Income Tax Appellate Tribunal - Bangalore
Hewlett Packard (India) Software ... vs The Deputy Commissioner Of Income Tax, ... on 18 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES "C", BANGALORE
Before Shri George George K, JM & Ms.Padmavathy S, AM
IT(TP)A No.961/Bang/2022 : Asst.Year 2018-2019
M/s.Hewlett Packard (India) The Deputy Commissioner of
Software Operation Pvt.Ltd. v. Income-tax, Circle 3(1)(1)
Survey No.192, Whitefield Road Bangalore.
Mahadevapura Post
Bengaluru - 560 048.
PAN : AAACH7164B.
(Appellant) (Respondent)
Appellant by : Sri.Padam Chand Khincha, CA
Respondent by : Ms.Neera Malhotra, CIT-DR
Date of
Date of Hearing : 17.01.2023 Pronouncement : 18.01.2023
ORDER
Per George George K, JM :
This appeal at the instance of the assessee is directed against final assessment order dated 30.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2018-2019.
2. The brief facts of the case are as follows:
The assessee is a company engaged in providing software development support service to its group entities. For the assessment year 2018-2019, the return of income was filed on 30.11.2018 declaring total income at Rs.488,64,37,720. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 23.09.2019. During the course of scrutiny assessment, the case was referred to the Transfer 2 IT)TP)A No.961/Bang/2022.
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Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the international transaction entered by the assessee with its Associated Enterprises (AEs). The TPO passed an order on 30.07.2021 u/s 92CA of the I.T.Act proposing the TP adjustment of Rs.199,79,71,600. The Assessing Officer passed draft assessment order dated 06.09.2021 incorporating the above TP adjustment proposed by the TPO and also making certain disallowance under the Corporate Tax segment.
3. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP) on 05.10.2021. The DRP vide its directions dated 20.06.2022 disposed of the objections of the assessee. Based on the directions of the DRP, the impugned final assessment order was completed on 30.07.2022, wherein the total income of the assessee was assessed at Rs.662,44,80,897 under the normal provisions of the Act. Later, the A.O. passed a rectification order dated 22.09.2022, wherein the TP adjustment of Rs.139,01,63,140 was deleted. In the rectified order, the total income was computed at Rs.523,43,17,757 under the normal provisions of the Act.
4. Aggrieved, the assessee has filed the present appeal before the Tribunal. Several grounds are raised, however, reliefs that were argued before the Tribunal, are as follows:-
"(i) To delete the disallowance section 37 of the Act in relation to the ESOP expenditure incurred by the Appellant amounting to INR 35,03,19,026;3
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(i) To allow the claim towards payment of leave encashment of INR 3,42,22,795; and
(ii) To allow the credit of taxes pertaining to Aruba India (Merged Entity) amounting to INR 21,48,27,493."
We shall adjudicate the above three reliefs that are sought, as under:-
Disallowance of expenses in relation to ESOP
5. The assessee had two types of share based compensation scheme, namely, Employee Stock Purchase Plan (ESPP) and Employees Stock Incentive Plan (ESIP) (hereinafter collectively referred as ESOP Scheme). Under the ESOP scheme, the employees of the assessee were eligible to purchase / get shares of the ultimate holding company (through ESPP/ESIP scheme). The shares of the ultimate holding company are issued under these schemes. For the relevant assessment year, namely, A.Y. 2018-2019, the assessee had claimed a sum of Rs.35,03,19,026 as eligible deduction u/s 37 of the I.T.Act towards reimbursement of ESOP expenditure cross charged by the ultimate holding company. The A.O. held that the expenditure on ESOP cross charged by the ultimate holding company is fictional / notional in nature and same does not qualify for deduction u/s 37(1) of the I.T.Act. The DRP affirmed the view taken by the A.O. 4 IT)TP)A No.961/Bang/2022.
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6. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that an identical issue was considered by the Tribunal in assessee's own case for assessment year 2016-2017 in IT(TP)A No.213/Bang/2021 (order dated 03.10.2022). It was submitted that the Tribunal in the above order, had held that the expenses claimed u/s 37 of the I.T.Act on account of ESOP scheme was allowable as a deduction.
7. The learned Departmental Representative supported the orders of the A.O. and the DRP.
8. We have heard rival submissions and perused the material on record. On identical facts, the Tribunal in assessee's own case for assessment year 2016-2017 (supra), had allowed the claim of the assessee as regards the reimbursement of ESOP expenditure cross charged by the ultimate holding company as an allowable deduction u/s 37 of the I.T.Act. The contentions raised by both the parties before the Tribunal and the findings of the Tribunal for assessment year 2016-2017 (supra), reads as follows:-
"34. Ground No.2 is regarding Corporate Tax. In ground Nos.2.1 & 2.9, the assessee has raised following grounds:-
"2.1 The Learned AO and Honorable DRP has erred in law and on facts, in disallowing the expenditure on ESOP of INR 18,18,00,000 under section 37 of the Act without appreciating the submissions furnished by the Appellant.5
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2.9 The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies."
34.1 The Ld. A.R. submitted that during the assessment proceedings for the subject AY 2016-17, the Learned AO had sought certain details in respect of Employee Stock Option Plan ("ESOP") cross-charges incurred by the Company, based on the disclosures made in the financial statements (refer note 25 of the financial statements). During the proceedings, the AO had specifically sought responses to following questions:
"A. Expenses incurred on remittance made to non-residents and whether section 195 of the Act, has been complied with?
B. In respect of ESOP cross-charges incurred by the assessee company, furnish a detailed note on modus operandi of ESOP calculation and vesting period option exercised by the employees and whether section 195 is applicable"
34.2 In response to the above the Company had furnished its response vide submission dated 06 December 2019, explaining the reasons why Tax Deduction at Source ("TDS") provisions are not applicable on the subject crosscharges, which are on cost-to-cost basis.
34.3 However, in the DAO the learned AO proceeded to make adjustments under section 37 of the Income-tax Act, 1961 ("the Act") (without providing the Company any opportunity to explain allowability of expenditure), while the AO also noted his observation on non-deduction of TDS under Section 195 of Act, in the DAO.
34.4 Ld. A.R. highlighted that the questions sought by the learned AO in the notice were pertaining to applicability of TDS provisions, but the AO proceeded to make adjustment under section 37 of the Act in the DAO. In view of the above, we have in the paragraphs below provided our detailed submission explaining the reasons for which the addition proposed by the learned AO needs to be dropped -
Background 34.5 Ld. A.R. submitted that the employees of the Company are eligible to participate in Share based compensation schemes of the Ultimate Holding Company, wherein the shares of Ultimate Holding Company are granted to employees of the Company on satisfying certain conditions (explained in detail in the paragraphs below). 34.6 As per the note 25 of the financial statements, the Company has two types of share based compensation scheme operational, namely - Employee Stock Purchase Plan ("ESPP") and Employee Stock Incentive Plan ("ESIP") (hereinafter collectively referred as 'ESOP schemes').
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Brief note on the schemes 34.7 Ld. A.R. submitted that as explained in the notes to accounts, under the ESOP schemes the employees are eligible to purchase/get the shares of Ultimate Holding Company (through ESPP/ESIP scheme). The shares of ultimate Holding Company are issued under these schemes, as HPISO is not a listed entity and its shares are not traded in open market.
34.8 A.R's submissions on ESPP scheme :-
• The ESPP scheme provide an opportunity for Employees of HPISO to purchase share of Ultimate Holding Company at defined concessional price and thereby to have an additional incentive.
• Employees' are eligible to participate in this scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The difference between the purchase price and market price of shares is cross-charged by the Ultimate holding Company to HPISO.
• In this regard, Ld. A.R. has enclosed Annexure 2, copy of the cost reimbursement agreement entered by the Company with the Ultimate Holding Company. Para 2.3(b) of the agreement provides that the said expenses shall be that of HPISO as the same is incurred in respect of shares granted to the employees of HPISO. Accordingly, the same is considered as expenses relating to HPISO's employees and debited to profit and loss account of HPISO. Further, such cross charges are considered as a part of salary income of the concerned employees of HPISO, based on perquisite valuation rules and accordingly taxed in their hands.
• The stock options vest to employees and become exercisable according to the vesting schedule.
• Illustration/Mechanism Particulars Refer Amount Market price A 30 Exercise Price / B 20 Purchase price for the employee No of shares allotted C 1500 ESOP expenses cross- 15,000 charged to HPISO [1500*(30-20)]
He submitted that the cross-charges to HPISO is in respect of actual cost incurred towards options exercised and shares purchased by employees of HPISO.
AR's submissions on ESIP Scheme 7 IT)TP)A No.961/Bang/2022.
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34.9 ESIP schemes provides for various incentives. In India, employees of HPISO are eligible to receive stock awards (in the form of Restricted Stock Units, hereinafter referred to as "RSU") and stock options. The rewards under the stock options and RSU, are explained in the paragraphs below -
• RSU represents Restricted Stock Unit. As per the scheme, upon completion of vesting period, the employees will be eligible to receive reward in the form of shares. HPE grants RSUs at no cost to the employees. The value of the RSU shall be the market price of stock multiplied by the number of shares, which the employee is eligible to receive.
• Stock options represents options, which provide employees the right to purchase Shares in future at a specified price (the grant price) set on the grant date. The mechanism and illustration similar to ESPP scheme shall apply under stock option plan.
• The interest of the employee (i.e., shares) in the RSUs/stock options shall vest according to the vesting schedule (say 1/3 each year over a period of three years).
• Illustration/Mechanism for RSU Particulars Refer Year 1 Year 2 Year 3 Market price A 30 32 35 Exercise Price B -- -- -- / Purchase price for the employee No of shares C 500 500 500 allotted ESOP 15,000 16,000 17,500 expenses (500*30) (500*32) (500*35) cross-charged to HPISO
• The cost of such shares granted by the Ultimate Holding Company, to the eligible employees of HPISO under this scheme are cross-charged to HPISO by Ultimate Holding Company. The cross-charged amount is the expense incurred by HPISO and debited to its Profit and Loss account under the head Employee benefit expenses. The ESOP expenses in hands of HPISO is considered as a part of salary Income for the employees based on perquisite valuation rules.
• HPE global ESIP plan document along with sample RSU Grant agreement and Stock Option Award Agreement are enclosed as Annexure 3, Annexure 4A and 4B respectively. Additionally, the cross-reimbursements agreement enclosed as Annexure 2, shall apply in respect of cross charges of expenses by Ultimate Holding Company to HPISO.
ESOP schemes - Administration and Management 8 IT)TP)A No.961/Bang/2022.
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34.10 Ld. A.R submitted that as explained in the earlier paragraphs, the shares pertaining to Ultimate Holding Company are granted to eligible employees of HPISO under the above ESOP schemes. In this regard, Ld. A.R. submitted the following-
• The ESOP schemes are managed and administered by the Ultimate Holding Company for all the employees across HPE group entities.
• Employees of the Company are eligible to participate in these ESOP schemes, and accordingly, shares are granted based on their performance and certain other parameters.
• HPISO recommends the list of eligible employees to the ESOP Committee, based on employee performance and the other parameters.
• Ultimate Holding Company's responsibility is limited to grant of these shares to employees of HPISO as the shares are listed in stock exchange in USA. HPISO will handle all the paperwork, collection of options, providing eligible list of employees with number of shares to be granted, perquisite computation for the employees, TDS computation on perquisite and remittance thereof, etc. as the actual beneficiary of such shares are the employees of HPISO.
34.11 In connection with the above, Ld. A.R. submitted that the differential price/full price of the shares granted under these schemes are considered as a part of 'perquisite' taxable in the hands of employees under section 17(2) of the Act. Accordingly, the Company has deducted appropriate TDS under section 192 of the Act. ESOP Cross-charqes represents actual cost to HPISO 34.12 Ld. A.R. submitted that the ESOP cross-charges incurred by the Company represents the actual expenditure incurred by the Company. The remittance made towards such cross charges are in fact in the nature of incentives/compensation paid to the employees of HPISO, who form part of its business and are involved in carrying out day-to-day business operations/management. To substantiate the above, we have enclosed the following -
• Details of shares granted to employees in respect of which cost is recovered by Ultimate Holding Company from HPISO (enclosed as Annexure 6);
• Sample debit note/invoices in respect of which remittance is made towards ESOP charges during the year (enclosed as Annexure 7);
• Copy of the cost reimbursement agreement (enclosed as Annexure 2);
• Sample Form 16 evidencing that ESOP considered as taxable perquisite in the hands of the employees and included in their taxable salary and deduction of TDS on the taxable salary including the ESOP perquisite value as granted to the employees 9 IT)TP)A No.961/Bang/2022.
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• ESPP scheme document, ESIP scheme document and sample RSU agreement are enclosed as Annexure 1, Annexure 3 and Annexure 4A respectively. 34.13 From the above, it is evident that the ESOP charges incurred by the Company represents actual expenditure and therefore question of the same being notional in nature, as alleged by the learned AO, does not arise in the subject case.
34.14 Ld. A.R. in the paragraphs below provided detailed submission on the deductibility of ESOP charges and the reasons for which provisions of TDS under section 195 of the Act are not applicable. ESOP cross-charqes are deductible under Section 37(1) of the Act 34.15 Ld. A.R. submitted that as indicated earlier, the ESOP cross-charges represents the actual expenditure incurred by the Company in respect of its employees, who form part of the Company's business and are involved in carrying out day-to-day business operations/management. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for deduction under section 37 of the Act.
34.16 These expenses are nothing but compensation paid to employees of HPISO and accordingly, taxed in the hands of employees as 'Perquisites'. The disallowance of these expenses under section 37 of the Act would imply that the AO believes that the compensation paid to its employees is not allowable under section 37 of the Act.
34.17 Provision of section 37(1) of the Act inter alia provides that "any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, not being in the nature of capital expenditure or personal expenses, shall be eligible for deduction in computation of total income". In the subject case, we wish to submit as under:
• The ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company's business operations. The scheme is designed primarily to incentive and for retaining the employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees.
• Further, the share based compensation under the ESOP scheme is construed both by the employees and the Company as a part of employment remuneration package, which is an expenditure inextricably linked to the business of the Company.
• On similar facts, Income-tax Appellate Tribunal ("Tribunal"), Bangalore in the case of Nova Nordisk India Private Limited (ITA NO 1275/Bang/2011) (copy enclosed as Annexure 8) has held that ESOP expenditure incurred is deductible under Section 37(1) of the Act.
• In the cited case, the Tribunal was dealing with the expenditure incurred on ESOP schemes (managed by the Holding Company) and expenditure was in respect of employees of Indian Company. The Tribunal held that the ESOP 10 IT)TP)A No.961/Bang/2022.
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expenditure was wholly and exclusively for the purpose of the business of the Indian Company and had to be allowed as deduction as a revenue expenditure. Relevant extract of the decision is provided below -
• "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 Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a healthy 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 (supra)"
• In addition, Ld. A.R. placed reliance on the decision of the Bangalore ITAT (Special Bench) in the case of Biocon Ltd. Vs. DCIT [2013] 25 ITR(T) 602, wherein the Tribunal has held as under
• "It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the Id. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. 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."
34.18 In addition to the above, various Courts have also upheld deductibility of ESOP expenses in the following cases:
ING Vysya Bank Ltd. Vs: ACIT [2014] 39 ITR(T) 250 (Bangalore ITAT) Sterlite Technologies Ltd (ITA No.4841/Mum/2013) (Mumbai ITAT) CERA Sanitaryware Ltd (ITA No.2817/Ahd/2011) (Ahmedabad ITAT) Aditya Birla Nuvo Ltd (ITA No.3178/M/2012) (Mumbai ITAT) -
HDFC Bank Ltd (ITA No.374/Mum/2012) (Mumbai ITAT) -
Inox Leisure Ltd (ITA Nos.374 & 523/AHD/2012) (Ahmedabad ITAT) -
Korn Ferry International Pvt Ltd (ITAs No.5152/Mum/2012) (Mumbai ITAT) Sandvik Asia Pvt Ltd (ITA Nos.1841 & 1842/PN/2012) (Pune ITAT) 11 IT)TP)A No.961/Bang/2022.
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Religare Commodities Limited (ITA No.2283/Del/2013 and ITA No.3634/Del/2014)(Delhi ITAT) -
DCIT vs Kotak Mahindra (IT APPEAL NO. 698 (MUM.) OF 2016)(Mumbai ITAT) -
CIT v. Lemon Tree Hotels Ltd. [IT Appeal No. 107 of 2015, dated 18-8-2015] -
CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) 34.19 Therefore, Ld. A.R. submitted that it is amply clear that cross-charges towards ESOP scheme is an expenditure incurred by the Company wholly and exclusively towards its business. Expenditure incurred is not notional expense 34.20 As explained in the earlier paragraphs, the expenditure incurred on ESOP cross-charges represents actual expenses, evidenced from the invoices, employee listing, actual remittances made by the Company and other documentary evidences;
34.21 In fact, the Company has deducted appropriate TDS under section 192 of the Act on the ESOPs granted to the employees (as evidenced by sample Form 16 enclosed). Therefore, the question of the said expenditure being notional in nature does not arise;
34.22 Additionally, in the decisions referred above, it has been clearly emphasized that ESOP cost represents actual expenditure and not notional in nature. Therefore, the expenditure is eligible for deduction under section 37 of the Act.
34.23 Given the expenditure incurred in the subject case is towards employees of the Company, the question of the same being in nature of 'personal' does not arise.
Expenditure is not capital in nature 34.24 ESOP schemes designed are primarily to incentivize better performing employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. The schemes designed are not with an intention to increase the capital needs of the Company. The shares granted to employees are the shares listed and traded in stock exchange at USA.
34.25 The compensation paid to the employees in the form of ESOPs is revenue in nature and no asset of enduring nature is coming into existence. The decisions referred above also emphasize the said fact that expenditure incurred is in the nature of revenue expenditure.
34.26 Accordingly, Ld. A.R. submitted that said expense should be deductible in the hands of the employer. Additionally, Ld. A.R. submitted that the treatment cannot be different in the hands of the employee and in the hands of employer.
12IT)TP)A No.961/Bang/2022.
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Share based compensation under ESOP schemes is taxable in the hands of employees as "perquisite" under Salary income and TDS provision are applicable on such payment.
34.27 In view of the above, he submitted that the incurrence of expenditure towards ESOP for employees is a clear and explicit expenditure incurred for the employees and directly affects the performance of employees, which in-turn is critical for the Company's business and its long-term growth. Accordingly, we wish to submit that the expenditure incurred is deductible under section 37(1) of the Act.
34.28 While the learned AO failed to evaluate the facts of the case and made an unwarranted disallowance by wrongful application of section 37(1) of the Act. The learned AO had also erred in stating that the subject cross-charges were subject to withholding under Section 195 of the Act. In the paragraphs below, the Company submitted its contention against the application of section 195 of the Act.
Provisions of section 195 of the Act shall not apply 34.29 At the outset, Ld. A.R. reiterated that the Company has deducted appropriate TDS under section 192 of the Act in respect of share based compensation under ESOP schemes, as 'perquisites' under section 17 of the Act. Accordingly, it is submitted that the ESOP cross charges are subject to TDS provisions under section 192 of the Act and the same is in accordance with the Circular No. 17/2014 issued by the Central Board of Direct taxes for computation of taxable income of employees.
34.30 Without prejudice to the above, Ld. A.R. submitted the following:- • As mentioned earlier, the cross charges from the Ultimate Holding Company represent the cost of these shares as incurred by the Ultimate Holding Company in respect of shares granted to employees of HPISO and exercised by them. Accordingly, the subject cross charges and the remittances against the same does not contain any element of income, which is taxable in the hands of the Ultimate Holding Company as the same is cross-charged to HPISO on cost-to- cost basis.
• Provisions of section 195 of the Act inter a/ia provides for deduction of TDS only in respect of any sum of which is chargeable to tax under the Act. In the absence of any income element in the subject remittance, there is no sum chargeable to tax to Ultimate Holding Company and hence the provisions of Section 195 of the Act would not apply.
• The above principle has been upheld by various Courts including the Hon'ble Supreme Court in the case of GE India Technology Cen.(P.). Ltd vs CIT [2010] 327 ITR 456 (SC). Relevant extract of the Supreme Court decision is reproduced below -
13IT)TP)A No.961/Bang/2022.
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"Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of "any sum paid to any resident". Similarly, sections 194EE and 194F inter alia provide for deduction of tax in respect of "any amount" referred to in the specified provisions........
......The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225 (SC) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the Income-tax Act."
34.31 The above view has also been upheld by various other courts -
− Principal Commissioner of Income Tax vs Nova Technocast (P.) Ltd [2018] 94 taxmann.com 322 (Gujarat HC) − Commissioner of Income-tax vs Prism Cement Unit [2015] 61 taxmann.com 273 (Madhya Pradesh HC) − Commissioner of Income-tax -IV vs Himalya International Ltd. [2014] 51 taxmann.com 213 (Delhi HC) − Indo Overseas Films vs Income Tax Officer, International Taxation [2017] 81 taxmann.com 378 (Chennai - Trib.) 34.32 While the AO has considered the decision of GE India Technology Cen.(P.). Ltd in the DAO but without examining the facts of the case, has proceeded to conclude that ESOP cross charge is in the nature of income and are taxable under the Act.
34.33 The learned AO has neither examined nor has given any factual finding as to how the element of income is embedded in the reimbursement of ESOP cross charges. The AO has failed to take cognizance of the fact that the reimbursements are made on cost-to-cost basis. The AO has also made references to various other provisions of the Act without analyzing whether the ESOP cross-charges includes any income element, which is taxable under the Act.
34.34 Further, the case laws relied upon by the Learned AO are very different on facts and not applicable in the context of the Company.
34.35 The ESOP expenditure incurred is a compensation/incentive to the employee and has direct nexus with his/her employment. Such compensation to the employees in the form of ESOP are included in salary of the employees under 14 IT)TP)A No.961/Bang/2022.
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Section 17 of the Act. Therefore, such expenses are incurred for the purposes of business and hence allowable expenditure under section 37 of the Act in the hands of the employer i.e. the Company.
34.36 The expenditure of ESOP cross-charge amounting to INR 18,18,00,000 by the Ultimate Holding Company to HPISO are actual expenses incurred and remitted by HPISO and not notional in nature.
34.37 The ESOP remittance does not contain any element of income, which is taxable in the hands of the Ultimate Holding Company as the same are cost-to- cost reimbursements. Accordingly, the provisions of Section 195 of the Act is not applicable in the subject case.
34.38 Given the above facts and the judicial precedents, the Company submitted that ESOP expense is a deductible expenditure under section 37 of the Act and provisions of section 195 of the Act is not applicable.
35. The Ld. D.R. relied on the order of lower authorities.
36. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd. in ITA No.1275/Bang/2011 dated 30.9.2013, wherein it was held as under:-
18. "We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the 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. 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.
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 15 IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
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 shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the 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 Assessee and it is the Assessee who has to bear the difference in cost of the shares. The 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 (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.
16IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (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 company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees 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 (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 motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (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.
17IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
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 allowed as deduction."
36.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 dated 27.09.2022 has held as under:-
"20. We have heard rival submissions and perused the material on record. In assessee's group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee's group case, reads as follows:-
"20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:-
"From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be attracted. Section 37 does not envisage incurrence of expenditure in cash.
An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction, even though, the liability may have to be quantified and discharged at a future date.
Section 2(15A) of the Companies Act, 1956, defines "employees stock option" to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as 18 IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees.
The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital.
Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible."
21. In view of the above judgement of Hon'ble Karnataka High Court in the case of Biocon Ltd., we are in agreement with the contention of assessee's counsel in principle on this issue. However, we make it clear that the AO has to verify whether the said amount has been subject to TDS in the assessment year under consideration u/s 192/195 of the Act as argued by the Ld. A.R. before us. Accordingly, this issue is remitted to AO for fresh consideration in the light of above."
21. The assessee has raised grounds with regard to the issue that the assessee is not liable for TDS u/s 195 of the I.T.Act (refer grounds 2.9 to 2.15). We are of the view that these grounds need not be adjudicated, since, on perusal of the final assessment, it is clear that the disallowance of ESOP expenses has made under the provisions of section 37 of the I.T.Act (though there was some discussion in the draft assessment order with reference to disallowance u/s 40(a)(i) of the I.T.Act). Therefore, grounds 2.1 to 2.8 are allowed and ground 2.9 to 2.15 is not adjudicated."
36.2. In view of the above order of the Tribunal, we are inclined to allow both the above grounds taken by the assessee."
9. In the light of the above order of the Tribunal, which has considered an identical ESOP scheme, we hold that the assessee is entitled to deduction u/s 37 of the I.T.Act in 19 IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
relation to ESOP expenditure amounting to Rs.35,03,19,026. It is ordered accordingly.
Payments towards encashment of Rs.3,42,22,795
10. The assessee had claimed provision for leave encashment on accrual basis for assessment years 2011- 2012, 2012-2013 and 2013-2014. The claim of the assessee for provision for leave encashment was on the basis of the judgment of the Hon'ble Calcutta High Court in the case of Exide Industries Limited & Anr. v. Union of India reported in (2007) 292 ITR 470 (Cal). It is submitted that, however, the claim of the assessee for the aforesaid years were disallowed by the A.O. For the assessment year 2018-2019, the assessee had paid an amount towards leave encashment of a sum of Rs.3,42,22,795. The aforesaid payment was not claimed as a deduction, since it was claimed in the earlier years on accrual basis. Subsequently, on 24.04.2020, the Hon'ble Apex Court vide Civil Appeal No.3545/2009 overruled the judgment of the Hon'ble Calcutta High Court in the case of Exide Industries Limited & Anr. v. UOI (supra) and upheld the constitutional validity for deduction of leave encashment on payment basis u/s 43B of the I.T.Act. In view of the Hon'ble Apex Court judgment, the decision on account of provision for leave encashment cannot be sustained. However, the assessee is claiming deduction u/s 43B(f) of the I.T.Act on the payment made towards leave encashment for the relevant assessment year, namely, A.Y. 2018-2019, which has not been claimed in the return of income for the year under consideration.
20IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
11. We have heard rival submissions and perused the material on record. On identical facts in the case of group company, namely, Global E-Business Operations (P.) Ltd. v. DCIT reported in 145 taxmann.com 413 (Bang-Trib.), the Bangalore Bench of the Tribunal had held that leave encashment actually paid as per the provision of section 43B(f) of the I.T.Act is to be allowed as a deduction. For the aforesaid purpose, the Tribunal in the case of Global E- Business Operations (P.) Ltd. v. DCIT (supra), restored the matter to the files of the A.O. to verify the claim of the assessee and to allow deduction to the assessee as per law. The relevant finding of the Tribunal reads as follows:-
"25. We have heard rival submissions and perused the material on record. In the light of the decision of the Hon'ble Supreme Court in the case of Exide Industries (supra) , the assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Taking into consideration the circumstances under which the assessee did not claim a sum of Rs.7,59,06,267 being leave encashment actually being paid during the previous year relevant to Assessment Year 2016-2017 we are of the view that the assessee should be allowed leave encashment actually paid as per provisions of section 43B(f) of the Act. We remit the issue to the AO to verify the claim of the assessee and allow deduction to the assessee as per law after affording assessee opportunity of being heard. It is ordered accordingly."
12. Since the facts considered by the Tribunal is identical to the facts of the instant case, adopting similar direction, we restore this issue to the files of the A.O. The A.O. is directed to afford a reasonable opportunity of hearing to the assessee 21 IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
before a decision is taken in the matter. It is ordered accordingly.
Credit of tax paid to Aruba Network India Private Limited amounting to Rs.21,48,27,493
13. The assessee had claimed tax credit of the merged entity amounting to Rs.21,48,27,493 in the return of income filed. However, the A.O. did not grant tax credit of the merged entity, namely, Aruba Networks India Private Limited. The DRP vide its directions, restored the matter to the A.O. The directions of the DRP in this regard, reads as follows:-
"2.16.45 Having considered the submissions, the AO has erred in law and facts, in not considering Assessee's submission in relation to tax credit of the merged entity (i.e. Aruba Networks India Private Limited) and allow the claim of the assessee if found in order. This ground of objection is disposed of accordingly."
14. Pursuant to the DRP's directions, the A.O. in the final assessment order disposed of the above issue as under:-
"15.1 Claim of tax credit of the merged entity M/s.Aurba Networks India Private Limited The DRP has further directed to verify the claim of the tax credits of the merged entity (M/s.Aurba Networks India Private Limited-PAN AAFCA4556M). The assessee has submitted the details of TDS along with Advance Tax and Self Assessment Tax as reflected in Form 26AS. However, the total tax credit of Rs.21,48,27,493/- is not given in this order as the amounts are not reflecting in the Assessee's PAN. The same will be considered on merging of the PAN of M/s.Aurba Networks India Private Limited-PAN AAFCA4556M to M/s.Hewlette Packard India Software Operations Private Limited PAN-AAACH7164B)."
22IT)TP)A No.961/Bang/2022.
M/s.Hewlett Packard (India) Software Operation Pvt.Ltd..
15. We have heard rival submissions and perused the material on record. It is claimed that M/s.Aurba Networks India Private Limited has been merged with the assessee during the relevant financial year by the judgment of the Hon'ble High Court. It is stated that the income of the said merged entity has been taken as income of the assessee. Therefore, any advance tax paid by M/s.Aurba Networks India Private Limited has to be given due credit to the assessee while computing the total income of the assessee. We direct the A.O. to examine the claim of the assessee afresh and give due tax credit of the merged entity as per law. It is ordered accordingly.
16. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 18th day of January, 2023.
Sd/- Sd/-
(Padmavathy S) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore; Dated : 18th January, 2023.
Devadas G*
Copy to :
1. The Appellant.
2. The Respondent.
3. The DRP-1, Bangalore
4. The Pr.CIT-3, Bengaluru.
5. The DR, ITAT, Bengaluru.
6. Guard File.
Asst.Registrar/ITAT, Bangalore