Northern Operating Services Private Limited Vs JCIT (ITAT Bangalore)
ITAT Bangalore held that expenditure towards Employees Stock Option Plan (ESOP) is allowable deduction u/s 37 of the Income Tax Act.
Facts- During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to 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).
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.
Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal.
Conclusion- On identical facts, the Bangalore Bench of the Tribunal in assessee’s own case for assessment year 2015-2016, had decided the ESOP expenses to be an allowable deduction.
Since the facts of the instant case are identical to assessment year 2015-2016, following the co-ordinate Bench order in assessee’s own case for assessment year 2015-2016, we hold that the expenditure towards ESOP is an allowable deduction u/s 37 of the Act. It is ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against final assessment order dated 30.08.2018 passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (“the Act” for short). The relevant assessment year is 2014-2015.
2. The brief facts of the case are as follows:
The assessee is a company engaged in the business of providing transaction based business process outsourcing services to its group companies. For the assessment year 2014-2015, the return of income was filed on 28.11.2014 declaring income of Rs.68,09,26,340. The case was selected for scrutiny and notice u/s 143(2) of the Act was issued on 29.08.2015. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to 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 09.01.2023 withdrawing the grounds relating to the TP adjustment pursuant to the Mutual Agreement Procedure (MAP) Resolution being accepted by the competent authority. The copy of the letter is placed on record. In view of the settlement of the issue as regards the TP adjustment under the MAP Resolution being accepted by the competent authority, the grounds relating to the TP adjustment, namely, Grounds 1 to 16 are dismissed as withdrawn.
6. The surviving grounds relating to the corporate issues, namely, the expenses disallowed with reference to ESOP, reads as follows:-
“Erroneous disallowance of Payment of Employee Stock Option Plan (‘ESOP’) expenses
1. The Hon’ble DRP / learned AO has erred in disallowing ESOP expenses, amounting to INR 10,729,828, by contending that the same is a fictitious cost.
2. 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.
3. The Hon’ble DRP erred in issuing the directions, without appreciating the directions issued in the case of the Appellant for A Y 2012-13 wherein, it has held that if the Appellant 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.
4. 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.
5. 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 Financial Year (‘FY’) 2015-16.
6. The Hon’ble DRP / learned AO has erred in disallowing expenses on Restricted Stock Units (‘RSU’), without considering the details submitted by the Appellant that the tax has been deducted on the ‘Perquisite’ amount as “Salary” income, at the time of vesting of the RSU.
7. Notwithstanding and without prejudice to our above contention, if the ESOP expenses are not 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 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 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:
