Income Tax Appellate Tribunal - Mumbai
Mahindra Engineering Services Limited ... vs Deputy Commissioner Of Income Tax ... on 13 February, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI SANDEEP GOSAIN, JM
ITA No. 4483/Mum/2017
(Assessment Year:2012-13)
Mahindra Engineering Services Limited Dy. CIT, Circle-2(2),
(Now merged with Tech Mahindra Aayakar Bhavan,
Limited) Vs. Mumbai
Gateway Building, Apollo Bunder,
Mumbai-400 001
PAN/GIR No. AAACM 3484 F
(Appellant) : (Respondent)
Appellant by : Shri Karthi Natrajan
Respondent by : Shri Awungshi Gimson
Date of Hearing : 06.12.2018
Date of Pronouncement : 13.02.2019
ORDER
Per Shamim Yahya, A. M.:
This appeal by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-5, Mumbai ('ld.CIT(A) for short) dated 21.03.2017 and pertains to the assessment year (A.Y.) 2012-13.
2. The grounds of appeal read as under:
1. The learned CIT A erred in disallowing the claim of the appellant under Section 37 of the Income Tax Act, 1961 Rs.31,19,00,847/- being the amount of difference between par value of equity share and the exercise price per equity share pursuant to the option granted by the appellant to its employees under Employees' Stock Option Schemes (ESOS) floated for their benefit and in consideration of services rendered by them.
2. The learned CIT A further erred inter alia in not appreciating the fact that
i) The grant of options and the exercise price per equity share pursuant to grant of option under the ESOS was clearly specified and quantified at the time of grant of option itself to the respective employee and therefore the liability incurred by the appellant was definite and ascertained at the time of grant of option in the relevant previous year to its employees
ii) The discount amount being the amount of difference between the par value of equity share and the exercise price per share pursuant to grant of option to the employee was benefit granted by the appellant to the employees in consideration of employment and represented employee cost and expenditure incurred wholly and exclusively by the appellant for its legitimate business purpose in the relevant previous year
iii) The inference that the exercise price per share was determinable only at the time of vesting and exercise of options in the hands of the respective employees of the 2 ITA No. 4483/Mum/2017 appellant and would reflect the correct employees cost was wholly unwarranted and bereft of proper appreciation of facts on record.
3. Brief facts of the case are that the assessee company is engaged in the business of engineering consultancy services. The assessee filed return of income declaring total income of Rs.28,92,71,080/- on 30.11.2012.
4. In the impugned issue the Assessing Officer (A.O. for short) had noticed that assessee had claimed ESOP charges for Rs.31,19,00,847/- under section 37 (1) of the Act. Assessee stated that assessee had announced ESOP Scheme of (3) & (4) during the year. On announcement of the scheme of ESOP 3 on 22.08.2011 which has vesting period of 3 years, number of shares was 9,28,332 and for ESOP 4, number of shares was 1,55,666, vesting period was 3 years and grant date was 14.12.2011. On the above schemes, the assessee claimed ESOP charges of Rs.31,19,00,848/-. AO after considering the assessee's submission by relying on Delhi Bench of ITAT's decision in the case of Ranbaxy Laboratories where it is held that ESOP charges are not allowable u/s 37 of the Act disallowed the ESOP expenses. AO also further mentioned that there were contrary judgments of other Tribunals such as Biocon Limited vs. Dy. CIT (in ITD No. 248/Bang/2010) where the decisions are not accepted by the department and further appeals are filed on the issue. Further AO states that decision of Jurisdictional Mumbai Tribunal in the case of VIP Industries vs DCIT [ITA No.7240/Mum/2008] supports the departmental stand on this issue.
5. Against the above order, the assessee appealed before the ld. CIT(A).
6. The ld. CIT(A) elaborated the facts of the case and noted the crux's of the assessee's submissions as under:3 ITA No. 4483/Mum/2017
The details of ESOP Scheme 3 & 4 are as under :
Total Charge
Scheme ESOP 3 ESOP 4
No. of Shares 9,28,332 1,55,666
Vesting period 3 years 3 years
Grant date 22.08.2011 14.12.2011
Total charge over three 26,71,10,772 4,47,90,075 31,19,00,848 Amount claimed in the year period return Amount as per 7,07,40,146 57,98,029 7,65,38,174 Amorization On granting the above two EXOP 3 8t 4 schemes, appellant had computed the discounted value with respect to the market value of the shares and the difference between the value at which shares were offered to the employees as incentive, based on the number of years of working in the company. So appellant had computed the difference between the market price of the shares and value at which it was offered to the employees. The difference of this amount is claimed as ESOP charges of the appellant at Rs.31,19,00,848/-. In the appellant's submission, appellant states that the company had claimed entire deduction in the first year of the grant. According to the appellant, once ESOP was granted to the employee, it's liability is crystallized. According to the appellant whether the employee would exercise the option granted on the vesting date is a future event which would quantify the company's overall discount it would offer to the employees as well as deduction to e claimed. Accordingly appellant pleads that entire expenditure may be allowed as deduction in the first year itself. In support of its claim, appellant refers to decisions in the case of Bharat Earth Movers v CIT [245 ITR 428] and Taparia Tools Ltd. vs. JC1T [Civil Appeal Nos.6366-6368 of 2003] and states that liability has crystallized at the time of grant of options and hence the entire ESOP expense should be allowed as deduction. Appellant further pleads that disallowance of Rs.31,19,00,848/-made by the AO may be deleted. Alternatively, appellant also states that the decision of the Banglore Special Bench in the case of Biocon Ltd. has held that the assessee are allowed proportionate deduction of ESOP expenses only in the year of actual vesting. As per the said decision, the company would be entitled to proportionate deduction only from A.Y. 2013-14 as the date of vesting of the option is 21 August 2012. Further appellant states that in view of decision of the Supreme Court in/the case of Bharat Earth Movers, appellant's claim may be allowed in this year.
7. The ld. CIT(A) referred to the ITAT Special Bench decision in the case of Biocon Limited (supra). He noted that though the ITAT had considered the deductibility of the discount, it had also noted the other aspects. In this regard, the ld.
CIT(A) observed as under:
This eligibility of ESOP expenses was examined by Bangalore Special Bench of Tribunal in the case of Biocon for A.Y. 2004-05 and 2007-08 and it is discussed at length regarding when ESOP expenses can be claimed. In appellant's submission appellant clearly mentioned that on granting of the scheme, appellant is liable to total ESOP charges for Rs.31,19,00,848/- which according to the appellant .liability has crystallized at the time of the grant of option, hence entire ESOP expenses should be allowed as 4 ITA No. 4483/Mum/2017 deduction in which liability has arisen. Here appellant claims this deduction in view of decision of the Supreme Court in the case of Bharat Earth Movers vs. CIT [245 ITR 428] and Taparia Tools Ltd. vs. JOT [Civil Appeal Nos.6366-6368 of 2003]. Here when we examine the Biocon decision on the ESOP issue this Bharat Earth Movers and also Rotork Controls India (P) Ltd. was discussed in detail in para 9.3.3, 9.3.4 & 9.3.5 where they have held in para 9.3.5 as under :
9.3.5 When we consider the fact of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers(supra) and Rotork Controls P. Ltd.(supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services.
It is clearly held in the Biocon decision in the above para that employee become entitled to option at the end of vesting period and it is only then the actual amount of disallowance would be determined. Further in Biocon decision after referring to various Supreme Court decision, in para 10.3 to10.5 it is held as under:
10.3 We have earlier underlined the concepts of grant of options, vesting of options and exercise of options. The period from grant of option to the vesting of option is the vesting period. It is during such period that an employee is supposed to render service to the company has to earn an entitlement to the shares at a discounted premium. The vesting period may vary from a case to case, if the vesting period is, say four years with equal vesting at the end of each year, then it is the end of the vesting period or during the exercise period, which in turn immediately succeeds the vesting period, that the employee becomes entitled to exercise 100 options or qualify for receipt of 100 shares at discount. Though the shares are allotted ot the end of the vesting period, but it is during such vesting period that the entitlement is earned. It means that 25 options vest with the employee at the end of each year on his rendering service for the respective year, if during the interregnum, he leaves the service, say after one year, he will still remain entitled to exercise option for 25 shares at the discounted premium at the time of exercise of option. In that case, the benefit which would have accrued to him at the end of the second, third and fourth years would stand fortified. Thus it becomes abundantly clear that an employee becomes entitled to the shares at a discounted premium over the vesting period depending upon the length of service provided by him to the company, in all such schemes, it is at the end of the vesting period that option is exercisable albeit the proportionate right to option is acquired by rendering service at the end of each year.
10.4 Similar is the position from the stand point of the company. An obligation falls upon the company to allot shares at the time of exercise of option depending upon the length of service rendered by the employee during the vesting period.
The incurring of liability towards the discounted premium, being compensation to employee, is directly linked with the span of services put in by the employee. In the above illustration, when 25 out of 100 shares vest in the employee after rendering one year's service, the company also incurs equal obligation at the end of the first year for which it becomes entitled to rightfully claim deduction u/s 5 ITA No. 4483/Mum/2017 37(1) of the Act. Similarly at the end of the second year of service by the employees, the company can claim deduction for discounted premium in respect of further 25 shares so on and so forth till fourth year when the last tranche of discounted premium in respect of 25 shares becomes available for deduction. It, therefore, transpires that a company under the mercantile system can lawfully claim deduction for total discounted premium representing the employees cost over the vesting period at the rate at which there is vesting of options in the employees.
10.5 From the above discussion it is lucid that at the event of granting options, the company does not incur any obligation to issue the shares at discounted premium. Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised. When we refer the above paras it is clear that event of granting of option does not cast any liability on the company. So it is clear in the Biocon case decision that granting option does not cast any liability. Hence appellant's submission that by granting of options itself liability is crystilized is not sustainable in view of the above decision. It is also clearly held in the decision that company incurs liability to issue shares at a discounted premium only during the vesting period and liability is neither incurred at the stage of granting of option nor when option is exercised. It is clear that appellant can claim the deduction only at the end of the year of the vesting period not at the time of granting of option nor at the time of exercising option. It is further illustrated in the case of Biocon in page 48 para 12.2(c) as under ;
12.2 (c) It has been noticed above that the stage for the grant of deduction of discount is on the respective vesting of the options. In ESOP 2000, the vesting takes place @ 25% after each year of service. It means that the first part of 25% deduction would be available on the completion of one year from the date of grant of option. The assessee was required to indicate the date of grant of options in respect of which deduction has been claimed in the instant year. Two letters granting options to Shri Murali Krishnan K.N. and Neville Bain have been randomly filed which are dated 2nd April, 2002. If the options are ganted on 2nd April, 2002, then 25% of the total option shall vest in the employees at the end of the first year from this date, which date would be 1st April, 2003. As such, the amount would become deductible in the previous year relevant to A.Y. 2004-05 and not 2003-04. The Ld.AR contended that though these letters are dated 2nd April, 2002, but in fact the options were granted on 1st April, 2002. The correct date of grant and vesting needs to be verified at the AO'send.
6 ITA No. 4483/Mum/20178. From the above, the ld. CIT(A) inferred that the assessee can claim 1/3rd ESOP scheme from the end of the vesting period as per Biocon Limited (supra) decision. The ld. CIT(A) held as under:
In the above decision, it is clearly held that appellant is eligible for the claim on ESOP as per SEBI guidelines proportionately after ESOP scheme was announced for the vesting period of 3 years, appellant is eligible for the claim at the end of the year of the vesting period. In the case of the appellant, ESOP scheme 3 was announced on 22.08.2011 and first vesting period of the appellant comes in the year 22.8.2012. So appellant can claim 1/3rd of the ESOP scheme from the end of the vesting period of 22.8.2012 ie. at the end of 31.3.2013 financial year appellant can claim 1/3rd of the amount of ESOP scheme as per Biocon decision. Further in the case of ESOP 4 the grant date was 14.12.2011. First vesting period starts from 22,8.2014 and 1/3rd can be claimed by the appellant in the F.Y. ending 31.3.2015. By the above discussion, in view of the Biocon decision, it is clear that appellant is not eligible for deduction on ESOP expenses on grant of option to the employee. Here in the appellant's own case appellant claimed deduction on ground of option on ESOP 3 & 4 in the year the schemes were granted. Following the above decision of Biocon, appellant is not eligible for E50P expenses on grant of option as deduction. Hence, in view of the detailed discussion, appellant is not eligible for deduction on the date of granting of option for amount of Rs. 31,19,00,848/-. AO's disallowance is upheld. This ground of appeal is dismissed.
9. Against the above order, the assessee is in appeal before us.
10. We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the assessee's claim should be allowed in view of the decision of Hon'ble Apex Court in the case of Bharat Earth Movers v CIT [245 ITR 428]. He claimed that the amount should be upfront allowed. The ld. Counsel of the assessee further placed reliance upon the decision of the ITAT, Mumbai Bench in the case of DBOI Global Services Private Limited vs. Pr. CIT (in ITA No. 3170/Mum/2015 for A.Y. 2008-09 vide order dated 11.12.2017), wherein the order of the ld. CIT exercising the jurisdiction u/s. 263 was quashed by the ITAT.
11. The ld. Counsel of the assessee made an alternate plea for the proportionate deduction for ESOP expenditure which should be allowed upto 31st March without 7 ITA No. 4483/Mum/2017 reference to vesting date. The ld. Counsel of the assessee later on submitted that the computation of allowable expenditure as per the alternate methodology comes to an amount of Rs.5,88,00,756/-. The ld. Counsel of the assessee submitted that Biocon Limited (supra) judgment represents a plausible line of thought and has also become a subject of reference before the Hon'ble High Court. He also submitted that the interpretation of the Special Bench requires reconsideration in the broader context of the mercantile system of accounting. However, the ld. DR submitted that the Special Bench decision never held that the amount can be claimed upfront. Hence, he pleaded that the assessee's appeal has no merits.
12. Upon careful consideration, we find that as per the assessee's own admission the Special Bench never held that the claim should be allowed upfront, but it had taken a view that the stage for the grant of deduction of discount was on the respective vesting of option. The assessee requests that the Special Bench interpretation requires reconsideration. In our considered opinion, the Special Bench has passed an order after adequate deliberation. Accordingly, even at the cost of repetition, we may refer para 10.5 of the above order quoted hereinabove:
10.5 From the above discussion it is lucid that at the event of granting options, the company does not incur any obligation to issue the shares at discounted premium. Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their 8 ITA No. 4483/Mum/2017 services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised.
13. Thus the Special Bench has unequivocally expounded that liability is not incurred at the time of grant of option. The alternate request of the ld. Counsel of the assessee is also not in accordance with the exposition of Special Bench of the Tribunal in the case of Biocon Limited (supra). In fact, it is the plea of the ld. Counsel of the assessee that the decision of the Special Bench in the case of Biocon Limited (supra) should be referred for reconsideration to a larger bench. In our considered opinion, we do not find any need for such reference. Hence, we uphold the claim of the authorities below, rejecting the assessee's claim of the impugned expenditure.
14. As regards the decision of the ITAT referred by the ld. Counsel of the assessee, we find that the said decision was rendered in connection with the quashing an order u/s. 263 of the Act, wherein the ld. CIT has held the ESOP payments to be contingent. The ITAT has inter alia found that the A.O. has made all the necessary enquiry. Hence, this case law is not applicable on the facts of this case.
15. In the result, this appeal by the assessee stands dismissed.
Order pronounced in the open court on 13.02.2019
Sd/- Sd/-
(Sandeep Gosain) (Shamim Yahya)
Judicial Member Accountant Member
Mumbai; Dated : 13.02.2019
Roshani, Sr. PS
9
ITA No. 4483/Mum/2017
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT - concerned
5. DR, ITAT, Mumbai
6. Guard File
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai