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TMI Blog2023 (3) TMI 1035X X X X Extracts X X X X X X X X Extracts X X X X ..... question of estimation of quantum of expenditure on creating intangibles, in view of the above conclusions. We hold that the loss as declared by the Assessee in the return of income should be accepted by the AO and his action in disallowing expenses and arriving at a positive total income by assuming that there was an expenditure of a capital nature incurred by the Assessee in arriving at a loss as declared in the return of income and further disallowing such expenditure and consequently arriving at a positive total income chargeable to tax is without any basis and not in accordance with law. Disallowance u/s. 37 towards ESOP expenses - HELD THAT:- We notice that the issue of whether ESOP cross charge expenses are allowable u/s. 37 of the Act has already been decided by this Tribunal in favour of the assessee in the case of Biocon Ltd [ 2013 (8) TMI 629 - ITAT BANGALORE ] which has also been affirmed by the Hon ble Karnataka High Court [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT ] by categorically holding that the expression expenditure will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961 ( Act ) amounting to INR 15,50,70,000/- 2. The Ld. CIT(A) has erred in confirming the disallowance of the expenditure on ESOP of INR 15,50,70,000/- under Section 37 of the Act, both in facts and in law and by erroneously distinguishing binding precedents and by rendering perverse findings contrary to the record. 3. The Ld. CIT(A)'s finding on the issue of deductibility of ESOP expenditure is erroneous as: 3.1. the expenditure is not notional, fictious or contingent; 3.2. is in accordance with the books of accounts prepared according to recognized accounting standards; 3.3. is an actual cost incurred by the Appellant which is paid to the Holding company; and 3.4. the ESOP is not a service by Holding Company to Subsidiary Holding Non-Applicability of Section 195 of the Act 4. The Ld. CIT (A) has erred in law and on facts by upholding the actions of the Ld. AO of disallowing the ESOP expenditure under section 40(a)(i) of the Act by holding that Appellant is liable to deduct tax under Section 195 of the Act on reimbursement made to the Holding Company towards ESOP expenditure. 5. The Ld. CIT(A) has erred in law and on facts by ignorin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en on record for the purpose of adjudication. 6. The summary of the submissions made by the ld. AR in the written submissions is that (i) ESOP expenses qualify the conditions prescribed u/s. 37 of the Act. (ii) It is an unascertained liability and not a contingent liability. (iii) ESOP expenses are recognized in accordance with the Accounting Principles i.e., INDAS 102. (iv) ESOP expenses are recognized by following a consistent accounting method year on year. (v) Based on various judicial pronouncements, it is well settled that there is no liability to withhold tax in the case of cost to cost reimbursement, as is in the assessee s case. 7. Through the written submissions, the ld DR brought to our attention the relevant parts of the CIT(A) s order in order to distinguish the assessee s case from Biocon Ltd. (2013) 25 ITR (T) 602 (Bang. Trib.) and submitted that the assessee has not submitted the relevant details in this regard. 8. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of Novo Nordisk India P. Ltd. v. DCIT, [2014] 42 taxmann.com 168 (Bang. ITAT) has considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. 20. We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee at the behest of the SUNIL Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture Services (P.) Ltd. (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee's case, as the assessee had on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy of rewarding employees of affiliates with its shares being given at a discount and that policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP was at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from various persons and sells the same immediately to retail seller like M/s. WS Retail Services P. Ltd. and M/s. Flipkart Online Services P. Ltd. During the assessment proceedings, the AO noticed that the assessee has been selling the goods purchased to the resellers/retailers at a price less than the cost price of the assessee. The AO further noticed that during the year under consideration, the assessee has made a sale of Rs.15,264.42 crores to the retailers and against this, the cost of goods was Rs.15,425.35 crores and accordingly a cash loss of Rs.160.93 crores. The AO considered this as a basis for marketing intangibles and accordingly made an addition towards the same. 12. The CIT(A) deleted the addition by relying on the decision of the coordinate Bench in assessee s own case for AY 2015-16 [2018] 92 taxmann.com 387 (Bang. Trib) where the Tribunal has held that the profit margin forgone by the assessee cannot be held to be expenditure in creating intangible or goodwill. Aggrieved, the revenue is in appeal before the Tribunal. 13. In the written submissions, the ld. DR highlighted the relevant paragraphs from the order of the CIT(A) to support the contention that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to as retailers in brick and mortar). The further plea of the Assessee was that by offering goods at a lesser price, the Assessee in the long run will capture a huge market and generate profits in the long run. According to the AO the strategy of selling goods at lower than cost price was to establish customer goodwill and brand value in the long run and reap benefits in the later years. Therefore the profits foregone in the earlier years by selling goods at less than cost price was to be regarded as expenditure incurred in creating intangibles/brand value or goodwill. Since such expenditure create asset in the form of intangible/brand or goodwill, the expenditure has to be construed as capital expenditure and would go to reduce the loss declared by the Assessee in the return of income. Therefore the loss declared by the Assessee in the return of income filed was converted into positive income by disallowing expenditure. The quantification of expenditure was done by adding to the cost price, profit margin which Assessees engaged in similar business would earn and reducing there from the actual sale value realised by the Assessee. The question is whether the course of actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other sources has to be computed and it lays down that such income shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) of Section 145 provides that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Sub-Section (3) of Section 145 provides that Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. It is thus clear from the statutory provisions that the starting point of computing of income from business is the profit or loss as per the profit and loss account of the Assessee. The AO cannot disregard the profit or loss as disclosed in the profit and loss ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the AO can ignore the sale price declared by an Assessee and proceed to enhance the sale price without material before him to show that the Assessee has in fact realized higher sale price. As contended by the learned counsel for the Assessee, wherever the legislature wanted to tax income not earned, it had made specific provisions in the Act by way of deeming fiction like provisions of Sec.43CA(1, Sec.45(4) and Sec.50C(1) of the Act. 53. In view of the above conclusion, there may not be any necessity to deal further with the manner in which the AO has proceeded to compute total income of the Assessee and we can conclude by holding that the loss returned by the Assessee has to be accepted and the manner of determination of total income as done by the AO is not in accordance with law. Nevertheless, we shall also address the issue as to whether the conclusions of the AO that the Assessee incurred expenses in creating intangibles/brand or goodwill and also the question whether the conclusion of the AO that to the extent the Assessee has foregone his profit margin, he can be said to have incurred expenditure in creating intangibles/brand or goodwill. 54. Did the Assessee incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of purchase by venture capitalists of the shares of the Assessee of Re.1/- in the previous years relevant to AY 15-16 and 14-15 at a premium of Rs. 1899/- and Rs. 595/- respectively was cited by him. According to him such high share premium was justified only because of the asset base created by the Assessee in the form of brand value. This again is an argument without bringing on record any material to substantial that valuation of shares were done only because of value being ascribed to brand or goodwill or any intangibles. The valuation of shares as per the AO was on DCF method and there is no mention in the order of assessment regarding values being ascribed to goodwill/brand or intangibles. We therefore hold that there was no expenditure incurred by the Assessee except those that are set out in the profit and loss account. The question of incurring expenditure on creating intangibles does not arise for consideration at all. 56. In view of our conclusions that the action of the AO in disregarding the books results cannot be sustained and the further conclusion that the action of the AO in presuming that the Assessee had incurred expenditure for creating intangible assets/b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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