Whether when assessee, subsidiary of a foreign company, incures certain expenses for acquiring shares from parent for alloting the same under ESOP to employees, such expenses are to be allowed as revenue expenditure - YES: ITAT

THE issues before the Bench are - Whether when the assessee, a subsidiary of a foreign company, incures certain expenses for acquiring shares from the parent for alloting the same under ESOP to an employee, such expenses, which represent the difference with the fair market value, are to be allowed as revenue expenditure and Whether expenses incurred for the benefit of third party are not allowable if the same are incurred on account of commercial expediency. And the verdict goes in favour of the assessee.

Facts of the case

Assessee Company is primarily engaged in the marketing and distribution of healthcare products, specifically diabetes care products such as insulin formulations/other insulin products. It filed its ROI claiming deduction of certain expenses. The return filed by the assessee was selected for scrutiny. During the course of assessment proceedings the AO observed that employee of assessee Company had received shares of parent Company on discounted price and in this transaction the difference occurred in fair market price and discounted price had been paid by the assessee Company to its parent company and deduction of this difference had been claimed by the assessee as revenue expense. The AO was of the opinion that in the grab of ESOP allotment the assessee had provided benefit to the parent company and had claimed deduction of capital expenses. The CIT(A) affirmed the order of the AO.

On appeal, the ITAT held that,

++ 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. 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 workforce. 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 and 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 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;

++ in the case of Accenture, 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 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 is erroneous.