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TMI Blog2023 (5) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Aggrieved by the DAO, the assessee filed objections before the Dispute Resolution Panel (DRP). The TP adjustment was reduced to Rs.19,35,28,445. However, the ESOP disallowances were sustained by the DRP. On receipt of the DRP's directions, the impugned final assessment order was passed on 30.08.2018. 4. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The assessee had raised 16 grounds against the TP adjustment and 7 grounds with reference to corporate tax issues, namely, disallowance of ESOP expenses. 5. The learned AR has placed on record a letter dated 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 perused the material on record. On identical facts, the Bangalore Bench of the Tribunal in assessee's own case for assessment year 2015-2016 (supra), had decided the ESOP expenses to be an allowable deduction. The Bangalore Bench of the Tribunal (supra) had followed the Co-ordinate Bench order in the case of Novo Nordisk India P. Ltd. v. DCIT (2014) 42 taxmann.co, 168 (Bang.Tribunal). The discussion of the facts, the contentions of the parties and the findings of the Tribunal for assessment year 2015-2016 in assessee's own case, reads af follows:- "5. The brief facts in this regard are that that the assessee had participated in the Northern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 filed appeal against the same before the Higher Appellate Authorities i.e., High Court. * The AO relied on the decision of the Hon'ble High Court of Karnataka ("KHC") in the case of Infosys Limited and held that no perquisite arises in the hand of an employee till the shares have been actually to them. * The Employee share-based expenses booked by the assessee and reimbursed to its holding company was a 'colourable devise' to shift profits outside India. 7. Aggrieved, the assessee filed its objections before the DRP. The DRP rejected the objections of the assessee with respect to the Employee sharebased payment. The DRP relying on Delhi ITAT in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 of business. It was submitted that ESOP expenditure is not in the nature of capital expense or personal expense and the same is not in the nature of fine or penalty. Discount on ESOP representing amount foregone on shares to be issued to employees in lieu of services rendered by them qualifies as 'expenditure' under section 37 of the Act. The ESOP expenditure incurred by assessee is not a contingent liability. In this regard, the Assessee submits as under: * The discount on options under ESOP is an ascertained liability and not contingent liability. Further, as mentioned above, NT Corporation has raised a debit note on the assessee in relation to the same and there is actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench 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. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. (supra), we find that the facts of the case of Accenture Services (P.) Ltd. (supra)are identical. In the case of Accenture Services (P.) Ltd. (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 Rs. 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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