Relief to HP: ITAT allows Deduction on ESOP Cross Charges paid to Overseas Ultimate Holding Company, allowable as Expenditure [Read Order]

While granting relief to M/s. Hewlett Packard (India) Software Operation Pvt Ltd (HP) the Bangalore Bench of the Income Tax Appellate Tribunal (ITAT), held that Employee Stock Option Plan (ESOP)paid to Overseas Ultimate Holding Company are allowable as expenditure.

The appellant company, M/s. Hewlett Packard (India) Software Operation Pvt Ltd is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services.

The Counsel for the assessee, submitted that the ESOP cross-charges represents the actual expenditure incurred by the Company in respect of its employees, who form part of the Company's business and are involved in carrying out day-to-day business operations or management. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for deduction under section 37 of the Income Tax Act, 1961.

The Counsel further stated that that the Company has deducted appropriate TDS under section 192 of the Income Tax Act in respect of share-based compensation under ESOP schemes, as 'perquisites' under section 17 of the Income Tax Act. Accordingly, it is submitted that the ESOP cross charges are subject to TDS provisions under section 192 of the Income Tax Act and the same is in accordance with the Circular No. 17/2014 issued by the Central Board of Direct taxes for computation of taxable income of employees.

A Bench consisting of N V Vasudevan, Vice President and Chandra Poojari, Accountant Member observed that “The ESOP expenditure incurred is a compensation/incentive to the employee and has direct nexus with his/her employment. Such compensation to the employees in the form of ESOP are included in salary of the employees under Section 17 of the Income Tax Act, 1961. Therefore, such expenses are incurred for the purposes of business and hence allowable expenditure under section 37 of theIncome Tax Act in the hands of the employer i.e. the Company.”

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