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Facts
The assessee claimed a refund of Dividend Distribution Tax (DDT) paid in excess on dividend distributed to its overseas holding company, arguing it should be at 5% as per the India-Mauritius DTAA. The Revenue's grounds of appeal pertained to disallowance of ESOP expenses, disallowance under Section 14A r.w.r. 8D, and disallowance under Section 43B for MAT computation.
Held
The Tribunal held that the Double Taxation Avoidance Agreement does not apply to DDT paid under Section 115-O of the Act, thus rejecting the assessee's claim for a DDT refund. The Tribunal also upheld the CIT(A)'s decision allowing ESOP expenses and restricting the disallowance under Section 14A r.w.r. 8D, and found no reason to interfere with the CIT(A)'s decision regarding disallowance under Section 43B for MAT computation.
Key Issues
Whether the assessee is eligible for a refund of DDT paid in excess of 5% on dividend distributed to its foreign holding company. Whether ESOP expenses are allowable as a deduction, and whether disallowances under Section 14A and 43B are justified.
Sections Cited
143(3), 10(2), 37(1), 192, 115-O, 14A, 8D, 43B, 115JB
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Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
Assessment Year: 2016-17 Principle Commissioner of Sterlite Technologies Limited Income Tax- 27, E-1 Waluj, MIDC Industrial Vs. Navi Mumbai Area, Aurangabad - 431136 Maharashtra (PAN: AAECS8719B) (Appellant) (Respondent) Present for: assessee : Shri Nikhil Tiwari and Ms. Palak Mehta, CAs Revenue : Shri Satyaprakash R. Singh, CIT DR and Shri Leyaqat Ali Aafaqui, Sr. DR Date of Hearing : 30.07.2025 Date of Pronouncement : 30.09.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These two appeals are filed by the assessee and Revenue against the orders of Commissioner of Income Tax (Appeals)-13, Pune, vide order No. ITBA/APL/M/250/2023-24/1058725938(1), dated and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 13.12.2023 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.
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.
2.1. 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”? ii. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that deduction of ESOP expenses should be disallowed as per express provisions of the act as well as the CBDT Circular No. 9/2007? iii. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deciding the issue in favour of assessee based on the details furnished before the Ld. CIT(A) during the appellate proceedings without calling for the remand report from the assessing officer or remanded the issue back to the AO. ? iv. Whether, 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 for A.Y. 2008-09 and in the case of Lupin Limited for A.Y. 2009-10"?. v. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT was right in restricting the disallowance u/s 14A r.w. Rule 8D at Rs. 85,000/- instead of Rs. 1,05,68,831/- ignoring the fact that the amount of disallowance was worked out by the Assessing Officer as per Section 14A of the I. T. Act r.w. Rule 8D of the I. T. Rules and without appreciating the facts that the issue is contested before the Hon'ble High Court in assessee's own case for A.Y. 2008-09?" and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 vi. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting the disallowance u/s 14A of the I. T. Act r.w. Rule 8D of the 1. T. Rules while computing book profits u/s 115JB of the Act and without appreciating the facts that the issue is contested before the Hon'ble High Court in assessee's own case for A.Y. 2008-09? vii. Whether, on the facts and in the circumstances of the case and in the law, the Ld. CIT(A) was right in holding that no specific adjustment stipulated for considering the disallowance u/s. 43B while computing book profit u/s 115JB of the Act?"
2.2. In these two appeals, one by the assessee and the other by the Revenue, grounds of appeal raised by both the parties are different.
3. 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/- 3.1. 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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 amounting to Rs. 23,65,05,804/- during FY 2016-17 on which it paid DDT of Rs.4,81,47,016/- u/s.115-O at the rate of 20.36% including applicable surcharge and cess. Out of this total dividend paid, assessee had paid dividend amounting to Rs.12,53,47,024/- to its holding company namely, Twin Star Overseas Ltd., being a tax resident of Mauritius. Corresponding DDT of Rs. 2,55,17,704/- was discharged by the assessee on this dividend payout to its holding company. Assessee claimed that rate of DDT on the amount of dividend paid to its holding company, it being a tax resident of Mauritius, shall be restricted to 5% and thus, claimed a refund of Rs.1,92,50,353/- towards DDT discharged by it in excess of 5% of the dividend amount paid to its holding company.
4.1. 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 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.
4.2. 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. and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 6.1. 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 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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 since these were taxable in the hands of the employees, the expenditure uxas allowable as revenue deduction, We found that the very similar issue has been decided by the Mumbai Bench of the Tribunal in assessee's own case in for AY.2001-02 & 2002-03 in favour of assessee regarding the claim of assessee for ESOP expenses. The CIT(A) after considering the aforesaid decision ITA No. 4755/M/2014 3 of the Tribunal allowed the claim of assessee for ESOP expenses. Respectfully following the order of the Tribunal in assessee's own case, we are of the considered view that the CIT(A) has rightly allowed the claim of the assessee. Hence, we uphold the decision of the CIT(A) regarding allowing ESOP expenses claimed by the assessee and dismiss the ground NO.1 of the Revenue." Respectfully following the said decision of the Co-ordinate bench in assessee's oun case, we sustain the order of the Ld. CIT(A) in allowing the claim of the assessee by following the decision of the Co-ordinate Bench for the Assessment Years 2001-02 and 2002-03”
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).
8.1. 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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employees cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options. it can be done by making suitable northwards or southwards adjustment at the time of exercise of option. This can be explained with the following example with the assumption of vesting period of four years and the benefit vesting at 25 percent each at the end of 1st to 4th years:- At the time At the time of exercise of option of granting Situation Situation II Situation option HI Market value 110 110 130 90 per share Option price 10 10 10 10 Employees 10 100 120 80 compensation on Discount 11.1.7. 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.
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.
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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 vesting period. As the actual quantification of the compensation has turned out to be Rs 80, the company is liable to reverse the deduction of Rs.20 at the time of exercise of option."
8.2. 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:
S. No. Particulars Amount (Rs.) 1 Total number of options exercised (in number) 11,06,263 2 Perquisite value taxed in the hands of the 8,55,10,820 employees exercising such options (a) 3 ESOP cost determined to be claimed during the 3,20,66,518 vesting period on the basis of the Fair value of such options (b) 4 Amount in excess of perquisite taxed in the hands 5,34,44,302 of the employees over the ESOP expenditure determined on the basis of the fair value of such options (a-b)
8.3. 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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 disallowance of Rs 85,000/- considering the impact of salary cost of personnel overlooking the investment and remote administrative expenses. On these factual matrices, ld. CIT(A) further, noted that case of the assessee on this issue is squarely covered by the decision of Coordinate Bench in assessee's own case for Assessment Year 2008-09 in and for Assessment Year 2009-10 in ITA No.2140/Mum/2014, order dated 20.01.2017, whereby the disallowance so made was deleted. Also, the year under appeal is Assessment Year 2016-17. Amendment brought by Finance Act, 2022 by inserting explanation to section 14A has been held to be applicable prospectively from Assessment Year 2022-23. Hon'ble High Court of Delhi in the case of PCIT vs. ERA Infrastructure, India Ltd. [2022] 141 taxmann.com 289 (Del) had dealt with this issue, holding the amendment prospective in nature.
9.1. 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.
9.2. 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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 disallowance to Rs.85,000/- while computing the book profit under MAT provisions. This issue is also squarely covered by the decision of Hon'ble Special Bench in the case of Vireet Investment 165 ITD 27 (Del Trib)(SB). Accordingly, in the given factual matrix and the position of law, we do not find any reason to interfere with the finding arrived at by ld. CIT(A) on this issue. Accordingly, ground No.5 and 6 are dismissed.
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.
10.1. 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 and 612/MUM/2024 Sterlite Technologies Ltd. AY 2016-17 referred, we do not find any reason to interfere with the findings arrived at by ld. CIT(A). Thus, ground no. 7 raised by the Revenue is dismissed.