Facts
- Procter & Gamble Hygiene and Health Care Limited[1] (P&G) (‘the Appellant’), is an Indian subsidiary of Procter & Gamble Co., USA, which administered global compensation schemes, namely the Employee Stock Option Plan (ESOP) and International Stock Ownership Plan (ISOP), for its employees.
- Under ESOP, eligible P&G employees received stock-linked benefits upon meeting vesting conditions. Under ISOP, all employees could contribute part of their salary towards buying the parent company’s shares, with P&G matching up to 50% subject to a cap.
- For Assessment Year 2015-16, P&G claimed a deduction of ₹11.17 crores as employee benefit expenses under both schemes, with actual tax deducted at source and relevant documentation furnished.
- The Assessing Officer (‘the AO’) disallowed the whole amount, considering it as either contingent/notional, not crystallized, or as capital expenditure.
- Assessee argued that the expense represents actual, crystallized outflows reimbursed to the parent company for Indian employees and is wholly and exclusively for business purposes (to incentivize and retain staff), thus should be deductible u/s 37(1) of the Income-tax Act. This was supported with the claim of invoices, evidence of foreign remittance, and perquisite reporting for employees.
- Assessee relied on the Special Bench decision in Biocon Ltd[2] and Karnataka High Court ruling in Biocon Ltd[3], which held that ESOP discounts constitute a part of employee remuneration and are allowable business expenses under section 37(1). This principle was directly applied to the present case, underscoring the deductibility despite the pending SLP against it in the Supreme Court.
- However, revenue emphasized that liability was not crystallized in the relevant year, expenses depended on contingent events (like employee vesting), and hence could not be allowed u/s 37(1). It asserted that such stock-based benefits are capital-linked, so costs have the nature of capital expenditure.
- Revenue relied on prior adverse rulings such as Ranbaxy Laboratories Ltd[4], Eimco K.C.P. Ltd[5], Reinz Talbros Pvt Ltd[6], and Indian Molasses Co. Ltd[7], highlighting principles that only real, irrevocably incurred expenses are deductible and not notional or contingent.
Tribunal’s Findings
- The Tribunal found that the ESOP and ISOP were offered by the parent company, and P&G merely reimbursed the actual cost linked to its Indian employees. No shares were issued by P&G nor was there any alteration in its capital structure.
- This was supported by documentary evidence, the expenses were substantiated as real, ascertained, and not notional or contingent, satisfying the conditions for deduction u/s 37(1).
- The argument that expenditure is capital in nature was rejected since the shares related to the US parent company and not to P&G India. There was no capital advantage to the Appellant.
- Heavy reliance was placed on Karnataka High Court’s ruling in case of Biocon Ltd, which favored the deductibility of ESOP expenses, and its status as binding precedent despite a pending SLP before the Supreme Court.
- The Tribunal also cited commercial expediency principles as laid out in Supreme Court Judgements such as Sassoon J. David Co. (P) Ltd[8] and Walchand & Co.[9], directing that employee-related outlays, if incurred for business priorities and organizational growth, qualify as deductible on grounds of commercial expediency.
- Accordingly, the disallowance was deleted, and the appeal was allowed in favor of the assessee. Consequential grounds regarding interest adjustments were disposed as per law.
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[1] Procter & Gamble Hygiene and Health Care Limited v. DCIT, NFAC (ITA No. 3518/MUM/2025)
[2] Biocon Ltd. v. DCIT (144 ITD 21) (Bang)
[3] CIT v. Biocon Ltd. [2020] 121 taxmann.com 351 (Kar)
[4] ACIT v. Ranbaxy Laboratories Ltd
[5] Eimco K.C.P. Ltd. v. CIT (159 CTR 137, SC)
[6] CIT v. Reinz Talbros Pvt. Ltd. (252 ITR 637, Delhi HC)
[7] Indian Molasses Co. Pvt. Ltd. v. CIT (37 ITR 66, SC)
[8] Sassoon J. David & Co. (P) Ltd. v. CIT (118 ITR 261, SC)
[9] CIT v. Walchand & Co. (65 ITR 381, SC)
