Income Tax

Hewlett Packard India Ltd Vs Deputy Commissioner of Income Tax

On 18^th January 2023, the ITAT Bangalore pronounced an order in the case titled Hewlett Packard India Ltd Vs Deputy Commissioner of Income Tax wherein an appeal was filed by the assessee against the final assessment order dated 30.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2018-2019. The present article shall discuss the aspects covered in the case to provide clarity on the same

Facts of the Case

• The assessee is a company engaged in providing software development support services to its group entities. For the assessment year (AY)  2018-2019, the income tax return was filed on 30.11.2018 declaring total income at Rs.488,64,37,720, which led to the assessment being selected for scrutiny followed by the issuance of notice u/s 143(2) of the I.T.Act on 23.09.2019.
• During the course of the scrutiny assessment, the case was referred to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transaction entered by the assessee with its Associated Enterprises (AEs).
• The order was passed by the TPO on 30.07.2021 u/s 92CA of the I.T.Act, proposing the TP adjustment of Rs.199 79, 71,600. The draft assessment order was passed by the Assessing Officer  (AO ) dated 06.09.2021 incorporating the above TP adjustment proposed by the TPO along with making certain disallowance under the Corporate Tax segment.
• Aggrieved by the draft assessment order, objections were filed before the Dispute Resolution Panel (DRP) by the assessee on 05.10.2021. The DRP disposed of the objections of the assessee vide its directions dated 20.06.2022.
• Based on the directions of the DRP, the impugned final assessment order was completed on 30.07.2022, wherein the total income of the assessee was assessed at Rs.662 44 and 80,897 under the normal provisions of the Act.
•  Later, the rectification order was passed by the AO  dated 22.09.2022, deleting the TP adjustment of Rs.139 01, 63,140. In the rectified order, the total income was calculated at Rs.523 43, 17,757 under the normal provisions of the Act.

Relief Sought By the Assessee

Aggrieved, the assessee filed the present appeal before the Tribunal. Several grounds are raised; however, reliefs that were argued before the Tribunal are as follows:

• Deletion of the disallowance  under section 37 of the Act regarding the ESOP expenditure incurred by the Appellant amounting to INR 35,03,19,026;
• Allowance of the claim towards payment of leave encashment of INR 3,42,22,795; and
• Allowance of the credit of taxes pertaining to Aruba India (Merged Entity) amounting to INR 21,48,27,493.”

Observations and Ruling of the Tribunal

They deal with these aspects  by observing and ruling the following-

Disallowance of Expenses regarding ESOP

The assessee had two types of share-based compensation schemes, namely, Employee Stock Purchase Plan (ESPP) and Employees Stock Incentive Plan (ESIP) (hereinafter collectively referred to as ESOP Scheme). Under the ESOP scheme, the assessee’s employees were eligible for purchasing/get shares of the ultimate holding company (through the ESPP/ESIP scheme).

The shares of the ultimate holding company are issued under these schemes. For the relevant AY, namely, A.Y. 2018-2019, the assessee had claimed a sum of Rs.35,03,19,026 as eligible deduction u/s 37 of the I.T.Act towards reimbursement of ESOP expenditure cross charged by the ultimate holding company.

 It was held by the AO that the expenditure on ESOP cross charged by the ultimate holding company is fictional/notional in nature and same doesn’t qualify for deduction u/s 37(1) of the I.T.Act, and this view of the AO was affirmed by the DRP.

The learned AR submitted that an identical issue was considered by the Tribunal in the assessee’s own case for the AY 2016-2017 in IT(TP)A No.213/Bang/2021 (order dated 03.10.2022). It was submitted that the Tribunal, in the above order, had held that the expenses claimed u/s 37 of the I.T.Act ¹on account of the ESOP scheme were allowable as a deduction.

The court thoroughly went through the judgement and, in the light of the above order of the Tribunal, which has considered an identical ESOP scheme, held the assessee  to be entitled to the  deduction u/s 37 of the I.T.Act in relation to ESOP expenditure amounting to Rs.35,03,19,026 and ordered accordingly.

Payments towards Encashment of Rs.3 42, 22,795

The assessee had claimed provision for leave encashment on an accrual basis for AY2011- 2012, 2012-2013 and 2013-2014. The claim of the assessee for provision for leave encashment was based on the judgment of the Hon’ble Calcutta High Court in the case of Exide Industries Limited & Anr. v. Union of India reported in (2007) 292 ITR 470 (Cal).

 It is submitted that despite the assessee’s claim for the aforesaid years being disallowed by the A.O, for the AYs 2018-2019, the assessee had paid an amount towards leave encashment of a sum of Rs.3,42,22,795. The assessee wanted the aforesaid payment to be claimed as a deduction since it was claimed in the earlier years on an accrual basis.

Subsequently, on 24.04.2020, the Hon’ble Apex Court vide Civil Appeal No.3545/2009 overruled the judgment of the Hon’ble Calcutta High Court in the case of Exide Industries Limited & Anr. v. UOI upheld the constitutional validity for deduction of leave encashment on payment basis u/s 43B of the I.T.Act.

In view of the Hon’ble Apex Court judgment, the decision on account of the provision for leave encashment want sustained by the tribunal. However, the assessee is claiming deduction u/s 43B(f) of the I.T.Act on the payment made towards leave encashment for the relevant assessment year, namely, A.Y. 2018-2019, which hasn’t been claimed in the income tax return for the year under consideration.

On identical facts in the case of the group company, namely, Global E-Business Operations (P.) Ltd. v. DCIT  (Bang-Trib.), the Bangalore Bench of the Tribunal had held that leave encashment actually paid as per the provision of section 43B(f) of the I.T. Act must be allowed as a deduction. For the aforesaid purpose, the Tribunal, in the case of Global E-Business Operations (P.) Ltd. v. DCIT  restored the matter to the files of the A.O. for verifying the claim of the assessee and allowing the deduction to the assessee as per law. The relevant finding of the Tribunal reads as follows:-

“Once the facts considered by the Tribunal is identical to the facts of the instant case, adopting a similar direction, we restore this issue to the files of the A.O. The A.O. is directed to afford a reasonable opportunity of hearing to the assessee.”

Allowance Of The Credit Of Taxes Pertaining To Aruba India (Merged Entity) Amounting To INR 21,48,27,493.”

The assessee had claimed tax credit of the merged entity amounting to Rs.21,48,27,493 in the income tax return  filed. However, the A.O. didn’t grant a tax credit to the merged entity, namely, Aruba Networks India Private Limited. The DRP, vide its directions, restored the matter to the A.O. As per the directions of the DRP, the claim of the assessee was allowed.

It is claimed that M/s.Aurba Networks India Private Limited has been merged with the assessee during the relevant financial year by the judgment of the Hon’ble High Court. It is stated that the income of the said merged entity has been taken as income of the assessee. Therefore, any advance tax paid by M/s.Aurba Networks India Private Limited has to be given due credit to the assessee while computing the total income of the assessee. The tribunal directed the A.O. for examining the claim of the assessee afresh, along with giving a tax credit to the merged entity as per law.

Conclusion

After considering the relief sought by the assessee, the tribunal had partially allowed the appeal of the assessee, thereby providing the much-needed clarifications on the above-mentioned provisions of the Income Tax Act 1961 

Read Our Article: Section 269SS of Income Tax Act 1961: An Overview

1. https://en.wikipedia.org/wiki/Information_Technology_Act,_2000