TMI Blog2023 (2) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of Hon ble Supreme Court in the case of Excel Industries Ltd. [ 2013 (10) TMI 324 - SUPREME COURT] and hence respectfully following the same, we accept the arguments of the ld.AR on principle but remit the matter back to the file of the AO for verification purposes. This issue of assessee s appeal is allowed for statistical purposes. Disallowing charges paid in respect of Employees Stock Option Plan (ESOP) - HELD THAT:- We noted that the expenses incurred by assessee by way of payment to its parent company, which has in turn issued shares to the employees of the assessee, the expenditure seems towards disbursing compensation to the employees for their services and hence, the same is to be treated as revenue in nature as held by the Tribunal in the case of Caterpillar India Pvt. Ltd. [ 2017 (4) TMI 1138 - ITAT CHENNAI] as well as TE Connectivity Services India Pvt. Ltd. [ 2022 (9) TMI 1413 - ITAT BANGALORE] - Respectfully following the decision of Co-ordinate Bench of Chennai and Bangalore, we allow the claim of assessee. - ITA No.: 680/CHNY/2020 - - - Dated:- 22-12-2022 - Shri Mahavir Singh, Vice President And Shri Manoj Kumar Aggarwal, Accountant Member For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providers of such off the shelf software products has been entered into by overseas Amec Foster Wheeler Group entities on behalf of all the group entities due to administrative convenience and to minimize the overall costs. The costs pertaining to software products utilized by assessee are recharged by the contracting Amec Foster Wheeler Group entity by raising a debit note. Given that the software costs have been recharged by Amec Foster Wheeler Group entities to assessee on a cost to cost basis without any mark up, the assessee has not withheld any tax on such reimbursements which has no income element in it. There is no income arising in the hands of the Amec Foster Wheeler Group overseas entities with respect to such cost to cost reimbursement and hence the question of withholding tax does not arise. The AO treated the transaction as royalty by holding that as per the provisions of section 9(1)(vi)(b) of the Act, the income by way of royalty payable by a person who is the resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. CIT, [2021] 125 Taxmann.com 42 and allowed the claim of assessee on exactly identical facts and on the same pretext vide para 17 18 as under:- 17. The learned Counsel for the Assessee now argued that the expenditure incurred towards its share of software cost which are in the nature of off-the-shelf software products such as of Microsoft Office [MS Office], IBM Lotus Notes, AVEVA, Auto CAD, etc. It was contended that the above said expenses were negotiated and incurred at a group level with the third-party vendors by the overseas Associated Enterprises [AE] on behalf of all the group entities and the corresponding cost was recharged to the various entities on a cost-tocost basis without any mark-up. He stated that this issue stands now covered by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax reported in [2021] 125 Taxmann.com 42 (SC), wherein the Hon ble Supreme Court has held that the amount paid by resident Indian and end-user / distributors to non-resident computer software manufacturers / suppliers , as consideration for resale / use of computer software through EULAs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L etc. The assessee in its books of accounts during the relevant assessment year recorded a provision for loss contracts amounting to Rs.5,32,47,117/- and this loss was in relation to contract awaited with Reliance Industries Ltd., which was entered into during the financial year 2012-13 relevant to assessment year 2013-14. It was contended that this project was in progress during the relevant assessment year also. It was claimed that this loss amount represents the expected loss on the contract which was recorded during the relevant assessment year in line with the requirements of AS-7, as prescribed by the Institute of Chartered Accountants of India. But said provision for loss was claimed as deduction by the assessee in computing the taxable income for the relevant assessment year. The AO during the course of assessment proceedings asked to provide the details regarding the provision for loss contracts and justify the same being allowed as an allowable expenditure, in view of it being a provision. The AO noted that the assessee other than claiming it to be an estimated contract cost did not furnish any other detail to substantiate the quantification of the same. The AO noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest u/s.234B 234C of the Act. In answer to the same, the ld.AR stated that this issue is covered by the decision of Hon ble Supreme Court in the case of CIT vs. Excel Industries Ltd., 358 ITR 295, wherein it is held that once the item of expenditure is revenue neutral, the entire exercise of seeking to disturb the year of liability of expenditure should be futile. 10. After hearing rival contentions and going through the facts, we noted that this issue needs verification at the level of AO, who will verify whether the assessee has declared this income and are accepted by Revenue in assessment year 2015-16 2016-17 by reversing the entry of provision for loss contract created by assessee for an amount of Rs.5,32,47,117/-. But in any eventuality, the issue on principle is covered by the decision of Hon ble Supreme Court in the case of Excel Industries Ltd., supra, and hence respectfully following the same, we accept the arguments of the ld.AR on principle but remit the matter back to the file of the AO for verification purposes. This issue of assessee s appeal is allowed for statistical purposes. 11. The next issue in this appeal of assessee is as regards to the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its employees. The AO after considering the submissions of the assessee held that ESOP expenses even if it is treated as expenditure, the same is in the nature of capital expenditure because security premium is a capital item and hence, cannot be allowed u/s.37 of the Act. Further, he noted that the liability arises in the hands of the holding company namely Foster Wheeler AG, Switzerland only as it is, the expenses related to the same, on discount of issue of shares, the same is to be treated as expenses in the hands of ultimate holding company. Therefore, the AO disallowed the claim of assessee. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of the AO by treating the expenditure in the nature of capital expenditure. Aggrieved, now assessee is in appeal before the Tribunal. 13. We have heard rival contentions and gone through facts and circumstances of the case. We noted the arguments of ld.AR that the assessee, as she explained that that Foster Wheeler AG, Switzerland, the ultimate holding company, operates a Performance Share Plan (PSP) covering certain eligible employees of its subsidiaries. PSP for conditional shares are awarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of issuance of ESOP, the price differentials in the form of ESOP expenditure was debited in the books of the assessee company as part of staff welfare measures. Admittedly, the scheme provides for allotment of shares of Caterpillar Inc even to deputed employees. The said payment of Rs. 7,41,51,630/- was actually made by the assessee and hence it is not a notional loss . Moreover, the shares of the parent company were issued to those employees. Hence the finding given by Delhi Tribunal that issue of shares under ESOP at less than market price only results in short receipt of share premium does not arise at all. Accordingly, the case law relied upon by the lower authorities on the decision of the co-ordinate bench of Delhi Tribunal in the case of Ranbaxy Laboratories Ltd vs ACIT reported in 26 DTR 420 is not applicable in the instant case. We find that the expenses in connection with the issue of shares of Caterpillar Inc. U.S.A. under ESOP scheme by the assessee to the employees is an ascertained liability and more in the nature of welfare measures for the employees. Accordingly the compensation paid in the form of price differentials is squarely allowable as deduction as an exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the taxable income of the employer company. However, if the shares are allotted to the employees from the share capital of the company, no deduction is allowable in computing the taxable income of the company since no expenditure has been incurred by it. In the instant case, the shares of Caterpillar Inc. U.S.A. has been allotted to the employees and the price differential is debited to the assessee company by way of a debit note and as stated supra, since the employees were under the control of the assessee company on deputation and more so the ESOP scheme also provided for allotment of shares under ESOP to deputed employees also, the assessee had debited the price differentials as ESOP expenditure in its profit and loss account. This in our considered opinion, is an allowable expenditure and is in tune with the reply given in the Frequently Asked Questions (FAQ) in the CBDT Circular No. 9/2007 dated 20.12.2007. The Circular issued by the CBDT is binding on the tax authorities and the same could be used by the assessee if proved beneficial to the assessee. We also find that the issue under dispute is squarely covered by the decision of the Hon ble Jurisdictional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. 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 other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held 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. The said decision has been upheld by the Hon ble Karnataka High Court in the case of BIOCON Ltd. (supra). Therefore the issue in so far as this Bench of ITAT is concerned is concluded by the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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