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TMI Blog2023 (4) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... 44C(13) of the Income-tax Act, 1961 [the Act] dated 26.9.2019 by the JCIT, Special Range 5, Bangalore, for the assessment year 2015-16. 2. The assessee is a company engaged in the business of providing back office services in the nature of processing of securities, banking operational activities, administrative services, etc. to its AE. The assessee filed the original return of income for the AY 2015-16 on 25.11.2015 declaring total income of Rs.81,25,92,790. The case was selected for scrutiny and the notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions with its AE, a reference was made to the TPO to arrive at the arm s length price (ALP) of the international transactions. The TPO arrived at a TP adjustment of Rs.36,79,45,675. The AO passed a draft assessment order and besides the TP adjustment, the AO made an adjustment towards Employee Stock Option Plan [ESOP] for an amount of Rs.1,41,47,125. Aggrieved, the assessee raised objections before the DRP whereby the TP adjustment was reduced to Rs.21,29,68,370 and the ESOP disallowance was sustained. Accordingly, the AO passed the final assessment order against which the assessee is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO should allow expense to the Assessee in the year in which the employees will exercise the options. 5. The brief facts in this regard are that that the assessee had participated in the Northern Trust Corporation 2012 Stock Plan issued by its parent, The Northern Trust Company ( NT Corporation ) whereby awards based in shares of the NT Corporation were granted directly by The Compensation and Benefit Committee of NT Corporation s board of directors to the Assessee s employees through the stock option ( ESOP ) scheme or the restricted stock unit ( RSU ) scheme. Under the ESOP scheme, stock options on equity shares of the ultimate holding company i.e., NT Corporation were granted to the employees and Directors of the ultimate holding company, its subsidiaries and affiliates. The equity shares are granted directly by the ultimate holding company to the employee. Accordingly, employees are eligible to participate in the scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The ESOP expenses represents the discount offered to Assessee s employees on issue of shares of its ultimate holding company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits outside India. 7. Aggrieved, the assessee filed its objections before the DRP. The DRP rejected the objections of the assessee with respect to the Employee share-based payment. The DRP relying on Delhi ITAT in the case of ACIT v Ranbaxy Laboratories ITA No.2613 and 3871/2004 upheld the disallowance made by the AO and held as under: The perquisite was charged to the employees on mere amortization of the expenses though option had not been exercised by the employees as on the charge of perquisite. The assessee cannot claim ESOP as allowable deduction prior to the date of exercise of option by the employee. The issue of shares was not crystallized till the date on which the employee exercises the option and hence, any expenditure debited during the vesting period remains contingent in nature. The assessee was choosing to either receive securities premium of a lower amount or no securities premium when compared to that of which it would have received during a normal course of share issue. There was therefore no expenditure that the Assessee was incurring or laying out. The ESOP expense even if treated as expenditure was a capital expenditure, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is not a contingent liability. In this regard, the Assessee submits as under: The discount on options under ESOP is an ascertained liability and not contingent liability. Further, as mentioned above, NT Corporation has raised a debit note on the assessee in relation to the same and there is actual outflow of funds to NT Corporation. The ESOP expenditure represents discount on issue of shares. The quantum of expenditure depends on the number of employees accepting the offer. However, the same does not render the expenditure contingent. It is a settled principle that the deduction is permissible in respect of an ascertained liability. The provision, which is scientifically or actuarially ascertained, is construed as an accrued liability and deduction will be allowed on the same. Further, what should be certain is the incurring of the liability and it should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. If the said requirements are satisfied the liability is not a contingent one. The AO has not raised any point of contention against the expense being wholly and exclusively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses 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 betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 SUNIL 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 Services (P.) Ltd. (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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