' does not arise. Expenditure is not capital in nature 2.24 Ld. A.R. stated that ESOP schemes designed are primarily to incentivize better performing employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. The schemes designed are not with an intention to increase the capital needs of the Company. The shares granted to employees are the shares listed and traded in stock exchange at USA. 2.25 The compensation paid to the employees in the form of ESOPs is revenue in nature and no asset of enduring nature is coming into existence. The decisions referred above also emphasize the said fact that expenditure incurred is in the nature of revenue expenditure. 2.26 Accordingly, Ld. A.R. submitted that said expense should be deductible in the hands of the employer. Additionally, Ld. A.R. submitted that the treatment cannot be different in the hands of the employee and in the hands of employer. Share based compensation under ESOP schemes is taxable in the hands of employees as perquisite under Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Supreme Court in the case of GE India Technology Cen.(P.). Ltd vs CIT [2010] 327 ITR 456 (SC). Relevant extract of the Supreme Court decision is reproduced below - Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression sum chargeable under the provisions of the Act is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of any sum paid to any resident . Similarly, sections 194EE and 194F inter alia provide for deduction of tax in respect of any amount referred to in the specified provisions .. ...The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly Co. (India) (P.) Ltd. [2009] 312 ITR 225 (SC) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable Code and, therefore, the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recedents, the Ld. A.R. submitted that ESOP expense is a deductible expenditure under section 37 of the Act and provisions of section 195 of the Act is not applicable. 3. The Ld. D.R. relied on the order of lower authorities. 4. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd. in ITA No.1275/Bang/2011 dated 30.9.2013, wherein it was held as under:- 18. We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous. 23.With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. The expression expenditure also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the Appellant was eligible for the deduction towards leave encashment actually paid (even though the same was not claimed in the ROI filed by the Company for AY 2017-18) given that the claim of deduction of provision for leave encashment made in AY 2011-12, AY 2012-13 and AY 2013-14 (on accrual basis) based on the decision of Hon ble Calcutta High Court in the case of Exide Industries Limited v. Union of India [2007][164 taxman 9], was subsequently rejected. 6. Facts of the case are that during the DRP proceedings the assessee has raised an additional ground of claim of deduction on payment towards leave encashment of INR 4.39,31,243. The assessee also relied on the decision of Calcutta High Court in case of Exide Industries v. Union of India [20071 (164 taxman 91. However, the claim of accrual for leave encashment for above years was disallowed during assessment proceedings which were appealed by the company. Meanwhile, the Hon ble Supreme Court vide order dated 24.04.2020 reversing the decision of Calcutta High Court held that leave encashment claim has to be made in accordance with the provisions of section 430 on actual payment basis and not an accrual basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income u/s 139 of the act for the year under consideration . The assessee has not placed before us any record or evidence for having made impugned payment towards leave encashment during the F.Y. 2015-17 to be eligible for claiming the deduction u/s 43B (f) for the A.Y. 2017-18. The claim made on accrual basis for A.YS. 2011-12, 2012-13 and 2013-14 and subsequent withdrawn of the claim under VSV scheme by paying corresponding disputed liability for the AY 2012-13 has no bearing for the subject assessment year. Thus, we find no merit in the objection raised. 6.2 The Apex Court upholding the constitutional validity of sec. 43B (f) reversed the judgment of the Calcutta HC in Exide Industries Ltd. The Hon'ble Court remarked that 'the broad objective of enacting Section 43B concerning specified deductions referred to therein was to protect larger public interest primarily of revenue including welfare of the employees and Clause (f) fit into that scheme and shared sufficient nexus with the broad objective?' Hence, the intention of the legislature is very clear that the leave encashment not paid during the relevant previous year shall not be allowable. Even the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment Year ( AY ) 2007-08 and AY 201314. Accordingly, the AO made an adjustment of INR 6,83,81,220 and INR 11,66,67,733 -respectively, to the total income in the assessment order under section 143(3) of the Act, for the said AY's. The Hon'ble Income Tax Appellate Tribunal, Bangalore ( ITAT ) in case of assessee for AY 2007-08 and AY 2013-14, has remitted the issue back to the file of the AO through order dated 16 January 2017 in I.T(TP).A No. 1092/Bang/2011 and order dated 25 October 2019 in ITA No. 368(Bang)/2018 respectively to decide the issue based on the outcome of the Hon'ble Supreme Court's decision in the case of Exide Industries. 22. Subsequently on 24 April 2020, the Hon'ble Supreme Court vide Civil Appeal 3545/2009 overruled the decision of Calcutta High Court in the case of Exide Industries and upheld the constitutional validity for deduction of leave encashment on payment basis under section 43B(f) of the Act. In view of the Hon ble Supreme Court decision, the deduction on account of provision for leave encashment cannot be sustained. However, the assessee wants to raise additional grounds of appeal for allowing the deduction under section 43B( ..... 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