JCIT (OSD) -3(4), MUMBAI, MUMBAI vs. STERLITE TECHNOLOGIES LIMITED, AURANGABAD

12.2023 passed against the assessment order by ACIT, LTU, Circle- 1, Mumbai, u/s. 143(3) of the Income-tax Act (hereinafter referred to as the “Act”), dated 21.12.2018 for Assessment Year 2016-17. 2. Grounds taken by the assessee are reproduced as under: 1.1 Erred in upholding the action of the learned Assessing Officer ('AO') in not allowing the claim of Appellant that the rate of DDT in respect of dividend distributed to its overseas holding company ought to be restricted to the rate of tax of 5% prescribed under Article 10(2) of applicable India- Mauritius DTAA and that the Appellant is eligible for refund of DDT paid in excess of such rate.

1. Grounds taken by the Revenue are reproduced as under: i. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of ESOP expenses without appreciating the facts that the issue is contested before the Hon'ble High Court in assessee's own case in A.Y. 2008-09”?

2. In these two appeals, one by the assessee and the other by the Revenue, grounds of appeal raised by both the parties are different.

Common facts relevant to both the appeals are that assessee is engaged in manufacturing of telecom cables, telecommunication equipment, alloy/aluminium conductors and networking solutions as well as telecom software product business. Assessee filed its return of income on 29.11.2016, reporting total income at Rs. 161,79,93,020/-. Assessment was completed by making the following additions/disallowances: i. disallowance of ESOP expenses – Rs.13,46,38,862/- ii. disallowance u/s.14A r.w.r. 8D – Rs. 1,05,68,831/-

1. Ld. Assessing Officer had also made disallowance u/s. 43B of Rs.4,83,92,306/- while computing the book profit u/s.115JB to apply Minimum Alternate Tax (MAT). Further, assessee had claimed refund of Dividend Distribution Tax (DDT) paid in excess in relation to dividend distributed to its shareholder which was denied by the ld. Assessing Officer.

We first take up appeal by the assessee, wherein the sole issue is in respect of claim of refund of DDT. Assessee had declared dividend Sterlite Technologies Ltd. AY 2016-17

1. The said issue is squarely covered against the assessee which the ld. Counsel for the assessee in the course of hearing before us had fairly accepted the stated position. Hon'ble Special Bench of Mumbai ITAT in the case of Total Oil India Pvt. Ltd. and others vs. DCIT in ITA. No. 6997/Mum/2019 dealt with this issue and held against the assessee. Hon'ble Special Bench took the view that Double Taxation Avoidance Agreement does not get triggered at all when a domestic company pays DDT u/s. 115-O of the Act. It thus, held that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder which attracts additional income tax, i.e. tax on distributed profits referred in Section 115-O, such additional tax payable by the domestic company shall be at the rate mentioned in Section 115-O and not at the rate of tax applicable to the non-resident shareholder as specified in the relevant DTAA with reference to such dividend income. Ld. CIT(A) thus, by referring to the decision of Hon'ble Special Bench (supra) rejected the claim of refund made by the assessee and the ground of appeal was thus, dismissed. Sterlite Technologies Ltd. AY 2016-17

2. We have taken note of the decision of the Hon'ble Special Bench to which ld. Counsel for the assessee fairly conceded. Accordingly, ground raised by the assessee in its appeal is dismissed. In the result, appeal of the assessee is dismissed.

We now take up appeal by the Revenue. Ground No.1, 2, 4 deal with disallowance of ESOP expenses. Ground No. 5 and 6 are in respect of disallowance made u/s. 14A r.w.r. 8D and ground No.7 relates to disallowance made u/s.43B which has been added while computing the book profit u/s. 115JB. Thus, essentially there are three issues involved in the appeal by the Revenue.

In respect of disallowance of ESOP expenses, it is noted that assessee granted equity-based incentive to its employees under its Employee Stock Option Scheme, 2006 and 2010 with the objective to attract, retain, reward and motivate its employees to contribute to the growth and profitability of the assessee. Vesting of option was subject to continued employment with the assessee. Liability of ESOP cost was determined on a scientific basis i.e., fair value method based on mandate of SEBI guidelines. Assessee debited an amount of Rs.13,46,38,862/- in its profit and loss account and claimed the same as deductible expense while computing the taxable business income. Detailed disclosures were made in this regard in Note No. 24 to its audited financial statements. Assessee made detailed submissions before the ld. Assessing Officer explaining its case for claim of deduction u/s. 37(1). According to the assessee, benefits arising in the hands of the employees on account of ESOP scheme is chargeable as perquisites in their hands and the same has also been subjected to TDS u/s. 192. Sterlite Technologies Ltd. AY 2016-17

1. Further, assessee claimed an additional amount of Rs. 5,34,44,302/- in respect of perquisite value in excess of ESOP discount, debited in the profit and loss account for which the basis was the decision of Coordinate Bench in assessee's own case for Assessment Year 2008-09 and 2009-10 as well as the decision of Hon'ble Special Bench in the case of Biocon Ltd. 144 ITD 21. However, ld. Assessing Officer disregarded the submissions made and disallowed the claim by making an addition of Rs. 18,80,83,164/- i.e., Rs.13,46,38,862/- computed on the basis of fair valuation method and Rs. 5,34,44,302/- in excess of perquisite value over the ESOP expenditure claimed.

In the first appeal, assessee made elaborate submissions including the judicial precedence in its own case decided by the Coordinate Bench of ITAT, Mumbai in appeals for Assessment Year 2001-02, Assessment Year 2002-03 and Assessment Year 2007-08 to Assessment Year 2010-11. Ld. CIT(A) referred to the decision of Coordinate Bench in assessee's own case for Assessment Year 2010-11 in ITA No. 4755/Mum/2014 dated 26.10.2016, wherein this issue on ESOP expenses was allowed. Relevant para from the said decision is extracted below for ready reference. “5. Heard both sides, perused the orders of the authorities below and the orders placed before us. We find that the issue in appeal has been decided in favour of the assessee wherein the Co-ordinate Bench allowed the ESOP expenses incurred by the assessee observing as under “7. We have heard the parties and carefully gone through the material available on record. We found that the CIT(A) in its appellate order has observed that the ESOP expenses of Rs. 1,86,63,187/- represented the option discount, that is, the excess of the market price of the share on the date of grant of the option under ESOP 2006 over the exercise price of the option. It has been submitted that (1) SEBI guidelines mandate that the ESOP expenses should be debited to the P&L Account, (2) the liability was not a contingent or notional liability but an ascertained liability and it uxis also not a capital expenditure, (3) ESOPs were granted to the employees of the company as per the scheme for motivating them to work for a certain number of years and Sterlite Technologies Ltd. AY 2016-17

Before us nothing contrary was brought on record by the revenue to distinguish the factual matrix vis-a-vis the present case before us. In the given set of facts where there is no material change both, in the factual position and the applicable law, respectfully following the orders of the Coordinate Bench in assessee's own case for past several preceding years, claim of the assessee on account of ESOP expenditure of Rs 13,46,38,862/- is allowed and no interference is called on the observations and findings of ld. CIT(A).

1. Further, in respect of claim of Rs 5,34,44,302/- pertaining to excess of ESOP perquisite value taxed in the hands of its employees over the ESOP expenditure claimed as per the fair value method during the vesting period, reliance was placed by ld. CIT(A) on the decision of Hon'ble Special Bench in the case of Biocon Limited which has elaborately dealt with this issue in para 11.1.6 and 11.1.7 which are extracted below. “11.1.6. The amount of discount at the stage of granting of options ur.t the market price of shares at the time of grant of options is always a tentative employees cost because of the impossibility in correctly visualizing the Sterlite Technologies Ltd. AY 2016-17

1.7. From the above table it can be noticed that the market price of the shares at the time of grant of option was Rs.1 10 against the option price of Rs. 10, which resulted in discount at Rs. 100. With the vesting period of four years with the equal vesting, the company can rightly claim deduction at the rate of Rs.25 each at the end of first, second, third and fourth year of vesting. But this total deduction for discount of Rs.100 over the vesting period needs to be adjusted at the time of exercise of option by the employee when the shares are issued. In Situation 1, the market price of shares at the time of exercise of option is at Rs.110, which is similar to the market price at the time of grant of option. As the total amount of discount of Rs. 100 over the vesting period is actually quantified at Rs. 100, no further adjustment to the discount is required at the time of exercise of option. In Situation II, the market price of the share at the time of exercise of option has gone up to Rs. 130. The amount of real compensation to employee is Rs.120 as against the tentative compensation of Rs. 100 per share which was accounted for and allowed as deduction during the vesting period. As the actual quantification of the compensation has turned out to be Rs.120, the company is entitled to a further deduction of Rs.20 at the time of exercise of option. In Situation III, the market price of the share at the time of exercise of option has come down to Rs.90. The amount of real compensation to employees is Rs 80 as against the tentative compensation of Rs.100, which was allowed as deduction during the Sterlite Technologies Ltd. AY 2016-17

2. Assessee had furnished the details of perquisite value taxed in the hands of the employees for Rs 5,34,44,302/- which is tabulated below:

3. Ld. CIT(A) after considering these facts and the decision of Hon'ble Special Bench (supra) allowed the claim of the assessee. We have perused the material on record and gone through the factual matrix. Nothing has been brought on record to controvert the factual position and accordingly, the claim of the assessee is allowed without finding any reason to interfere with the observations and finding of ld. CIT(A) on this issue. Accordingly, ground No. 1 to 4 raised by the Revenue are dismissed.

In respect of ground No.5 for disallowance made u/s.14A r.w.r.8D of Rs 1,05,68,831/-, assessee submitted that earning of exempt income is a prerequisite for invoking section 14A r.w.r. 8D. Fact of the matter is that during the year under consideration, assessee did not earn any exempt income to call for disallowance u/s. 14A. It had made a suo moto Sterlite Technologies Ltd. AY 2016-17

1. Considering the judicial precedence in assessee's own case and the applicability of the amendment prospectively as well as the factual position which remains undisputed that assessee had not earned any exempt income during the year, though suo moto had disallowed an amount of Rs.85,000/- towards direct expenses, does not call for any interference in the observations and finding of ld. CIT(A), giving relief to the assessee by deleting the disallowance computed by ld. Assessing Officer.

2. Further, vide ground No.6 on the same issue relating to disallowance u/s.14A, ld. Assessing Officer added the same while computing the book profit u/s. 115JB which ld. CIT(A) has held in favour of the assessee, by relying on decision of Coordinate Bench in assessee's own case for Assessment Year 2008-09 (supra). Further, ld. CIT(A) has granted relief on this issue also by restricting the Sterlite Technologies Ltd. AY 2016-17

Ground No.7 is in respect of disallowance u/s.43B of Rs. 4,83,92,306/- which ld. Assessing Officer has added while computing the book profit u/s. 115JB. According to the assessee, it had already disallowed this amount while computing taxable income under the normal provisions of the Act. The said disallowance u/s. 43B is not required to be considered for the purpose of computing book profit u/s. 115JB as evident from the adjustments to book profit specified under Explanation 1 to section 115JB. Ld. CIT(A) by referring to the Explanation 1 to section 115JB(2), noted the position of law that the said explanation provides for various adjustments which can be made to the book profit. He noted that section 115JB is a sacrosanct code and amenable only by adjustments stipulated under the said section. Since there is no specific adjustment stipulated for the disallowance made u/s. 43B, the same cannot be added while computing the book profit.

1. Nothing contrary is brought on record in this respect. Factual position is that assessee had suo moto disallowed the same while computing the total income under the normal provisions of the Act. Further, it is a settled position as held by Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT 122 Taxman 562 that any addition/reduction to the book profit should be restricted to the adjustments provided in Explanation 1 to section 115JB(2) of the Act. Accordingly, in the given set of facts and the judicial precedents Sterlite Technologies Ltd. AY 2016-17

In the result, appeals of both, the Revenue and the assessee are dismissed. Order is pronounced in the open court on 30 September, 2025 (Amit Shukla) Accountant Member