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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: Shri Joginder Singh & Shri Rajendra
आदेश / O R D E R Per Joginder Singh (Judicial Member) This bunch of five appeals is by the Revenue as well as by the assessee, challenging the impugned respective orders of the ld. First Appellate Authority, Mumbai. First, we shall take up appeal of the Revenue (ITA No.940/Mum/2010 & ITA No.1653/Mum/2008).
During hearing of these appeals, at the outset, Shri F.V. Irani, ld. counsel for the assessee contended that in the tax effect is Rs.8,01,542/- and in ITA No.1653/Mum/2003, the total tax effect is Rs.7,45,794/-, therefore, both these appeals are not maintainable being below prescribed monetary limit for filing the appeal before this Tribunal. The ld. DR, Shri Arvind Kumar, did not controvert the factual matrix.
2.1. We have considered the rival submissions and perused the material available on record. In view of the above, it is noted that the tax effect in the present appeals is below prescribed limit of Rs.10 lakh for filing the appeal before the Tribunal.
2.2. In view of the fact, that the tax effect in the present appeal is below prescribed monetary limit, as contained in CBDT instruction No.21 of 2015, dated , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
10/12/2015 (F No.279/Misc./142/2007-IT(PT), applicable with retrospective effect, wherein, the Department was advised/directed by the Board not to file appeal in the cases where the tax effect does not exceed the following monetary limit.:-
Sl. Appeals in Income –tax matters Monetary Limit (in Rs.) No. 1. Before ITAT 10,00,000/- 2. U/s 260 A before Hon’ble High 20,00,000/- Court 3. Before Hon’ble Supreme Court 25,00,000/- As per the aforesaid instruction/revised monetary limit, the Department is not to file appeal before the Tribunal, wherein, the tax effect is less than Rs.10,00,000/-, consequently, the appeals of the Revenue are not maintainable, therefore, the appeals of the Revenue are dismissed as not maintainable. Finally, the appeals of the Revenue are dismissed as not maintainable.
Now, we shall take up appeal of the assessee for A.Y. 2004-05 (ITA No.1416/Mum/2008), wherein, first ground raised by the assessee pertains to interest income from debentures/REC bonds, which was treated as income from other sources amounting to Rs.1,14,03,249/-. The ld. counsel for the assessee did not press this ground to which , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
the ld. DR also has no objection, therefore, this ground of the assessee is dismissed as not pressed.
4. The next ground pertains to addition of Rs.5,12,333/- being the disallowance of Employees Stock Option Plan (ESOP) expenses. The crux of argument on behalf of the assessee is that the impugned issue is covered by the decision of the Tribunal in the case of DCIT vs Accenture Services Pvt. Ltd. (2010) TIOL 409-ITAT-Mumbai, for which our attention was invited to page 12 (para-19 of the paper book). This factual matrix was not controverted by the ld. DR. 4.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order dated 23/03/2010 for ready reference and analysis:-
“17. Ground No. 5 is against the deletion of disallowance of expenses on employees stock purchase plan as the expenses incurred for the benefit of parent company.
18. The assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
parent company and the benefit of such expenditure accrues to the parent company and not assessee. The disallowance made by the AO has been deleted by the CIT(A) by observing as under:-
“I have gone through the submissions of the appellant and perused the material on record and noted that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL and not to the employees of the parent company. Though the shares of the parent company have been allotted, the same have been given to the employees of the appellant at the behest of the appellant. It is an expense incurred by the appellant to retain, motive and award its employees for their hard work and is akin to the salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hard- working employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted. Further, such shares have not been issued out of the share capital of the appellant and hence cannot be said to be a capital expenditure. I have analysed the decision of SSI Ltd. relied on by the appellant and am of the view that the same is applicable to the appellant’s case. As argued by the appellant, such expense is a qualified business expenditure and should be allowable in computing the taxable income of the appellant. This aspect has been upheld in various judicial precedents. , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
Based on the above, I am of the opinion that such expenses qualify as business expenses of the appellant and the appellant should accordingly be given a deduction on this account. Accordingly I hereby delete the addition made by the AO on ground No. 9.”
19. We have heard the learned representatives of the parties and perused the record. The CIT(A) has given a categorical finding after examining the relevant material and submission of the assessee that shares were allotted to its employees and not to the employees of the parent company. The expenses incurred by the assessee to motivate and award its employees for their hard work, which amounts salary cost of the assessee company. The expenditure incurred by the assessee for the purpose of business on employees is allowable expenses. The CIT(A) has examined the entire scheme and found that such expenses are business expenses and should be allowable as deduction. Since there is no contrary material to the findings of the CIT(A), in the light of that we confirm the order of CIT(A) on this issue.”
4.2. Our view further find support from the decision in Novo Nordisk India Pvt. Ltd. vs DCIT (ITA No.1275/Bang/2011) order dated 30/09/2013. We are reproducing hereunder the relevant portion from the aforesaid order for analysis and ready reference:-
“This appeal by the assessee is against the order dated 03.10.2011 of the CIT(Appeals)-III, Bangalore relating to assessment year 2006-07. , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
2. In this appeal, the only grievance of the assessee is against the action of the revenue authorities in disallowing the claim of the assessee for deduction of sum of Rs.1,51,91,003 as expenditure incurred in providing shares of “Novo Nordisk A/S” Denmark under the Novo Nordisk India Private Limited Employee Stock Purchase Scheme, 2005. (“hereinafter referred to as ESOP”). The further grievance of the assessee is with regard to charging of interest u/s. 234D of the Act.
3. We shall first take up the grievance of the assessee with regard to the disallowance of expenditure incurred on providing shares under the ESOP. The facts necessary for adjudication of the aforesaid ground are as follows.
The assessee (NNIPL) is a wholly owned subsidiary of Novo Nordisk A/S, Denmark (“NNAS”) and is a private limited company incorporated under the Companies Act, 1956, having its registered office in Bangalore. It is primarily engaged in the marketing and distribution of healthcare products, specifically diabetes care products such as insulin formulations/other insulin products. In carrying on its business activities in India, the assessee sources the products from Indian companies/NNAS and markets/ distributes such products in India through wholesale distributor(s).
NNAS the parent company of the Assessee has a scheme called NNAS Global Share Programme, 2005 (“the Plan”). As per the Plan the employees of NNAS were entitled to purchase shares of NNAS at a price less than the market price. The shares of NNAS are listed on the Copenhagen Stock Exchange. By a Board resolution dated 10.8.2005, the Board of Directors of NNAS resolved that the employees of foreign affiliates of NNAS would also be entitled to opt to purchase shares of NNAS under the Plan. A copy of the international information memorandum for purchase of employees shares in NNAS as given by NNAS is at page 32 to 37 of the Assessee’s paper book. The employees of the Assessee who have , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
opted for acquiring shares of NNAS under ESOP have to give their option to purchase on or before 31.10.3005 and pay the money payable for acquiring the shares to the Assessee. The Assessee will deposit the purchase price so collected from its employees and make a lump sum payment to NNAS on behalf of the employees. NNAS will allot shares during January-February, 2006. The employees will not be entitled to sell the shares so allotted till the end of 2008. The Memorandum further sets out the tax and accounting treatment in the affiliates and it reads thus:
“Tax and accounting treatment in the affiliates The total benefit for the employees will – if permitted by local rules – be recharged from Novo Nordisk A/S to the relevant affiliates using the average market price for the period 3rd October, - 17the October, 2005. The recharge will be made in local (convertible) currencies before the 15th of December, 2005. The recharge is necessary in most countries to obtain a local deduction for tax purposes.
In some countries it might be necessary to get an approval from the Central Bank, to be able to pay the recharge. In other countries it is impossible, due to legal restrictions, to accept a recharge.”
The Assessee framed Novo Nordisk India Private Limited Employee Stock Purchase Scheme, 2005. (“hereinafter referred to as ESOP”) whereby it offered shares of MNAS to its employees subject to certain terms and conditions set out in the scheme. A copy of the ESOP is at page-28 to 31 of the Assessee’s paper book. For the Assessment Year 2006-07, the assessee filed its return of income on November 29, 2006, reporting an income of Rs 58,399,200. During the FY 2005-06, eligible employees of assessee (NNIPL) were given the option of purchasing shares of its parent company NNAS under the NNAS Global Share Programme, 2005 (“the Plan”). In this regard, 231 employees of the company had , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
applied for purchase of 12,931 shares at the price of DKK 150 per share. Further, as per the Plan, the difference between the purchase price of the shares and the average market price of the shares during the purchase offer period (i.e., DKK 313.39) amounting to DKK 163.39 per share was recharged by NNAS to NNIPL. The Plan was conceptualised with a view to encouraging stock ownership among NNIPL’s employees, to motivate and encourage employees to render services which would contribute to the continued growth and success of the company. Accordingly, since NNIPL has actually incurred the expenses during the subject financial year, the entire amount of ESOP recharge cost amounting to DKK 2,112,796 (Rs 15,191,003) was recognised as employee cost, and claimed as a deductible expenditure in computing the taxable income of NNIPL for the AY 2006-07.
The assessee submitted before the AO that the aforesaid expenditure was revenue expenditure wholly and exclusively laid out or expended for the purpose of business or profession of the assessee and should be allowed as deduction u/s. 37(1) of the Act. The assessee also pointed out that under the guidelines prescribed by SEBI (Employees Stock Option Scheme or Employee Stock Purchase Scheme) Guidelines, 1999, expenditure on stock option has to be treated as a form of employee compensation incurred by the company. The assessee pointed out that it had paid NNAS the difference between the price paid by the employees for acquiring the shares of NNAS and the average market price of the shares during the purchase offer period and thus the assessee had actually incurred the expenditure and there has been an actual cash outflow from the assessee towards such expenses and that the expenditure was not of notional cost. The assessee relied on the decision of the Chennai Bench of the Tribunal in the case of SSI Ltd. v. DCIT, 85 TTJ 1049 (Chn), wherein it was held that the discount on ESOP i.e., the difference between the market value of the shares and the price at which the shares have been given to the , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
employees has to be allowed as an expenditure. The assessee also brought to the notice of the AO, CBDT Circular No.9 of 2007 dated 20.12.07 which was issued in relation to fringe benefit tax in which in answer to Question No.16, the Board has clarified that the difference between the market price and exercise price arising on account of shares allotted or transferred under ESOP is allowable as deduction in calculating the taxable income of the employer.
The AO, however, did not agree with the submissions made on behalf of the assessee. In this regard, the AO considered NNIPL Employee Stock Purchase Scheme, 2005 in which under clause (4) there was a lock-in period provided during which the shares cannot be sold or transferred by the employee. The lock-in period was three years. The AO was of the view that because of the lock-in period, it was a capital expenditure. The second reason given by the AO for not accepting the claim of the assessee for deduction of the aforesaid expenditure was that the expenditure resulted in capital building of the parent company and therefore there was no expenditure incurred by the assessee in the regular course of its business. On the reliance placed by the assessee on CBDT Circular No.9 of 2007, the AO held that FBT was only taxed from the A.Y. 2007-08 and therefore the Circular referred to by the assessee would be irrelevant for the A.Y. 2006-07. The AO also observed that the shares of NNAS were listed in Copenhagen Stock Exchange, Denmark and not in any Indian Stock Exchange and therefore SEBI guidelines were not applicable to the transactions. The AO distinguished the decision relied on by the assessee in the case of SSI Ltd. (supra) by observing that SSI was a listed company in Indian Stock Exchange and therefore as per SEBI Guidelines, the expenses were debited to the P&L account. Further, the AO observed that the employees were free to transfer their shares whenever they liked without any lock-in period. The AO thus distinguished the decision relied upon by the assessee. The AO , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
accordingly disallowed the claim of the assessee for deduction on account of ESOP expenses.
9. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(Appeals). The CIT(A) agreed with the submissions of the assessee that the expenditure in question was not a capital expenditure. The CIT(A) also held that liability was not contingent or unascertained. He noticed the following facts as it transpired from the records:-
5.2 From an examination of the facts of the case, I find that the following facts are relevant t a proper appraisal of the issue: a) The ESOP is issued by the foreign parent of the appellant out of its own share-holding b) The appellant is only a conduit for the issue of the ESOPs by the parent with regard to the paperwork, collection of options, providing data for eligibility etc. No direct liability in the form of shareholding obligation in costs accrues to the appellant in the scheme. c) It is the foreign parent which has imposed the liability for “recharge of the discounted portion of the ESOP upon the appellant d) The discounted amount is an expenditure not to meet any outside liability but only a “reimbursement “to the parent company for the amount of shortfall in the latter’s books on the discounted issue of ESOPs.
10. The CIT(A) thereafter formulated a question as to whether the claim of the assessee for deduction has to be considered as allowable u/s. 37(1) of the Act. The CIT(A)’s reasons may be summed up thus: , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
a) The parent company at Denmark has handed over a benefit out of its own stock holding (no new shares are floated for the ESOP), and in the fitness of normal accounting principles, it should bear the liability for the discount instead of passing on this liability to the appellant by a purely administrative, internal arrangement. The parent company perhaps would not be entitled to deduction of such discount as it would fall clearly in the realm of capital expenditure since its own share capital base is involved. b) The arrangement between the Assessee and NNAS was a clevermechanism to pass on the liability of NNAS to the affiliate in India (the assessee) who would make the tax deduction claim as an employee expense. The intention for routing this liability to the assessee is to facilitate the tax deduction claim of the affiliate. A capital expenditure of the parent company at Denmark is being cloaked in the garb of the revenue expense claim of the affiliate in India. c) There was no business expediency for the Assessee to have paid the difference in price of the shares because a legitimate liability of the parent company would not be “expenditure” laid out wholly and exclusively for the purposes of the business of the Assessee. d) Even if for argument’s sake the expenditure is considered as a business expenditure, it is clearly a related-party transaction which is liable to be hit by the provisions of Sec 40A(2)(b) since there is no justifiable reason why this payment should have to be absorbed by the appellant in India when the largesse and shares involved are those of its parent company at Denmark. e) SEBI guidelines are not applicable because the shares were not issued under any ESOP recognized by SEBI.
For the sake of ready reference the observations of the CIT(A) are also reproduced: , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
5.4. Thus, the basic issue that is to be considered in this appeal is with regard to the business expediency of the expenditure, ie. its allowability u/s 37(1) of the Act. On this count, I find that the following are the relevant facts of the matter: a) the appellant and its foreign Parent (NNAS) claim to have offered the ESOPs to encourage stock ownership among the appellant’s employees and to motivate and encourage them in their performance. b) NNAS, the foreign parent company, issued the ESOP voluntarily at a discounted value without however shouldering the liability for the same, via the mechanism of a “recharge of the discount obtained from the appellant. c) The appellant has absorbed a liability not arising out of its own regular business, but only to reimburse its parent company in Denmark for the discount which the latter has offered on its own volition. d) in the “International Memorandum” referred to above from the parent company, it is stated under the heading “Tax and accounting treatment in the affiliates” as follows:
The total benefit for the employees will - if permitted by local rules - be recharged from Novo Nordisk A/S to the relevant affiliates using the average market price for the period 3 October – 17 October 2005. The recharge will be made in local (convertible) currencies before the 15th of December 2005. The recharge is necessary in most countries to obtain a local deduction for tax purposes.” (emphasis is mine).
5.5. From the above it can be seen that the ESOP arrangement was meant to achieve several objectives simultaneously. Not only were the employees to be motivated and encouraged, the foreign parent company NNAS was simultaneously covering the losses arising , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. from its largesse by a mechanism of a “recharge” from the appellant. At the same time, this was done with the express intention of using the “recharge” as a means to obtain tax deduction for the appellant in its own country of location.
5.6. There could be propped an argument that the ESOPs are actually in the form of an enhanced employee compensation and welfare plan and are incurred to help the appellant “carry on” his business. To this extent, the expenses incurred by the appellant could qualify as extended expenses on payroll or employee costs or as a staff welfare measure. However, it is the intention behind the arrangement, and the consequential mechanism adopted to work that intention, that weakens the appellant’s case drastically. The parent company at Denmark has handed over a benefit out of its own stock holding (no new shares are floated for the ESOP), and in the fitness of normal accounting principles, it should bear the liability for the discount instead of passing on this liability to the appellant by a purely administrative, internal arrangement. However, the parent company perhaps would not be entitled to deduction of such discount as it would fall clearly in the realm of capital expenditure since its own share capital base is involved. This being the case, I am constrained to view this arrangement as a clever-mechanism to pass on the liability to the affiliate in India (the appellant) who would make the tax deduction claim as an employee expense. The International Memorandum reveals as much. The intention for routing this liability to the appellant is very clear from that document to be to facilitate the tax deduction claim of the affiliate. In this view, what is actually happening is that the capital expense of the parent company at Denmark is being cloaked in the garb of the revenue expense claim of the affiliate in India. In these circumstances, the point to be considered is whether such a “reimbursement” made to the parent qualifies to be taken as business “expenditure” at all for the purpose of Sec 37(1) of the Act. In terms of business expediency, I am not , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. convinced that cushioning a legitimate liability of the parent company (a liability which it has voluntarily raised) due to either tax claim considerations as stated, or possibly to the dictates of the parent (or due to both factors) - qualifies the claim of the appellant as “expenditure” laid out wholly and exclusively for the purposes of the business. Moreover, I find that even if for argument’s sake alone, the same is considered as a business expenditure, even so it is clearly a related-party transaction which is liable to be hit by the provisions of Sec 40A(2)(b) since there is no justifiable reason why this payment should have to be absorbed by the appellant in India when the largesse and shares involved are those of its parent company at Denmark. This parent company is itself a separate taxable entity and could have set off these expenses against its share premium or other relevant capital account, as per normal accounting principles. In this connection, the reliance on SEBI guidelines by the appellant at para 2.2 of his submission dated 22.11.2010 is completely misplaced since the Indian company had not issued shares under the concerned ESOP at all.
5.7. With regard to the case-laws cited by the appellant, I find that in the Accenture case before 1TAT Mumbai [ITA No. 4540/M/08], there are material differences in the facts of that case and the one before us. In the Accenture case, the shares were clearly stated by the CIT(A) to be allotted to the employees of the affiliate by the parent company “at the behest of” the affiliate. So in a way, the liability has been invited by the affiliate onto itself. There is no such initiative from the present appellant which is recorded in the Memorandum of Purchase, rather it only mentions that the Board of Directors of the parent company took this decision to allot ESOPs of ‘B’ shares out of its own stock holding. Hence, the basic anomaly of the appellant’s intention in donning this liability which belongs to its parent prevails. However, this issue is in any case distinct in the appellant’s circumstances since whatever be the administrative arrangement, the expenditure is not justifiable as it does not , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. pertain to the appellant and any perceived benefits are also not limited to it alone, but are extendable to the entire group headed by the parent company at Denmark, of which the appellant is only a contributing part.”
Aggrieved by the order of the CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. We have heard the submissions of the ld. counsel for the assessee and the ld. DR.
The ld. counsel for the assessee brought to our notice that the facts of the assessee’s case were identical to the facts as it prevailed in the case of DCIT v. Accenture Services Pvt. Ltd. ,ITA 4540/Mum/2008 for the A.Y. 2002-03, order dated 23.3.2010. In the aforesaid case, the Tribunal considered an identical ESOP whereby the Indian company issued shares of its foreign parent company and claimed the difference of the issue price and the fair market value as an ESOP cost. The Tribunal upheld the claim of the assessee. The ld. counsel further brought to our notice that the CIT(Appeals) in para 5.7 of his order after making a reference to the decision of the Tribunal in the case of Accenture (supra), held that in that case, the shares in that case were issued to the employees at the behest of the Indian affiliate, whereas in the instant case of the assessee, there is nothing to show that the assessee took initiative to reward its employees with an ESOP rather it was the foreign parent company who took the initiative to issue shares to employees of its affiliates in India. It was pointed out that this observation of the CIT(A) is factually incorrect, because in the case of Accenture (supra), the shares were issued at the behest of the Indian company and not at the instance of the foreign parent company, as has been wrongly understood by the CIT(A) in para 5.7 of his order.
It was further submitted that the observations of the CIT(A) that by issue of ESOP, the foreign parent company at Denmark was benefited will be no ground to disallow a legitimate business , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
expenditure of the Assessee which was employee cost of the Assessee. The ld. counsel for the assessee drew our attention to the decision of the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. v. CIT, 118 ITR 261 (SC), wherein the Hon’ble Apex Court took the view that if the assessee incurred any expenditure in the course of its business, even voluntarily and even without necessity, but if it is incurred for promoting the business and to earn profit, deduction u/s. 37(1) of the Act has to be allowed. The Hon’ble Court further held that the fact that somebody other than the assessee is also benefited by the expenditure, should not come in the way of expenditure being allowed as deduction.
Our attention was also drawn to the decision of the Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd., 166 ITR 836 (Kar), wherein following the Hon’ble Supreme Court decision in the case of Sassoon J. David & Co. (P) Ltd. (supra), the Hon’ble Karnataka High Court held that the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed as deduction u/s. 37(1) of the Act.
Our attention was also drawn to the Direct Tax Notification No.323 dated 11.10.2011, which was a notification issued in exercise of powers conferred u/s. 17(2) of the Act. The Central Government in the aforesaid Notification has specified the guidelines which need to be followed when shares are allotted under an ESOP scheme. In clause (6) of the aforesaid guidelines, the Central Govt. has laid down that where shares of a parent company are issued under an ESOP, the company issuing ESOP has to give the required particulars to the Chief Commissioner of Income-tax (“CCIT”) with an English translation of the plan or scheme, if the same is in a language other than English. It was pointed out that the assessee had duly complied with the aforesaid guidelines and filed the ESOP scheme with the CCIT as early as , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
05.12.2005. The ld. counsel drew our attention to the observations of the CIT(Appeals) in para 5.6 of his order, whereby the CIT(A) has observed that the arrangement by which the assessee issued the shares at a discount to its employees of the parent company under an ESOP and paid the difference between the issue price and the fair market value of the shares as reimbursement to the parent company was a mechanism to pass on the liability to the Indian company only to enable the Indian company to avail of the tax deduction under the Act. It was his submission that no such inference whatsoever had been drawn by the CCIT, pursuant to the assessee filing the required details of ESOP. With regard to the observations of the CIT(Appeals) that capital expenditure of the parent company was being cloaked in the garb of revenue expenditure of the affiliate in India, it was pointed out that there was an actual cash outflow from the assessee to the parent company and that there was no arrangement to pass on the capital expenses of the parent company as revenue expenses of the affiliate in India. The observations of the CIT(A) in this regard are based on surmises and suspicion.
The ld. DR relied upon the orders of the revenue authorities.
We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted.
In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee.
We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a health work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon’ble Supreme Court in the case of Sassoon J.David (supra).
The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee’s case, as the assessee had on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy of rewarding employees of affiliates with its shares being given at a discount and that policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
was at the behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous.
With regard to the observations of the CIT(Appeals) that the ESOP actually benefits only the parent company, we are of the view 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. The decision of the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon’ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard.
We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure.
For the reasons given above, we direct the expenditure be allowed as deduction.
In view of the decision on merits, the ground relating to charging of interest u/s. 234D of the Act is only academic.
In the result, the appeal of the assessee is allowed.”
In the present appeal also, the ld. counsel for the assessee claimed that the facts are identical, which were , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. not controverted by the ld. DR. Thus, considering the facts and the aforementioned decision of the Tribunal and also in the absence of any contrary facts brought to our knowledge by either side and more specifically the Revenue, since, the shares were allotted to the employees and the expenses were incurred by the assessee to motivate the employees, therefore, the expenses were incurred for business purposes. It is noted that the Bangalore Bench of the Tribunal in the aforesaid order dated 30/09/2013 has duly considered the scheme, decision of the Mumbai Bench in DCIT vs Accenture Services Pvt. Ltd. (supra) another decision in SSI Ltd. vs DCIT (85 TTJ 1049 (Chennai), CBDT Circular No.9 of 2007 dated 20/12/2007, Sassoon J. David & co. Pvt. Ltd. vs CIT (118 ITR 261)(SC), Mysore Kirloskar Ltd. 166 ITR 836(Karnat.), Bicon Ltd. (ITA No.248/Bang/2010) order dated 16/07/2013. In the present appeal also, the assessee has duly satisfied the conditions required u/s 37 of the Act, therefore, this ground the assessee is allowed.
5. The next ground pertains to disallowance of Rs.4,46,900/- made u/s 14A of the Act, by contending that there was no basis for making the adhoc disallowance without establishing that such expenditure was indeed incurred for earning exempt dividend income. It was explained that the assessee has not incurred any , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
expenditure, which was attributable to earning free dividend income, thus, there is no question of making adhoc disallowance. The ld. counsel place reliance upon following decisions:- i. Tata Consulting and Engineers Ltd. (ITA No.265/Mum/2011 and 2460/Mum/2012), ii. DCIT vs HDFC Bank Ltd. (ITA No.4529/Mum/2005, 3650 & 3651/Mum/2006 and 4039/Mum/2007) iii. Godrej Agrovet Ltd. (ITA No.1629/Mum/2009), which was approved in 934/2011 by Hon’ble High Court.
5.1. On the other hand, the ld. DR, though defended the addition but did not controvert the assertion of the ld. counsel for the assessee.
5.2. We have considered the rival submissions and perused the material available on record. The ld. Assessing Officer disallowed 10% of the tax free income as incurred for earning exempt income by placing reliance upon CBDT Circular no.621 dated 19/12/1991 and explanation (baa) to section 80HHC to make the disallowance by holding that the manpower and administrative machinery was used by the assessee to earn tax free income and accordingly, made disallowance. On appeal, before the Commissioner of Income Tax (Appeal) (as is evident from para 15 of the , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. impugned order), it was claimed that no direct expenses were attributed to earn exempt income. Reliance was also placed upon the Delhi Bench Tribunal decision in Motor and General Finance Ltd. (90 ITD 449) and Maruti Udyog Ltd. 92 ITD 11 and also the Mumbai Bench of the Tribunal in Gherzi Eastern Ltd. 6562/94. We find that in para 16 of the impugned order, there is observation by the Commissioner of Income Tax (Appeal) that “it is true that Assessing Officer has made adhoc disallowance which is not justified. It is necessary to evolve a system or basis for making disallowance u/s 14A…………”. The Commissioner of Income Tax (Appeal) adopted 1.92%, which is to be applied to administrative expenses. We find that in the case of Tata Consulting Engineers Ltd., the expenses were disallowed to 1%, whereas, in Godrez Agrovet Ltd.(ITA No.1629/Mum/2009, and 4897/Mum/2012), the disallowance was made to 2%. Considering the material available on record, we upheld the disallowance to 1.5% of the exempt income, thus, the Assessing Officer is directed accordingly.
6. Now, we shall take up for A.Y. 2005-06, wherein, first ground raised by the assessee pertains to interest income from REC bonds, which was treated as income from other sources. This , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
ground was not pressed by the ld. counsel for the assessee, therefore, dismissed as not pressed.
7. The next ground raised by the assessee pertains to disallowance of Rs.2,50,887/- on account of entertainment expenses. The crux of argument on behalf of the assessee is that the expenditure was incurred “wholly and exclusively for the purposes of business” therefore, is an allowable deduction u/s 37 of the Act. It was contended that it may be substantially reduced. The ld. DR, defended the addition.
7.1. We have considered the rival submissions and perused the material available on record. Considering the material available on record, factual matrix, submission of the assessee, the observation made in the assessment order/impugned order, argument of ld. DR, we find that no evidence was produced by the assessee at any stage, therefore, mere claim is not enough. In principle, we affirm the stand of the Commissioner of Income Tax (Appeal) . However, by taking a lenient view, the disallowance of Rs. 2,50,887/- is reduced to Rs.2 lakh, thus, this ground of the assessee is partly allowed.
8. Now, we shall take appeal in wherein, the first ground pertains to addition of Rs.42,49,947/-, being the difference between , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
service tax payable at Rs.3,65,80,525/- and the service tax paid at Rs.3,23,30,578/- on the ground that it is disallowable u/s 43B of the Act. The crux of argument on behalf of the assessee is that the difference of Rs.42,49,947/- represent service tax CENVAT credit availed and utilized by the assessee for payment of service tax liability. It was contended that no service tax is unpaid. The ld. counsel place reliance upon the decision in ACIT vs Kaiser Industries Ltd. (ITA No.555/Del/2010), Lloyds Steel Industries Ltd. vs UOI (2005) 183 ELT 351 (Bom.) and CIT vs Noble and Hewitt (I) Pvt. Ltd. (2007) TIOL 570-Del-IT. On the other hand, the ld. DR, defended the addition and place reliance upon the decision of the Commissioner of Income Tax (Appeal).
8.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, before the Assessing Officer, filed summary of payments of service tax and education tax from April 2005 to March 2006 in its service tax return. The ld. Assessing Officer observed that the assessee has actually paid service tax and education cess tax amounting to Rs.3,23,30,578/- against the total payable amount of Rs.3,65,80,525/-, accordingly, he brought to tax the difference of Rs.42,49,947/- u/s 43B of the Act. On appeal, before the Commissioner of Income Tax (Appeal), , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. the assessee took the plea that the differential amount of Rs.42,49,957/- is a deemed payment under the service tax credit rules 2002. This explanation of the assessee could not find favour with the Commissioner of Income Tax (Appeal) as he observed that the assessee has wrongly interpreted CENVAT Credit scheme and the claimed deduction cannot be allowed for the deemed payment u/s 43B of the Act, when actual payment has not been made by the assessee. The assessee is in appeal before this Tribunal. The assessee has relied upon certain case laws for its claim. We find that section 43(2) define certain terms relevant to income from profit & gains of business or profession and sub-section (2) speaks about the word “paid” which means actually paid or incurred according to method of accounting. Whereas, section 43B starts with non-obstante clause and permits the deduction of any sum payable by way of tax, duty, cess or fee, by whatever name called, in the year in which the sum is actually paid. Therefore, it can be said that adjustment, if any made, is as good as duty paid and it amounts to actual payment. If the payment has been made/adjusted before due date of filing of return u/s 139(1) of the Act. Identical ratio was laid down by Hon’ble High Court of Bombay in Lloyds Steels India Ltd. vs UOI 2005 (183) ELT 351 Bombay, holding that utilizing CENVAT credit to pay duty on clearance of final , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd. product is as good as making payment by debiting current account. Considering these decisions, the ld. Assessing Officer is directed to examine the factual matrix and decide in the light of the aforesaid decisions. This ground of the assessee is disposed off in terms indicated hereinabove.
The next ground pertains to disallowance of Rs.5,96,963/- u/s 14A of the Act. Considering the totality of facts and the establish norm that investment in mutual funds requires a good experience, professional skill and the administrative expenses involved, therefore, the disallowance is restricted to 1.5% of the exempt income. Thus, the ld. Assessing Officer is directed accordingly.
The last ground raised in this appeal pertains to disallowance of Rs.3,85,141/-, on account of entertainment expenses. The crux of argument is that the ld. First Appellate Authority is not justified in disallowing a sum of Rs.3,85,141/-, being 20% of the entertainment expenses of Rs.19,25,703/- on the ground that no supporting evidence was produced by the assessee to establish that the expenditure was incurred wholly and exclusively for the purpose of business. It was contended that the expenses were genuinely incurred for business purposes. Alternatively, it was contended that it may be reduced. On the other hand, the ld. DR contended that firstly evidence , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
was not produced by the assessee for its claim and secondly genuineness of the expenditure was never proved.
10.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee debited an amount of Rs.19,25,703/- towards entertainment expenses in its profit & loss account. The claim of the assessee was that expenses were incurred on hotel bills for the entertainment of customers. Before the ld. Assessing Officer, no documentary evidence was furnished by the assessee, thus, the explanation offered by the assessee was not found justified. Considering the totality of fats, he made disallowance of 20% of the claimed expenditure, being personal in nature, and added back to the income of the assessee.
10.2. On appeal, before the Commissioner of Income Tax (Appeal), the stand of the Assessing Officer was affirmed. We find that right from assessment stage and till the stage of the Tribunal except claiming that the expenses were incurred for business purposes, no evidence was furnished by the assessee, thus, we find no merit in the claim of the assessee and in principle sustain the order of the Commissioner of Income Tax (Appeal). However, taking a lenient view, the amount of Rs.3,85,141/- is reduced to Rs.3 lakhs, thus, this ground is partly allowed. , 1653/Mum/2008, 1416/Mum/2008, 861 & 862/Mum/2010 Kotak Mahindra Asset Management Co. Ltd.
Finally, the appeals in i. & ITA No.1653/Mum/2008 are dismissed as not maintainable, being, below prescribed monetary limit. ii. ITA No.1416/Mum/2008 (A.Y. 2004-05) is partly allowed. iii. ITA No.861/Mum/2010 and ITA No.862/Mum/2010 are also partly allowed.
This order was pronounced in the open in the presence of ld. representatives from both sides at the conclusion of the hearing on 06/04/2016.