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TMI Blog2024 (12) TMI 1048X X X X Extracts X X X X X X X X Extracts X X X X ..... e years under consideration is on one issue, regarding disallowance of the amount paid to Larson & Toubro Ltd., towards cost of ESOP benefits given by it to the assessee's employees or by the employees deputed by Larson & Toubro Ltd. to the assessee. 2.1. The Ld. AR submitted that, assessee having PAN No.AABCL0552G merged with the parent company being Larson & Toubro Hydro Carbon Engineering Ltd. having PAN No.ABBCL5967D with effect from 01/04/2016, as per the scheme approved by National Company Law Tribunal, Bangalore Bench vide its order dated 31/05/2017 and by the order passed by Hon'ble Bombay High Court vide its order dated 29/09/2016. 2.2. He further submitted that, Larson & Toubro Hydro Carbon Engineering Ltd further merged with its ultimate holding company being Larson & Toubro Ltd. having PAN No.AAACL0140P with effect from 01/04/2021 as per the order passed by National Law Tribunal, Mumbai dated 28/01/2022. 2.3. The Ld. AR submitted that, at the time of passing of the assessment orders, the assessee was known as Larson & Toubro Valdel Engineering Ltd. He submitted that, at the time its assessment orders under consideration were pending before the Ld. CIT(A). A reque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of L & T Ltd. being ultimate holding company and had deputed certain employees to work fulltime with the assessee who were always on the payroll of ultimate holding company. It was submitted that the expenditure in relation to such deputed employees incurred by the ultimate holding company was charged to the assessee on a cost to cost basis and on an ongoing basis. 3.2.2. The Ld. AR submitted that as per the ESOP scheme framed by the ultimate holding company, the employees deputed to the assessee were entitled to equity shares of the ultimate holding company. He submitted that the understanding between the assessee and the ultimate holding company was that the proportionate cost related to the employees deputed to the assessee were to be charged by the ultimate holding company. 3.2.3. Accordingly, the ultimate holding company raised debited notes to the assessee under the contractual obligation to bare all the expenditure as determined by the ultimate holding company. The Ld.AR submitted that assessee had filed copies of debit notes raised by the ultimate holding company at the time of assessment proceedings vide letter dated 30/12/2014. 3.2.4. The Ld.AR emphasised that the und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted employees are allowable as deduction u/s. 37 of the Act and that the Ld. AO cannot doubt the necessity of incurring expenditure as it is not in the domain of the assessment. 3.2.8. The A.R. emphasized that deputation of employees by L & T Ltd. to assessee has not been disputed by the revenue authorities. However, only in the absence of the written contract the expenditure claimed by the assessee was denied. The Ld. AR submitted that L & T Ltd. confirmed that the reimbursement was on cost to cost basis in respect of the employees deputed to the assessee and the amortised ESOP cost of such employees was charged on quarterly basis. It was submitted that issue relating to ESOP was considered by the Hon'ble Special Bench of this Tribunal in case of Biocon Ltd. vs. DCIT reported in [2013] 35 taxmann.com 335. The Ld.AR submitted that, this decision was upheld by Hon'ble Karnataka High Court reported in [2020] 121 taxmann.com 351. The Ld. AR submitted that, though the decision in respect of ESOP shares is not directly linked with the issue under consideration in the present facts, however, since the deputed employees of the holding company were in receipt of ESOP from the ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the issue was remanded with following directions.: 26. Grounds 2 and 3 in A. Y. 2008-09 and grounds 3, 4 and 5 in A. Ys. 2009-10 and 2010-11 are allowed. 27. Vide its grounds 5 and 6 for A. Y. 2008-09 and grounds 6 and 7 for A. Ys. 2009-10 and 2010-00 assessee assails disallowance of debit notes raised by its parent company for defraying the ESOP charges of employees deputed by it. Amount disallowed was of Rs. 2,70,99,347/- for A. Y. 2008-09 Rs. 5,27,68,682/- for A. Y. 2009-10 and Rs. 2,48,75,779/- for A. Y. 2010-11. 28. Facts apropos are that assessee had debited the above amounts under the head 'professional charges. Assessee was a subsidiary of L & T Ltd which had deputed certain employees of it to the assessee. AO required from the assessee details of the payments made by it to the employees sent by L & T Ltd, on deputation. In so far as the amounts paid to these employees in relation to allotment of shares under ESOP scheme, the AO was of the opinion that assessee had no such contractual obligation and assessee was unable to provide any contract between it and its holding company, for supporting such payments. Though the assessee claimed that payments were effected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the payments effected by the assessee to L & T Ltd, its holding company were based on debit notes placed at paper book pages 111 to 123. As per the Ld. AR assessee was obliged to reimburse the claims made by L & T since the employees debuted by L & T were working for the assessee. Assessee was supposed to reimburse the holding company on cost to cost basis. It had produced a letter from L & T Ltd, placed at page124 which would show that the payments were reimbursement of cost incurred by L & T Ltd. As per the Ld. AR, L & T Ltd, had shown such receipts from the assessee as a part of its income: Discount in the value of shares under an ESOP scheme was held to be allowable by the Special Bench in the case of Biocon Ltd, (supra), over the period of vesting. When the employees were being used by the assessee for its own business, the benefit of the ESOP which would have otherwise been that of the holding company was actually enjoyed by the assessee. According to him, nature of such expenditure was not doubted, but a disallowance was made on an erroneous reasoning that it was a capital outgo. 32. Per contra, Ld. DR strongly supporting the order of CIT (A) submitted that on me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details. No doubt before the CIT (A), it had produced a letter dt. 13.12.2012 from L & T Ltd, which stated as under: "To whomsoever It may Concern This is to confirm that Larsen & Toubro Limited has deputed its employees to L & T-Valdel Engineering Limited on cost- recovery basis. The amortized ESOP costs of such employees are being recovered on a quarterly basis. For the Financial Year 2007-08 an amount of Rs. 29,397,155/- has been recovered and the same has been treated as "Other income" in the books of Larsen & Toubro Limited and has also been offered to tax. For Larsen & Toubro Limited Sd/- Arun Kirtania Deputy General Manager Absence of a written contract by itself might not be fatal to the claim of an expenditure especially when such expenditure is based on an understanding between a Holding company and a subsidiary company, but nevertheless, it is the duty of the assessee to show that what has been reimbursed as amortised ESOP cost by its holding company were actually charged by such holding company in its P & L account as expenditure and the reimbursements made by the assessee were shown as a part of its income. Assessee has to demonstrate that the services receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees considered as ESOP charges. For the sake of convenience the annexure referred for assessment year 2012-13 is scanned and reproduced as under: Annexure 2 SALARIES, ALLOWANCES & CONSULTANCY XI A 1 Particular Sch Amount (in Rs.) BONUS ACCOUNT XI A 1 2,28,116 CONSULTANCY FEES ICO BLR XI A 1 7,91,11,952 CONSULTANCY FEES ICO FBD XI A 1 6,45,66,681 ESOP CHARGES ICO XI A 1 3,35,38,024 INSURANCE MEDICLAIM XI A 1 16,77,256 INSURANCE MEDICLAIM ICO XI A 1 1,99,470 INSURANCE WORKMEN COMPENSATION XI A 1 4,52,635 LEASE RENTALS VEHICLES ICO XI A 1 3,03,493 LEAVE ENCASHMENT XI A 1 35,33,735 LEAVE TRAVEL ALLOWANCE XI A 1 82,81,655 LEAVE TRAVEL ALLOWANCE ICO XI A 1 21,16,566 MEDICAL REIMBURSEMENT XI A 1 17,77,410 MEDICAL REIMBURSEMENT ICO XI A 1 13,20,096 PERFORMANCE INCENTIVES XI A 1 3,50,00,000 PETROL & MAINTENANCE XI A 1 14,77,634 PAINT SUBSIDY ICO XI A 1 1,82,250 PETROL & MAINTENANCE ICO XIA 1 83,06,542 RENT LEASED ACCOMODATION XI A 1 3,76,480 SALARIES & ALLOWANCES XI A 1 17,67,47,519 SALARIES & ALLOWANCES ABUDHABI ICO XI A 1 82,82,140 HOLIDAY HOMES PERKS XI A 1 2,80,465 ECAL EXPENSES XI A 1 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. It has to be therefore considered to have been incurred for the purposes of business. We therefore of the opinion that this expenditure is allowable u/s. 37 (1) of the Act. We thus held that this issue in favour of the assessee and Ground No. 1 raised in the assessee's appeals for all the years under consideration stands allowed. 5. Departmental appeal: In the appeals filed by the revenue, it is submitted that, all the issues are common for the years under consideration. Accordingly all grounds raised by the revenue in their appeals are categorised issue wise and adjudicated as under. The issues are tabulated by the assessee based on grounds raisedas under:- Sr. No. Issues A.Y.2011-12 ITA No. 4767/M/2023 A.Y.2012-13 ITA No. 4682/M/2023 A.Y.2013-14 ITA No. 4715/M/2023 A.Y.2014-15 ITA No. 4683/M/2023 A.Y.2015-16 ITA No. 4684/M/2023 1. Allowance of Software expenditure as revenue in nature Gr. Nos. 1 & 2 Gr. Nos. 1 & 2 Gr. Nos. 1 & 2 Gr. Nos. 1 & 2 Gr. Nos. 1 & 2 2. Denial of deduction under section 10A of the Act. Gr. No. 3 3. Increase of book profits by provision for leave encashment and provision for bonus as bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end applications that carry very high price tag. The Ld.AR specifically mentioned that the licenses that are purchased on perpetual model are being capitalised in the books as is evident from the depreciation schedule. He brought our notice the depreciation schedule of the audited financials at the pages in the paper book filed before us for the years under consideration. A.5. The Ld.AR submitted that, the assessee is also procuring software for short periods like a month or quarter, under revenue model to handle the spikes in project requirements. It is submitted that periodic maintenance fee is also paid in respect of such short term license and are charged as revenue expenditure. The Ld.AR the submitted that, the expenditure considered as revenue in nature are basically licenses purchased for short durations and maintenance charges of the same. Referring to the audit report, the Ld.AR submitted that, these are incurred on month-to-month basis and annual subscriptions are paid in respect of the same. The details of the expenses incurred by the assessee is placed at page 7-12 of the paper book brought to our notice by the Ld.AR. A.6. The Ld.AR placed reliance on following decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is of enduring nature ipso facto it must be held to be capital and not revenue in nature is contrary to the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT (1980) 3 Taxman 69. In the above case, while dealing with a similar submission, the Court has observed as under: "..................There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only whether the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2008-09, the deduction was denied on additional ground that, the assessee is engaged in research and analysis being in the nature of information technology assisted, and does not fall under the category of information technology enabled product and services as notified by CBDT by notification dated 26/09/2000. B.3. The Ld.AR submitted that, in line with the disallowance made for assessment year 2002-03 the disallowance u/s. 10A as made in all the subsequent assessment year with the additional condition that was included from assessment year 2008-09. The Ld.AR submitted that, the demerged company appealed against the disallowances before the Ld.CIT(A) from assessment years 2002-03 to 2004-05 and the present assessee preferred appeal before the Ld.CIT(A) from assessment years 2005-06 to 2010-11. It is submitted that, the Ld. CIT(A) disposed of the appeals by allowing the deduction under section 10A of the act for assessment A 2005-06 to 2010-11 against which the revenue preferred appeal before Hon'ble Bangalore Tribunal considered this issue on the issue of Hon'ble Bangalore Tribunal in favour of the assessee. The Ld.AR drew our attention to the relevant orders of Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer to the decisions of coordinate bench of Hon'ble Delhi Tribunal in case of Outsourcing Services Pvt.Ltd vs ITO in ITA No.1204/Del/2011 vide order dated 27/05/2011 wherein, it has been held that export of customised electronic data as required by the definition of computer software would make an assessee eligible to claim the deduction under section 10A of the act. B.7.1. Further the CBDT issued circular no. 2/2013 dated 17/01/2014, wherein more has been clarified that as regards the issue relating to export of computer software, direct tax benefit under section 10 A, 10AA and 10 B of the act is available. As regards the primary conditions based on which the Ld.AO denied the claim, we note that, Hon'ble Karnataka High Court upheld the observations of Hon'ble Bangalore Tribunal for assessment years 2008-09 to 2010-11 allowing the claim by observing as under: "Facts leading to filing of the appeal briefly stated are that assessee is a Design Engineering Company. The assessee filed its return of income for the Assessment Year 2007-08 on 19.06.2008 and thereafter, files a revised return on 04.11.2008, in which total income of Rs. 1,04,49,130/- was declared. The return was proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee submitted that the assessee is registered as STPL and was granted approval on 14.09.2001. It is further submitted that concurrent findings of fact have been recorded by the Commissioner of Income Tax (Appeals) as well as the Tribunal with regard to eligibility of the assessee to claim benefit of deduction under Section 10A of the Act, which have not been challenged as perverse. It is further submitted that the assessee was engaged on site development of software program and the programs were delivered at the premises of clients at the work site in South Korea and therefore, there was no need of a full fledged infrastructure facility and the assessee has therefore, rightly been held entitled to deduction under Section 10A of the Act. It is further submitted that newly established undertaking does not mean a new company or a partnership but means an undertaking independent of ail the undertakings of the assessee. In support of aforesaid submissions, reliance has been placed on the decisions in 'CIT VS. WIPRO GE MEDICAL SYSTEM LTD., 50 TAXMANN.COM 181 (KAR), 'CIT VS. EXPERT OUTSOURCE PVT LTD', 358 ITR 518 (KAR), 'CIT VS. QUEST INFORMATI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the questions emerged from sustainable findings of fact arrived at by courts of fact and it must be necessary to decide that question of law for a just and proper decision of the case. It has been held that entirely a new point raised for the first time before the High Court is not a question involved in a case unless, it goes to the root of the matter. In 'HERO VINOTH (MINOR) VS. SESHAMMAL', (2006) 5 SCC 545 while dealing with the scope of Section 260A of the Act, it was held that this court will not interfere with findings of the court, unless the courts have ignored material evidence or acted on no evidence or have drawn wrong inferences from proved facts by applying the law erroneously or the decision is based on no evidence. The aforesaid decisions were referred to with approval in VIJAY KUMAR TALWAR supra as well as in 'UNION OF INDIA V. IBRAHIM UDDIN', (2012) 8 SCC 148 and has been followed by a division bench of this court in 'CIT VS. SOFT BRANDS (P.) LTD.,' (2018) 406 TYR 513. 7. The findings of fact have not been assailed as perverse. it is alsu pertinent to mention that even in memo of appeal neither any grounds have been urged nor any mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal in commodities or foreign-exchange contracts and therefore provisions of section 43 (5) of the act does not apply. It is submitted that the claim is made on the principles of matching concept and is based on the accounting standard as per the Income tax Act. It is submitted that, the assessee takes forward cover which is incidental to the regular business of the assessee to hedge against losses or cover the losses arising due to the difference in foreign exchange fluctuation rates. The Ld.AR placed reliance on following decisions in support of this contention: Decision of Hon'ble Bombay High Court in case of CIT vs D. Chetna and Co.Ld reported in (2016) 75 taxman.com 300 Decision of this tribunal in case of the CIT vs GBTL Ltd reported in (2021)128 taxman.com 417 Decision of this Tribunal in case of S. Vinodkumar Diomands Pvt. Ltd vs DCIT reported in (2020) 118 taxman.com 317 D.4. The Ld.DR on the contrary relied on the observations of the Ld.AO. We have perused the submissions advanced by both sides in the light of records placed before us. D.5.From the records placed before us, we note that the Ld. AO has not raised anY allegation against the assessee that it is a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry provisions. In our view, the concurrent findings of the Commissioner and the Tribunal with regard to the nature of the transaction that it not being speculative in character is not perverse or vitiated by an error of law apparent on the face of record. The Division Bench held that once the main business is identified, if some incidental activities or transaction or dealing in foreign exchange is undertaken but that is also related to some extent to the main business activity, then, it could not be said that the assessee is in speculative business or speculative dealings is ordinarily a part of his business. We find that any larger question or controversy need not be addressed in the facts of the case before us. Once it is undisputed that the assessee is in the business of exports of diamonds and he credited the exchange difference which is for the purpose of a transaction which was undertaken in foreign exchange and that transaction fell within the parameters of law as laid down by the Division Bench, then, this is not a fit case for interference in further appellate jurisdiction. In para 17 & 18 of the order under challenge, the Tribunal noted the rival contentions and relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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