Ita/65/2024 Of The Pr Commissioner Of Income Tax v. Sap India Pvt Ltd

Digitallysigned byBHARATHI SLocation:HIGHCOURT OFKARNATAKA IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 19 DAY OF AUGUST, 2024 PRESENT THE HON'BLE MR JUSTICE S.G.PANDIT AND THE HON'BLE MR JUSTICE C.M. POONACHA INCOME TAX APPEAL No. 65 OF 2024 BETWEEN: 1. THE PR. COMMISSIONER OF INCOME -TAX 5 FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU – 560 095. 5 FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU – 560 095. 2. THE DEPUTY/ASST. COMMISSIONER OF INCOME - TAX CIRCLE - 6(1)(1), 2 FLOOR, CIRCLE - 6(1)(1), 2 FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU – 560 095. …APPELLANTS (BY SRI SUSHAL TIWARI N, ADVOCATE) AND: SAP INDIA PVT. LTD., 6 FLOOR, RMZ ECOWORLD 8A CAMPUS, SARJAPUR MARATHAHALLI OUTER RING ROAD DEVERABEESANAHALLI BENGALURU, KARNATAKA – 560 103. (PAN: AACCS 7483E) …RESPONDENT (BY SRI NAGESWAR RAO D D, ADVOCATE – V.C) THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A No. 874/BANG/2022 DATED 19/04/2023 FOR ASSESSMENT YEAR 2017-2018 ANNEXURE-A AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY / ASST. COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(1), BENGALURU AND ETC., THIS APPEAL COMING ON FOR ADMISSION THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER: CORAM: HON'BLE MR JUSTICE S.G.PANDIT and HON'BLE MR JUSTICE C.M. POONACHA ORAL JUDGMENT (PER: HON'BLE MR JUSTICE C.M. POONACHA) The present appeal is filed under Section 260A of the Income Tax Act, 1961[1] by the Revenue challenging the order dated 19.4.2023 passed in IT(TP)A No.874/Bang/2022 by the Income Tax Appellate Tribunal, Bangalore[2], for the Assessment Year[3] 2017-18. 2.In its memorandum of appeal, the appellant sought to urge the following substantial questions of law: 1 Hereinafter referred to as the ‘IT Act’ 2 Hereinafter referred to as the ‘Tribunal’ 3 Hereinafter referred to as the ‘AY’ “1) Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is correctly holding that the discount on the issue of ESOP is an allowable deduction in computing the income under the heads profit and gains of the business. 2) Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is justified in law in deleting the disallowance in respect of ESOP discount, even when the said amount representing discount i.e., expenses of fair market value over the face value of the capital receipt and consequently, any shortfall in receipt of such share premium is tantamount to capital loss and cannot be debited under profit and loss account. 3) Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is correct in law in allowing Assessee claim even though expenditure claimed by the assessee is notional and it is clear from the scheme of ESOP that the employees will not get any right in the share till completion of the period prescribed and expenditure claim is contingent, this is not an allowable expenditure under Section 37(1) of the Act.” 3.The relevant facts necessary for consideration of the present appeal are that the assessee is primarily engaged in sub-licensing, distribution and after sale support for products of SAP-SE. The assessee filed revised returns for AY 2017-18 and the said return was selected for scrutiny. A reference was made under Section 92CA of the IT Act to the Transfer Pricing - 4 - 3) Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is correct in law in allowing Assessee claim even though expenditure claimed by the assessee is notional and it is clear from the scheme of ESOP that the employees will not get any right in the share till completion of the period prescribed and expenditure claim is contingent, this is not an allowable expenditure under Section 37(1) of the Act.” 3.The relevant facts necessary for consideration of the present appeal are that the assessee is primarily engaged in sub-licensing, distribution and after sale support for products of SAP-SE. The assessee filed revised returns for AY 2017-18 and the said return was selected for scrutiny. A reference was made under Section 92CA of the IT Act to the Transfer Pricing - 4 - Officer[4]. Vide order dated 22.1.2021, the TPO recommended an amount of `178,54,75,146/- relating to TP adjustment. Subsequently, the Assessing Officer[5] passed a draft assessment order on 26.9.2021. Against which, the assessee filed objections before the Dispute Resolution Panel[6]. The DRP issued directions vide order dated 13.6.2022. Being aggrieved, the assessee preferred appeal IT(TP)A No.874/Bang/2022 before the Tribunal. The Tribunal by order dated 19.4.2023 partly allowed the appeal. Being aggrieved, the present appeal is filed by the Revenue. 4.Heard the submissions of Sri Sushal Tiwari, learned counsel for the appellant/Revenue and Sri Nageswar Rao, learned counsel for the respondent/assessee. 5.The primary contention put forth by the revenue is with regard to ESOP expenses of the assessee which was disallowed by the AO as well as the DRP. It is forthcoming that the assessee had claimed a deduction in the computation of income on account of “ESOP cost borne by the company”. The AO had held that the same tantamounted to revenue expenditure and hence, disallowed the same. The DRP affirmed 4 Hereinafter referred to as the ‘TPO’ 5 Hereinafter referred to as the ‘AO’ 6 Hereinafter referred to as the ‘DRP’ - 5 - the view taken by the AO. However, the Tribunal relying on the judgment of a coordinate Bench of the Tribunal in the case of Novo Nordisk India (P) Ltd.,[7] allowed the contention of the assessee regarding disallowance of ESOP expenses. 6.Learned counsel for the respondent has further placed reliance on the judgment of a coordinate Bench of this Court in the case of Commissioner of Income Tax, LTU v. Biocon Ltd.,[8]wherein this Court has also held the discount on issue of ESOP was allowable expense under Section 37(1) of the IT Act. 7.Although learned counsel for the Revenue does not dispute the proposition of law as held by the Tribunal and as laid down by the coordinate Bench of this Court in the case of Biocon Ltd.,[8], it is sought to be contended that the relevant material has not been placed by the assessee to claim the said deduction. The DRP while considering the said aspect has noticed various legal provisions and disallowed the same. However, the position of law as relied on by the Tribunal not having been disputed, considering a question of fact in the present appeal does not arise and hence the contention sought 7 (2014) 63 SOT 242 (Bang) 8 (2020) 121 taxmann.com 351 (Karnataka) - 6 - to be put forth by the Revenue in the present appeal is liable to be rejected. 8.It is clear and forthcoming that the Revenue had sought to contend in the present appeal that the expenditure towards ESOP is not an allowable expenditure as per Section 37(1) of the IT Act. However, this Court in the case of Biocon Ltd.,[8 ]having categorically held that the same is an allowable expenditure, there is no merit in the contention sought to be put forth by the Revenue. 9.In view of the aforementioned, and as no substantial question of law would arise, it is not a case for admission, the appeal is dismissed as being devoid of merit. Sd/- (S.G.PANDIT) JUDGE Sd/- (C.M. POONACHA) JUDGE Nd List No.: 1 Sl No.: 17