TMI Blog2023 (5) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, 1961 ( the Act for short). The relevant assessment year is 2014-2015. 2. The brief facts of the case are as follows: The assessee is a company engaged in the business of providing transaction based business process outsourcing services to its group companies. For the assessment year 2014-2015, the return of income was filed on 28.11.2014 declaring income of Rs.68,09,26,340. The case was selected for scrutiny and notice u/s 143(2) of the Act was issued on 29.08.2015. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm s Length Price (ALP) of the international transactions undertaken by the assessee with its Associate Enterprises (AEs). The TPO vide order dated 30.10.2017 passed u/s 92CA of the Act, proposed total transfer pricing adjustment amounting to Rs.30,49,62,139. The Assessing Officer passed draft assessment order (DAO)incorporating the TP adjustment suggested by the TPO. Apart from the TP adjustment, the A.O. disallowed an amount of Rs.1,07,29,828 claimed as deduction u/s 37 of the Act. The expenditure claimed was towards Employees Stock Option Plan (ESOP). 3. Aggrieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act to be read with Rule 3(8) of the Income tax Rules, 1962, stock options are taxed in the year of exercise of options. However, in the instant case, the ESOPs have not been exercised by the employees till Financial Year ('FY') 2015-16. 6. The Hon'ble DRP / learned AO has erred in disallowing expenses on Restricted Stock Units ('RSU'), without considering the details submitted by the Appellant that the tax has been deducted on the 'Perquisite' amount as Salary income, at the time of vesting of the RSU. 7. Notwithstanding and without prejudice to our above contention, if the ESOP expenses are not considered as allowable expenditure for the subject A Y, the learned AO should allow expense to the Appellant in the year in which the employees will exercise the options. 7. The learned AR submitted that as regards the disallowance of ESOP expenses are concerned, the issue is squarely covered in assessee s own case for assessment year 2015-2016 in IT(TP)A No.2395/Bang/2019 (order dated 31.01.2023). 8. The learned Departmental Representative was unable to controvert the assertion of the learned AR. 9. We have heard rival submissions and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period. Further, the cost of such expense (being the fair market value less exercise price) was apportioned over the vesting period in the books of account of the Assessee. The that assessee has included such value of RSU in the salary of the employee as perquisite and deducted the applicable taxes on the same. The sample copies of Form 16 issued to the employees are available at page 160 to 174 of paper book. The assessee claimed expenses of Rs.1,41,47,125/- towards Employee share-based payments while filing the return of income for the year under consideration. 6. The AO in the draft assessment order proposed to disallow the amount of Rs.1,41,47,125/- claimed by the assessee towards Employee sharebased payment expenses. The AO proposed to disallow the expenses for the following reasons: There was no transaction that resulted in loss. The loss on discounted price of share was only an imaginary loss (notional) and not a crystallized one. The said expenditure was notional, contingent in nature and not allowable under section 37 of the Income-tax Act, 1961 ( Act ). The judicial precedents relied on by the assessee were not accepted since the Department had fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, is in the nature of employee compensation . ESOP is taxable in the hands of the employees as perquisites under section 17(2) of the Act. In the case of ESOP s, the perquisites are considered when the employee has exercised the option and in the case of RSU, when the employee receives cash payments on completion of vesting period. Accordingly, there cannot be different treatment for a transaction in the hands of recipient of income and payer of income. Given that the ESOP forms part of an employee s salary, it supports the claim for the same being treated as revenue expenditure in the hands of the employer. ESOP expenses is not notional/ contingent in nature and allowable under section 37 of the Act As per the provisions of section 37 of the Act, an expenditure to be deductible under section 37 of the Act, the following conditions should be satisfied: There should be an expenditure Such expenditure should not be governed by section 30 to 36 of the Act The expenditure should not be capital in nature The expenditure should not be personal in nature The expenditure should have been laid out wholly and exclusively for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. v. Dy. CIT [2013] 35 taxmann.com 335 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 prem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Co. (P.) Ltd. (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at 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. IT(TP)A 22. With regard to the decision of the ITAT in the case of Accenture Services (P.) Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture Services (P.) Ltd. (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(1) of the Act. The decision of the Hon'ble Supreme Court in the case of Sassoon J. David Co. (P)Ltd. (supra) and the Hon'ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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