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TMI Blog2023 (4) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... ons with its AE, a reference was made to the TPO to arrive at the arm's length price (ALP) of the international transactions. The TPO arrived at a TP adjustment of Rs.36,79,45,675. The AO passed a draft assessment order and besides the TP adjustment, the AO made an adjustment towards Employee Stock Option Plan [ESOP] for an amount of Rs.1,41,47,125. Aggrieved, the assessee raised objections before the DRP whereby the TP adjustment was reduced to Rs.21,29,68,370 and the ESOP disallowance was sustained. Accordingly, the AO passed the final assessment order against which the assessee is in appeal before the Tribunal. 3. The assessee vide letter dated 3.1.2023 withdrew the grounds relating to TP adjustment pursuant to Mutual Agreement Procedure (MAP) Resolution acceptance by the Competent Authority, copies of which are placed on record. Accordingly, grounds No.1 to 20 raised with regard to TP adjustment are dismissed as withdrawn. Disallowance of ESOP expenses 4. The assessee is contending the disallowance of ESOP expenses through ground Nos.21 to 27 which read as follows:- "Erroneous disallowance of Payment of Employee Stock Option Plan (`ESOP') expenses 21. The Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e holding company i.e., NT Corporation were granted to the employees and Directors of the ultimate holding company, its subsidiaries and affiliates. The equity shares are granted directly by the ultimate holding company to the employee. Accordingly, employees are eligible to participate in the scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The ESOP expenses represents the discount offered to Assessee's employees on issue of shares of its ultimate holding company i.e., NT Corporation, being the difference between the fair market value of shares on the date of grant and the exercise price. The said expense was initially incurred by NT Corporation and was subsequently reimbursed by the assessee to NT Corporation. A sample copy of the debit note raised by NT Corporation on the assessee is available at page 159 of paper book. The assessee claimed the amount reimbursed to NT Corporation as an expenditure in the statement of profit and loss as 'Employee Benefit Expense'. Further, RSU's were also issued by NT Corporation to the employees of the assessee as a part of employee compensation scheme. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crystallized till the date on which the employee exercises the option and hence, any expenditure debited during the vesting period remains contingent in nature. * The assessee was choosing to either receive securities premium of a lower amount or no securities premium when compared to that of which it would have received during a normal course of share issue. There was therefore no expenditure that the Assessee was incurring or laying out. * The ESOP expense even if treated as expenditure was a capital expenditure, securities premium being a capital item. * Expenditure on ESOP recharge was a fictitious cost being discount offered on self-generated asset. * Expenditure that was debited was only notional loss to the holding company. * Expense booked by the assessee and reimbursed to the holding company was a colourable devise for shifting profits from India. 8. The ld. AR submitted that ESOP form parts of the employee's compensation as 'perquisite. It was further submitted as follows:- * The primary objective of ESOP is to earn profit by securing consistent and concentrated efforts of dedicated employees during the vesting period. * The said expenses represent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is construed as an accrued liability and deduction will be allowed on the same. * Further, what should be certain is the incurring of the liability and it should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. If the said requirements are satisfied the liability is not a contingent one. * The AO has not raised any point of contention against the expense being wholly and exclusively for the purpose of business and has only contended that it is notional in nature and also that it is on capital account. 9. In view of the above, the ld. AR submitted that ESOP expenditure is an ascertained liability and accordingly, the same should be allowed under section 37 of the Act. 10. The ld. DR relied on the orders of lower authorities. 11. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of Novo Nordisk India P. Ltd. v. DCIT, [2014] 42 taxmann.com 168 (Bang. ITAT) has considered the similar issue and held that - 18. We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Services (P.) Ltd. (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 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 motivat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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