Mumbai ITAT Rules in Favor of Deduction for ESOP and ISOP Costs – A Landmark Decision

 On 31st July 2025, the Mumbai Income Tax Appellate Tribunal (ITAT) delivered a significant ruling in the case of Procter & Gamble Hygiene and Health Care Limited, which has far-reaching implications on the tax treatment of employee stock-based compensation.

Key Issue

The dispute revolved around whether the Indian subsidiary could claim deductions under Section 37(1) of the Income-tax Act, 1961, for amounts reimbursed to its US-based parent company. These reimbursements were for costs relating to:

• Employee Stock Option Plan (ESOP): where employees received stock-linked benefits on meeting vesting conditions.

• International Stock Ownership Plan (ISOP): where employees could contribute salary to purchase parent company shares, matched by the Indian company.

The tax authorities had disallowed ₹11.17 crore, arguing the expenditure was contingent and capital in nature.

Tribunal’s Findings

The ITAT rejected the Revenue’s argument and ruled in favour of the assessee. Key observations include:

• The Indian entity only reimbursed actual costs incurred for its employees.

• These were real and substantiated expenses, backed by documentation such as cross-charge invoices and foreign remittance records.

• Liability was not contingent, but had clearly crystallized.

Importantly, the Tribunal ruled that since the shares belonged to the parent company, there was no change in the Indian company's capital structure, negating the argument of capital expenditure.

Legal Precedent and Commercial Rationale

In reinforcing its decision, the ITAT cited the Karnataka High Court's ruling in Biocon Ltd., which held such expenses to be allowable as deductions. The Tribunal acknowledged the binding nature of that decision in the absence of a contrary Supreme Court verdict.

The Tribunal emphasized that these expenditures are part of a conscious, strategic compensation mechanism—crucial for retention and motivation of employees, and hence, fall within the ambit of commercial expediency.

Impact

This ruling provides welcome clarity and relief to multinational corporations operating in India. It supports the view that employee benefit costs, even when linked to global equity plans, can be legitimate deductible business expenses under the Act.