ALP Of The ESOP Expenses Cannot Be Taken As ‘Nil’: ITAT

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the arm's-length price (ALP) of the employee stock option plan (ESOP) expenses cannot be taken as ‘Nil’.

The bench of Rahul Chaudhary (Judicial Member) and S. Rifaur Rahman (Accountant Member) has observed that the transfer pricing addition of INR 26,53,078 is, therefore, set aside, and the TPO/Assessing Officer is directed to re-compute the ALP and the transfer pricing adjustment, if any, by following the method adopted by the appellant for the determination of the ALP of the international transaction of reimbursement of ESOP expenses of Rs. 26,53,078.

The ultimate holding entity of the booking.com group (i.e., Booking Holdings Inc.) had established equity compensation plans. As per compensation plans, the group offered Employee Stock Option Plans (ESOPs) in the nature of restricted stock units (RSUs) and performance share units (PSUs) to employees eligible under the equity compensation plan of its group entity as incentives and rewards to encourage employees and executives to contribute to the long-term success of the group.

During the relevant previous year, the amount was recorded as having accrued in the books of accounts as ESOP Expenses in respect of charge towards RSUs, out of which INR 47,18,775 pertained to unvested grant expenses, and therefore, the same was disallowed in the return of income. Whereas deduction was claimed for the balance amount remitted to the AEs during the relevant previous year, which pertained to vested grant expenses and included incremental gain on the RSUs granted in 2015 and vested in the Financial Year 2017-18.

On the basis of invoices raised by the AE against the appellant, remittance of ESOP expenses was made by the appellant to its AE.

The ESOP expenses so remitted to the AE were debited to the profit and loss account as part of employee benefit expenses and treated as part of operating costs.

Since the appellant was compensated for its services at cost plus a markup of 5%, the ESOP expenses of INR 26,53,078/- were recouped by the appellant as compensation for services along with a margin of 5%.

Therefore, the appellant received a service charge from the AE. In addition, the appellant also had a margin of 5% on ESOP expenses of INR 26,53,078.

The appellant contended that the TPO determined the ALP of ESOP Expenses at ‘Nil’ without appreciating that the appellant had been invoiced for the cost of ESOP expenses. The ESOP expenses pertained to already-vested RSUs. On exercise of the option by the employees, the ultimate holding company of the appellant was under obligation to make payment of RSUs to the employees of the appellant as per the compensation scheme.

The tribunal held that the purpose of granting the RSUs to the employee of the appellant was to retain and motivate him to continue his employment with the appellant. The cost incurred by AE on the exercise of the RSUs by the employee of the appellant is the cost reimbursed by the appellant, which was initially picked up by AE.

Counsel For Appellant: Ajit Kumar Jain

Counsel For Respondent: Ajit Pal Singh Daia

Case Title: Booking.Com India Support & Marketing Services Private Limited Versus DCIT

Case No.: ITA No. 2069/MUM/2022

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