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TMI Blog2023 (2) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... s ground No.2, which reads as under:- "2. The Ld. CIT(A) and Ld. AO erred in non-consideration of the fact that the said expenditure merely represents cost to cost reimbursement of expenditure incurred on behalf of the Appellant by AFWG overseas entities and therefore, no income arises in the hands of AFWG entities necessitating the obligation to withhold taxes on the part of the Appellant under the provisions of the Act." 3. Briefly stated facts are that during the financial year 2013-14 relevant to this assessment year 2014-15, the assessee incurred expenditure amounting to Rs.5,52,97,013/- on account of costs in connection with the shelf software products utilized for its day to day business. According to assessee, such costs are paid by the Amec Foster Wheeler Group entities to the vendors and subsequently recharged to the assessee on cost to cost basis without any margin. The AO during the course of assessment proceedings noted that the assessee company has debited amount of Rs.4,67,49,942/- on account of software expenditure / purchases, which has been paid to the group companies without deduction of TDS. The AO required the assessee as to why said amount should not be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased software which is not 'copyrighted article' but the same falls under the domain of copyright. Therefore, according to him payments made there on to purchase of software constitute royalty within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) than the definition of 'royalty' under the DTAA As the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and the payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Sec.9(1)(vi) of the Act. Therefore, according to him, the assessee is liable to deduct TDS u/s.195 of the Act in respect of payments made to non-resident AE's towards purchase of software and therefore in case of failure will attract disallowance u/s.40(a)(i) of the Act. Hence, he confirm the action of the AO in bringing the amount of Rs.4,67,49,942/- under the tax net by invoking the provisions of section 40(a)(i) of the Act. Aggrieved, assessee is in appeal before Tribunal. 5. At the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra, we delete the disallowance and allow the appeal of assessee on this issue. 6. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in regard to addition made on account of amount pertaining to provision of loss contracts and AO concluding that the provision for anticipated loss is a uncertain liability and not allowable as deduction u/s.37 of the Act. For this, assessee has raised following ground Nos.5 & 6:- "5. The Ld. CIT(A) and the Ld. A0 erred in concluding that the provision for anticipated loss is an unascertained liability not allowable as a deduction under section 37 of the Act without appreciating that the such provision represents the excess of estimated contract expenditure over the estimated contract revenues. 6. The Ld. CIT(A) and the Ld. AO erred in concluding that future costs are not allowable as a deduction under the Act without appreciating that the accounting, of such costs is as per the requirements of the Accounting Standard -7, basis which, income subject to tax, has been recognized by the Appellant." 7. Brief facts are that the assessee is a part of global group which undertakes provision of en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant assessment year. She drew our attention to details filed before us, which reads as under:- AY Particulars INR Crores Rate of Tax Supporting Documents Impugned AY Provision for loss contract (5.32 Cr.) 33.99% Audited Financial Statements - Pg.4 of paper book Extracts of ITR - pg.31 of paper book 15-16 Other Income - Reversal of provision 4.89 Cr. 33.99% Audited Financial Statements - Pg.210 of paper book Extracts of ITR - pg.215 of paper book 16-17 Other Income - Reversal of provision 0.43 Cr. Audited Financial Statements - Pg.221 of paper book Extracts of ITR - pg.226 of paper book In view of the above, she stated that the addition should be deleted only for the simple reason that the assessee has already offered this income and Revenue accepted the same in assessment year 2015- 16 and 2016-17. 9. On the other hand, the ld.CIT-DR stated that although the assessee offered in assessment year 2015-16 & 2016-17 but actually assessment year for this alleged loss has actually reduced the income of relevant assessment year 2014-15. He stated that there is revenue loss on account of withholding of tax on account of charging of interest u/s.234B & 234C of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctible revenue expenditure. 12. Brief facts are that the AO during the course of assessment proceedings noticed that the assessee has debited an amount of Rs.33,89,770/- as payment made to Foster Wheeler AG, Switzerland, the holding company, charges with respect to shares allotted to the employees of the assessee company under employees stock exchange plan. The AO required the assessee to give details along with justification for claiming the same as revenue expenditure. The assessee explained the issue and filed submissions as under:-- "Foster Wheeler AG, Switzerland, the ultimate holding Company, operates a Performance Share Plan ("PSP") covering certain eligible employees of its subsidiaries. PSP for conditional shares are awarded to eligible based on their sustained performance and value. Foster Wheeler Energy Limited (on behalf of Foster Wheeler AG) charges out stock option recharges to the Company at the prevailing market value of shares at the time of delivery. The company accounts for these charges as and when the debit notes are received. In the relevant AY 2014-15, the Company recharged Rs.33,89,770 to FWEL for ESOP vested to its employees." The AO after considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Ranbaxy Laboratories Ltd., vs. Addl.CIT, [2010] 39 SOT 17, wherein ESOP expenditure is purely held to be notional. The ld.AR stated that the assessee has incurred expenses towards disbursing compensation to the employees for their services and hence, the same is revenue in nature. For this, she relied on the decision of Chennai Tribunal in the case of Caterpillar India (P) Ltd., vs. DCIT in ITA No.1722/Chny/2012, order dated 17.02.2017, wherein exactly on identical facts, the issue was decided by the Tribunal in para 3.6 as under:- 3.6. We have heard the rival submissions and perused the materials available on record including the paper books filed by the assessee. The brief facts of the case is that three employees who had been deputed to assessee company were allotted the shares of Caterpillar Inc, U.S.A. at a price less than the prevailing market price and the differential amount of USD 1694120 (INR equivalent Rs. 7,41,51,630/-) was raised as a debit note by Caterpillar Inc, U.S.A. on the assessee company which was paid by the assessee. Since the concerned employees were deputed / working in the assessee company at the time of issuance of ESOP, the price differential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, then the same would have to be construed as salary to the employees which is an allowable deduction for the employer. If there is any violation thereon in the form of non -deduction of tax at source, then the same would fasten some TDS liability on the employer u/s 201 and 201(1A) of the Act and that would not in any case hamper the allowability of deduction towards salaries in the hands of the employer. We find that the CBDT had issued a Circular in the context of Fringe Benefit Tax vide Circular No. 9/2007 dated 20.12.2007 , wherein , in response to Question No. 16 , they had specifically replied that ESOP expenditure is an allowable deduction in computing the taxable income of the employer company. For the sake of convenience, the same is reproduced hereunder :- "16. Whether the fringe benefit arising on account of shares allotted or transferred under ESOP is allowed as deduction in calculating the taxable income of the employer company ? Answer. In case where the employer purchases the shares and then subsequently transfers such shares to its employees, the expenditure so incurred is allowable as deduction in computing the taxable income of the employer compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctfully following the CBDT Circular and the judicial precedents relied upon hereinabove, we hold that the compensation paid in the form of ESOP expenditure is an allowable deduction as an expenditure incurred wholly and exclusively for the purpose of business. Hence we have no hesitation in directing the ld AO to delete the disallowance made in this regard. Accordingly, the Grounds 1a) to 1e) raised by the assessee are allowed. 13.1 The ld.AR also relied on another decision of Bangalore Bench of the Tribunal in the case of TE Connectivity Services India Pvt. Ltd., in IT(TP)A No.191/Bang/2022 dated 16.09.2022, wherein the Tribunal has considered exactly identical facts in para 30 as under:- 30. We have carefully 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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