Northern Operating Services Pvt. Ltd. Vs JCIT (ITAT Bangalore)
ITAT Bangalore held that expenditure towards ESOP is wholly and exclusively for the purpose of business and it satisfies all the conditions referred to in section 37(1). Accordingly, expenditure towards ESOP is eligible for deduction u/s 37 of the Income Tax Act.
Facts- The assessee had participated in the Northern Trust Corporation 2012 Stock Plan issued by its parent, The Northern Trust Company (“NT Corporation”) whereby awards based in shares of the NT Corporation were granted directly by ‘The Compensation and Benefit Committee’ of NT Corporation’s board of directors to the Assessee’s employees through the stock option (“ESOP”) scheme or the restricted stock unit (“RSU”) scheme.
Under the ESOP scheme, stock options on equity shares of the ultimate holding company i.e., NT Corporation were granted to the employees and Directors of the ultimate holding company, its subsidiaries and affiliates. The equity shares are granted directly by the ultimate holding company to the employee. Accordingly, employees are eligible to participate in the scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options.
The assessee claimed the amount reimbursed to NT Corporation as an expenditure in the statement of profit and loss as ‘Employee Benefit Expense’. Further, RSU’s were also issued by NT Corporation to the employees of the assessee as a part of employee compensation scheme. 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.
AO in the draft assessment order proposed to disallow the amount of Rs.1,41,47,125/- claimed by the assessee towards Employee share-based payment expenses. The AO proposed to disallow the expenses. Aggrieved, the assessee filed its objections before DRP who rejected the same.
Conclusion- Coordinate bench of Tribunal in the case of Novo Nordisk India P. Ltd. v. DCIT has held that 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.
Held that the assessee’s case being identical, respectfully following the above decision of the coordinate Bench, we hold that the expenditure towards ESOP is eligible for deduction u/s 37 of the Act.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is against the final assessment order passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 26.9.2019 by the JCIT, Special Range 5, Bangalore, for the assessment year 2015-16.
2. The assessee is a company engaged in the business of providing back office services in the nature of processing of securities, banking operational activities, administrative services, etc. to its AE. The assessee filed the original return of income for the AY 2015-16 on 25.11.2015 declaring total income of Rs.81,25,92,790. The case was selected for scrutiny and the notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions with its AE, a reference was made to the TPO to arrive at the arm’s length price (ALP) of the international transactions. The TPO arrived at a TP adjustment of Rs.36,79,45,675. The AO passed a draft assessment order and besides the TP adjustment, the AO made an adjustment towards Employee Stock Option Plan [ESOP] for an amount of Rs.1,41,47,125. Aggrieved, the assessee raised objections before the DRP whereby the TP adjustment was reduced to Rs.21,29,68,370 and the ESOP disallowance was sustained. Accordingly, the AO passed the final assessment order against which the assessee is in appeal before the Tribunal.
3. The assessee vide letter dated 3.1.2023 withdrew the grounds relating to TP adjustment pursuant to Mutual Agreement Procedure (MAP) Resolution acceptance by the Competent Authority, copies of which are placed on record. Accordingly, grounds No.1 to 20 raised with regard to TP adjustment are dismissed as withdrawn.
Disallowance of ESOP expenses
4. The assessee is contending the disallowance of ESOP expenses through ground Nos.21 to 27 which read as follows:-
“Erroneous disallowance of Payment of Employee Stock Option Plan (`ESOP’) expenses
21. The Hon’ble DRP / learned AO has erred in disallowing ESOP expenses, amounting to INR 14,147,125, by contending that the same is a fictitious cost.
22. The Hon’ble DRP / learned AO has erred in holding the loss on account of discounted price of shares is only a notional / imaginary loss and not a crystallized one.
23. The Hon’ble DRP erred in issuing the directions, without appreciating the directions issued in the case of the Assessee for AY 2012-13 wherein, it has held that if the Assessee has considered the said ESOP as perquisite at the time of vesting and has deducted taxes on the same, the said ESOP expenditure should be allowed as deduction.
24. The Hon’ble DRP / learned AO has erred in disallowing Stock Options expenses without appreciating the fact that the same is taxable in the hands of employees, as ‘Perquisites’ under the head “Salary”, at the time of exercise of options and not at the time of vesting of options.
25. The Hon’ble DRP / learned AO ought to have appreciated that as per the provisions of section 17(2)(iv) of the 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 FY 2015-16.
26. The Hon’ble DRP / learned AO has erred in disallowing expenses on Restricted Stock Units (`RSU’) without considering the details submitted by the Assessee that the tax has been deducted on the ‘Perquisite’ amount as “Salary” income, at the time of vesting of the RSU.
27. Notwithstanding and without prejudice to our above contention, if the ESOP expenses are not considered as allowable expenditure for the subject AY, the learned AO should allow expense to the Assessee in the year in which the employees will exercise the options.”
5. The brief facts in this regard are that that the assessee had participated in the Northern Trust Corporation 2012 Stock Plan issued by its parent, The Northern Trust Company (“NT Corporation”) whereby awards based in shares of the NT Corporation were granted directly by ‘The Compensation and Benefit Committee’ of NT Corporation’s board of directors to the Assessee’s employees through the stock option (“ESOP”) scheme or the restricted stock unit (“RSU”) scheme. Under the ESOP scheme, stock options on equity shares of the ultimate holding company i.e., NT Corporation were granted to the employees and Directors of the ultimate holding company, its subsidiaries and affiliates. The equity shares are granted directly by the ultimate holding company to the employee. Accordingly, employees are eligible to participate in the scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The ESOP expenses represents the discount offered to Assessee’s employees on issue of shares of its ultimate holding company i.e., NT Corporation, being the difference between the fair market value of shares on the date of grant and the exercise price. The said expense was initially incurred by NT Corporation and was subsequently reimbursed by the assessee to NT Corporation. A sample copy of the debit note raised by NT Corporation on the assessee is available at page 159 of paper book. The assessee claimed the amount reimbursed to NT Corporation as an expenditure in the statement of profit and loss as ‘Employee Benefit Expense’. Further, RSU’s were also issued by NT Corporation to the employees of the assessee as a part of employee compensation scheme. Under this scheme, the employee received cash payments, based on the fair market value, on completion of vesting 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 share-based payment expenses. The AO proposed to disallow the expenses for the following reasons:
