ITAT Allows ESOP Deduction to Intel India; Treats Cross-Charge as Revenue Expense

M/s. Intel Technology India Pvt. Ltd., engaged in providing IT and software services to its overseas group entities, filed its return for AY 2022-23 declaring income of Rs. 2,233 crore. During assessment, the Assessing Officer noted that the assessee had claimed deduction of Rs. 721 crore towards Employee Stock Option Plan (ESOP) expenses, being cross-charged by its parent company, Intel Corporation.

The assessee explained that ESOPs were granted to its employees by the parent company, and the corresponding cost was reimbursed by the Indian entity. Tax was duly deducted under Section 192 in the hands of employees, and the expense was incurred wholly for employee retention and business purposes. However, the Assessing Officer treated the ESOP cost as capital expenditure and disallowed it under Section 37. The CIT(A) upheld this view, stating that the expense related to share capital of the parent company and thus had a capital character.

Main Issue: Whether ESOP expenses cross-charged by a foreign parent company to its Indian subsidiary are allowable as revenue expenditure under Section 37(1) of the Income Tax Act.

ITAT’s Ruling: The Tribunal held that ESOP expenses incurred by the assessee are allowable as revenue expenditure and cannot be treated as capital in nature. It observed that the primary objective of ESOPs is to compensate and retain employees, and therefore, the expenditure is intrinsically linked to the business operations of the assessee.

Relying on binding precedent of the jurisdictional High Court in CIT v. Biocon Ltd., the Tribunal reiterated that ESOP discount constitutes employee compensation and is an ascertained liability, even if spread over the vesting period. The Tribunal also noted that the dismissal of SLPs by the Supreme Court strengthens the precedential value of the Biocon ruling.

Further reliance was placed on Flipkart India Pvt. Ltd. v. ACIT, where similar ESOP cross-charge arrangements were allowed as deductible expenses.

Thus, the Tribunal reversed the orders of the lower authorities and directed the deletion of the disallowance of Rs. 721 crore.

To Read Full Judgment, Download PDF Given Below