DCIT CIRCLE 3(1)(1), BANGALORE vs. HEWLETT PACKARD ENTERPRISE GLOBAL SOFT PRIVATE LIMITED , BANGALORE

First, we take up the facts in the case of ITA No.344/BANG/2026 for AY 2017-18 wherein the ld. AO is aggrieved with the order of the ld. CIT(Appeals), NFAC, Delhi dated 07-Nov-2025 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Income Tax Act, 1961 [the Act] dated 27.12.2019 passed by the ld. ACIT, Circle 3(1)(2), Bengaluru was partly allowed.

The only ground raised by the ld. AO is with respect to deduction of allowance on the issue of shares under Employee Stock Option Plan (ESOP) Scheme u/s. 37(1) of the Act wherein the ld. CIT(A) relying upon the decision of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd. [2020] 121 taxmann.com 351 deleted the disallowance.

The assessee company in the business of Information Technology and Information Technology enabled Services to HP group companies. It filed return of income on 30.11.2017 at a total income of Rs.50,69,67,330 which was picked up for scrutiny by issuing a notice u/s. 143(2) of the Act on 26.9.2018. The ld. AO found that an amount of Rs.9,71,89,050 has been remitted by the assessee towards reimbursement of ESOP Scheme and other cost without deduction tax at source. On the question, the assessee replied that the above expenditure remains allowable to the assessee and as such no tax is required to be deducted at it is reimbursement of expenditure. The reply of the assessee was considered by the ld. AO and then discussed that there is ESOP Scheme and ultimately held that cross-charge of the expenditure towards ESOP is only notional cost to the holding company and there is no actual cash flow. Therefore, the amount reimbursed by the assessee company may also not even relate to the period of employment of the employees and hence the same is not allowable. The ld. AO further noted that as per computation of income furnished by the assessee, the company has recognised an amount of Rs.1,99,07,049 as expenses on Stock Plan in the Profit & Loss account. Over and above the assessee has also claimed deduction of Rs.8,74,04,655 in the computation of income. As is claimed by the assessee that the whole of this amount is cross charged by the US entity, the ld. AO disallowed Rs.10,73,11,704. The assessment order was passed on 27.12.2019.

The ld. CIT(A) on appeal allowed the claim of the assessee vide para 6.2.3 of the order following the decision of the Hon’ble Karnataka High Court and recording the facts that assessee has actual incurred the expenditure, deducted tax at source on the payment made to the employees and expenses pertain wholly to the employee compensation forming part of the regular remuneration structure, the expenses are allowable. The ld. AO is in appeal before us.

The facts for the AY 2018-19 in ITA No.345/BANG/2026 wherein the ld. AO has made disallowance u/s. 37 of the Act of Rs.2,52,15,387. As per the computation of income, the assessee has added back a sum of Rs.6,39,45,229 and further claimed deduction of Rs.8,91,60,616 towards ESOP expenses and therefore the ld. AO disallowed the balance sum.

The ld. CIT(A) vide order dated 7-NOV-2025 allowed the claim of the assessee for similar reasons as stated in his appellate order for AY 2017-18.

In the appeal for AY 2021-22 in ITA No.319/BANG/2026 by assessment order dated 27.12.2022, the ld. AO disallowed a sum of Rs.8,82,41,534 which was allowed by the ld. CIT(A) by order dated 7-NOV-2025. Therefore the ld. AO is in appeal.

The ld. JCIT, Shri N. Balusamy, Sr. DR, submitted that the ESOP liability is pertaining to foreign holding company, assessee has borne that liability which is not the expenditure of the assessee and cannot be said to be wholly and exclusively incurred for the purposes of the business. It was further stated that the discount on issue of shares under ESOP Scheme cannot be constituted as an expenditure at all. It is not the real cost, but it is merely a notional entry. It was further stated that mere dilution in the value of holding company’s capital structure could not have become any expenditure incurred by the holding company and therefore the reimbursement of the same is not actual reimbursement, but mere outflow of funds from Indian entity to foreign entity. He further stated that though there is a decision of the Hon’ble High Court, but the same has been wrongly applied by the ld. CIT(A). He further submitted that there is no idea whether the expenditure is incurred by the parent company or not. Further the parent company has diluted its equity and therefore it cannot be considered as an expenditure and whether the parent company has really incurred any expenditure or not is also not known. Further the decisions relied upon by the learned CIT – A in case of Biocon Ltd it is not also ascertainable whether by which method the taxpayer has allotted the shares and what is the method of allotment of the shares of the parent company. The Biocon decision may apply only in case shares are administered through a trust. There is no finding of the learned CIT – A. The assessee’s claim is that the expenditure is incurred by the parent company, there is no expenditure incurred by the assessee and therefore, the accounting entries, if any made by the assessee, are also on notional. It is further stated that merely because the tax is deducted under section 192 of the act could not have made the expenditure deductible in the hands of the payee unless it is shown that the expenditure is incurred wholly and exclusively for the purposes of the business.

The ld. AR vehemently relied upon the order of the ld. CIT(A) and written submissions made before him. It was the claim of the ld. AR that the facts stated in the assessment order and the appellate order clearly show that the expenditure incurred by the assessee is allowable u/s. 37(1) of the Act. He further referred to the facts that in the case of group company in ITA No.961/BANG/2022 for AY 2018-19 dated 17.1.2023, identical cost is allowed and therefore the issue is squarely covered in favour of the assessee. He further submitted that the decisions of the Hon’ble Karnataka High Court, Hon’ble Delhi High Court and the Hon’ble Madras High Court clearly covers the issue in favour of the assessee. Accordingly, there is no infirmity in the order of the ld. CIT(A) and therefore the appeal of the ld. AO deserves to be dismissed.

We have considered the rival contentions and perused the orders of the ld. lower authorities. The facts clearly show that the employees of the assessee company participated in the share based compensation scheme of the US entity and are granted the option to subscribe to the shares. So far as those expenses relate to the employees of the Indian entity were cross charged to the Indian entity by the US entity. Those sums were paid by the assessee to the US entity. The decision of the Coordinate Bench in IT(TP)A No.213/BANG/2021 dated 3.10.2022 has considered the whole of the Scheme of the US entity at para 34.1 to 34.38. The Coordinate Bench in that case has relied upon several judicial precedents and allowed the claim of the assessee. In the case before us, the ld. CIT(A) has clearly recorded that assessee company has actually reimbursed the cost to its holding company in respect of shares allotted to the employees of the assessee under the global ESOP policy of the group. The perquisites of the ESOP has been included in the employees taxable salary and TDS has been deducted. On that basis, it was held that expenditure represents a real and ascertain employee cost. This was held based on the reliance on the decision of the Hon’ble Karnataka High Court in CIT v. Biocon Ltd., 121 taxmann.com 351. No doubt the issue is pending before the Hon’ble Supreme Court. However, for this reason the binding decision of the Hon’ble Karnataka High Court at this point of time binds us. Therefore, respectfully following the decision of the Hon’ble Karnataka High Court, we find no infirmity in the order of the ld. CIT(A) and confirm the order of the first appellate authority.

In the result, all the 3 appeals filed by the Department are dismissed.