ITAT Bangalore Holds Expenditure Incurred By Flipkart Towards ESOP Is Eligible For Deduction Under S. 37 Of ITA

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the appeal of Flipkart India against disallowance of over Rs.15.5 Crore of expenses claimed by it under Section 37 of the Income Tax Act, 1961, towards Employee Stock Ownership Plan (ESOP). Flipkart had claimed that the ESOP cross charge payments made to its Singapore based Holding Company were mere reimbursements, and the same were eligible for deduction under Section 37. The ITAT relied upon the decision of the Karnataka High Court in CIT (LTU) vs. Biocon Ltd. (2020), where it was ruled that issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares, would also be an expenditure incurred for the purpose of Section 37(1). The bench, consisting of George George K. (Judicial Member) and Padmavathy S (Accountant Member), thus concluded that the expenditure incurred by Flipkart towards ESOP is eligible for deduction under Section 37. Section 37(1) of the Income Tax Act provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under “Profits and gains of business or profession”. The assessee/ appellant- Flipkart India Pvt Ltd’s income tax return for the relevant assessment year was selected for scrutiny and statutory notices were served on it. The Assessing Officer (AO) made certain additions to Flipkart’s income, where it did not accept the loss declared by Flipkart in its books of account and treated the discounts offered by Flipkart on the goods sold by it, as capital expenses. The AO opined that the profits foregone by Flipkart by offering discounts, created intangibles assets, such as goodwill and a brand value. It thus made additions on account of ‘valuation of marketing intangibles’. The AO further disallowed the expenses claimed by Flipkart under Section 37 of the Income Tax Act towards ESOP. In an appeal filed by Flipkart against the assessment order, the Commissioner of Income Tax (Appeals) (CIT(A)) deleted the additions made by the AO towards valuation of Flipkart’s marketing intangible assets. However, the CIT(A) upheld the disallowance of the ESOP expenses. Against the order of the CIT(A), both Flipkart and the revenue department filed an appeal before the ITAT. Flipkart pleaded before the ITAT that the CIT(A) had erred in confirming the disallowance of the expenditure incurred on ESOP under Section 40(a)(i) of the Income Tax Act. The CIT(A) had concluded that Flipkart was liable to deduct tax under Section 195 of the Income Tax Act on the reimbursements made to its Singapore based Holding Company towards ESOP expenditure. Flipkart contended that the ESOP cross charge payments made to its Holding Company were mere reimbursements, having no mark-up or profit element attached to it. Since it was a case of cost-to-cost reimbursement, there was no liability to withhold tax on the same under Section 195, it contended. Flipkart further argued that the ESOP expenses qualify the conditions prescribed under Section 37, and that they are in the nature of an unascertained liability and not a contingent liability. The ITAT referred to its decision in Novo Nordisk India P. Ltd. vs. DCIT (2014), where the foreign parent company, in pursuance of its policy, had allowed its Indian subsidiary, i.e., the assessee, to issue the formers’ shares to the assessee’s employees. The difference between the fair market value of the parent company’s shares on the date of issue and the price at which those shares were issued by the assessee to its employees, i.e., the discounted premium, was reimbursed by the assessee to its parent company. Holding that the reimbursements made by the assessee were nothing but the employee cost incurred by it, the Tribunal had concluded that the same was a revenue expenditure incurred for the purpose of the business of the assessee and the same had to be allowed as deduction. The ITAT further observed that the issue whether the ESOP cross charge payments made by an assessee to its Holding Company are allowable under Section 37, has been decided by ITAT Bangalore in Biocon Ltd. vs. Dy. CIT (2013), which was later affirmed by the Karnataka High Court in CIT (LTU) vs. Biocon Ltd. (2020). The Karnataka High Court had ruled that the expression ‘expenditure’ under Section 37(1) of the Income Tax Act also includes a loss. Therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares, would also be an expenditure incurred for the purpose of Section 37(1), it had held. The ITAT thus held that the expenditure incurred by Flipkart towards ESOP is...

ITAT Bangalore Holds Expenditure Incurred By Flipkart Towards ESOP Is Eligible For Deduction Under S. 37 Of ITA

Parina Katyal

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