TE Connectivity Services India Private Limited Vs National Faceless Assessment Centre (ITAT Bangalore)
ITAT Bangalore held that the expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income.
Facts-
The assessee floated a share option plan scheme for its executives and senior employees. These options are given by the ultimate holding company i.e., TE Connectivity Limited, Switzerland (“TEL”), to the employees of assessee. The stock option plan granted to the employees during the current period is Restrictive Stock Options (“RSU”), which are assessed, managed and administered by the ultimate holding company. During the relevant FY 2016-17, assessee debited an amount of Rs.10,60,575 in the profit & loss account pertaining to costs relating to 236 shares vested during the year under consideration. The entire amount was cross charged to the assessee by the ultimate holding company, as the RSUs are allotted at free of cost to the employees of the assessee. In other words, the employees of the assessee were given option to invest in shares of the market value of the shares and the price at which the shares were issued to the employees was paid by the assessee to its holding company and such difference was claimed as employee cost of the assessee in the profit and loss account.
The AO rejected the claim of the Assessee on the ground that the Employee Stock Option Plan (ESOP) expenditure being a capital expenditure. The DRP also upheld the order of the AO on the ground that the similar issue on ESOP was pending before the Hon’ble Supreme Court and the addition was upheld just to keep the issue alive.
Conclusion-
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.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal by the assessee against the final Order of Assessment dated 27.01.2022 passed by the National Faceless Assessment Centre, Delhi, under section 143(3) r.w.s. 144C(13) read with section 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’), relating to Assessment Year 2017-18.
2. Ground No.1 raised by the assessee is general in nature and calls for no adjudication. Ground No. 2 raised by the assessee relates to the addition made to the total income of the assessee on account of determination of Arm’s Length Price (ALP) in respect of an international transaction entered into by the assessee with its Associated Enterprise (AE). The assessee has also raised additional ground No.14 which is nothing but a facet of the argument of the assessee in connection with the determination of ALP viz., companies with high turnover cannot be taken as a comparable company for comparing profit margins of the assessee. The specific contention in this regard is that the lower authorities erred in not applying an upper limit of turnover upto INR 200 crores for selection of comparable companies for benchmarking. At the time of hearing, learned Counsel for the assessee submitted that if some of the comparable companies that remain after the order of the Dispute Resolution Panel (DRP) are excluded then he would not press for adjudication of other grounds with regard to determination of Arm’s Length Price. Accordingly, we proceed to decide the issue with regard to determination of ALP.
3. The factual details with regard to the determination of ALP are that the assessee was incorporated on May 18, 2015, as a wholly owned subsidiary of Tyco Electronics Singapore Pte Ltd, Singapore, which is ultimately held by TE Connectivity Ltd., Switzerland. The assessee is a captive service provider and is engaged, inter-alia, in the business of providing shared services in the areas of Information Technology, Finance back-office, Human Resource, customer support, etc. to the TE Group entities across the globe i.e., Information Technology enabled Services [ITeS].
4. Since the aforesaid transaction of rendering of ITeS was an international transaction, income from the aforesaid transaction has to be determined having regard to the ALP as laid down in section 92 of the Act.
In support of the assessee’s claim that the price it received from its AE for rendering ITeS was at ALP, the assessee filed transfer pricing analysis choosing Transactional Net Margin Method (TNMM) as the most appropriate method for determining ALP. The operating margin of the assessee as computed in the TP study and as computed by the Transfer Pricing Officer (TPO) in his order was as follows:
(All amounts in INR Crores)
