Bangalore Tribunal rules on deductibility of employee share reward discount cross-charged by foreign parent company

 

This Tax Alert summarizes a ruling of the Bangalore Income Tax Appellate Tribunal (Tribunal) in the case of Novo Nordisk India Pvt. Ltd.(Taxpayer) on the issue of deductibility of expenditure incurred on providing shares of the Taxpayer’s parent company, being a foreign company (FCo), to the Taxpayer’s employees under an Employee Share Purchase Scheme (ESPS). The Tribunal held that the ESPS discount cross-charged by FCo was an employee cost, wholly and exclusively incurred for the purpose of the Taxpayer’s business and hence, to be allowed as revenue expenditure, irrespective of the fact that FCo stood to benefit indirectly by such an expenditure.

Deductibility of discount given to employees under a share reward program, where a company issues its own shares to its employees, has been a controversial issue. The decision of the Special Bench of the Bangalore Tribunal in the case of Biocon Ltd. held that ESOP discount is an allowable revenue expenditure, in terms of which, the issue is presently decided in the taxpayer’s favour.

The issue involved in the present appeal is on a different facet viz., where a subsidiary bears cross-charge of the parent’s share reward program to the extent that it pertains to the subsidiary’s employees. As compared to a situation of issue of own shares where the company receives lesser share premium, there is actual cash outflow for the subsidiary in this situation.

The present ruling reiterates the ratio of the earlier Accenture ruling while upholding that such cross-charge paid to a parent company is an allowable revenue expenditure, notwithstanding the fact that it is related to the issue of shares by the parent company and the parent company stands to benefit to the extent of cross- charge paid by subsidiary.