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Flipkart Wins Big with ITAT Ruling – ESOP Allowed as Revenue Expenditure and Marketing Intangibles Addition Deleted



The Hon’ble Bangalore ITAT in the case of Flipkart India Pvt Ltd. Vs. Asst. CIT [ITA No. 1141/Bang/2022] (‘Assessee’) pronounced its ruling in favor of the Assessee for disallowance of ESOP Expense and addition towards marketing intangibles made by the AO.

Allowance of ESOP as revenue expenditure:

Reliance was placed on the co-ordinate Bench ruling[1], which had held as under:

  • Foreign Parent Entity has a Global policy of offering ESOP to attract the best talent as its workforce which doesn’t mean that the ESOP has been issued to employees of the Assessee at the behest of the Parent Entity.
  • In any event, Assessee is the immediate beneficiary though the parent company may also be an indirect beneficiary of a motivated workforce of a subsidiary.
  • The difference between FMV of shares of the parent company and the issue price is an employee cost.
  • ESOP issued at a discount to compensate employees for their services is revenue in nature and incurred wholly and exclusively for business purposes which cannot be considered as a short capital receipt or a capital expenditure.

Rejection of department’s appeal on addition made on account of Marketing Intangibles:

The addition made by the AO considering loss incurred by the Assessee on purchase of goods from unrelated vendors and reselling to unrelated retailers at discounted sales price is ‘capital expenditure incurred for creating intangibles/brand /goodwill’ has been deleted.

The ITAT relied on the co-ordinate Bench ruling in the Assessee’s own case for the AY 2015-16, which had held as under:

Alteration of profits/loss:

  • AO can only disregard P&L Account if he invokes the provisions of Sec. 145(3) of the Act.
  • In the case of bona fide transactions, AO cannot tax the notional income which could have been earned but not earned, ignoring the real price of the transaction.
  • AO has to accept the loss incurred by the Assessee without any alteration/estimation of total income.

Whether Assessee has incurred expenditure for creating intangible/goodwill?

  • For expenditure, there should be either accrual of liability or payment outflow.
  • Profit foregone cannot be considered as an expenditure.
  • It is incorrect to say that profits foregone by the Assessee create goodwill/brand/intangible.

KNAV Comments

  • The aforesaid ruling clears the air amongst taxpayers having similar issues, stabilizing the position that ESOP expenditure is an allowable expenditure under section 37 of the Act.
  • The ‘commercial expediency’ of the businessman undertaking the transactions/expenditures (free of cost or at a loss) cannot be challenged by the AO.

[1] Novo Nordisk India P. Ltd. vs. DCIT, [2014] 63 SOT 242 (Bangalore – Trib.)

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