The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) held that a discount on Employee Stock Option Plan (ESOP) amounts to expense and deduction under section 37 of the Income Tax Act,1961 is allowable.
The assessee, EIT Services India Pvt. Ltd challenged the order of DCIT 2(1)(1), Bengaluru dated 27.3.2021 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) & 143(3B) of the Income Tax Act,1961 Act on various grounds.
It was contended by the assessee that the Transfer Pricing Officer (‘the TPO) erred in rejecting the value of international transactions relating to software development services (‘SWD services’) and information technology-enabled services (‘ITE Services’) as recorded in the books of accounts, as the arm’s length price.
Further argued that the disallowance of the expenditure on Employee Stock Option (‘ESOP’) of INR 28.72.00.000 under section 37 of the Act without appreciating the submission furnished by the Appellant was not correct.
The assessee pleaded to include Isummation Technologies Ltd, Batchmaster Software Pvt. Ltd, DCIS Dot.com Solutions Pvt. Ltd, Sagar Soft India Ltd as comparable companies, Ace Software Export Ltd and Sasken Communication Technology Ltd
It was observed that L&T Infotech Ltd, Persistent Systems Ltd. iii. Infobeans Technologies Ltd and Infosys Ltd need to be excluded from the comparable list as there were functional dissimilarities with the assessee company.
The Tribunal observed that the assessee’s plea for inclusion of certain companies can be granted as those companies were primarily engaged in Software development services and not in the sale of products.
A Coram of Shri Chandra Poojari, AM and Smt. Beena Pillai, J M observed that the Company has deducted appropriate TDS under section 192 of the Act in respect of share-based compensation under ESOP schemes, which have been taxed in the hands of employees as ‘perquisites’ under section 17 of the Act.
It was evident that the expression “expenditure” also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for section 37(1).
The Tribunal while partly allowing the appeal directed the AO to verify whether the said amount has been subject to TDS in the assessment year under consideration u/s 192/195 of the Act as argued by the assessee.
Shri Padam Chand Khincha appeared for the appellant and Shri Praveen Karanth appeared for the respondent.
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