2023 (3) TMI 1035 - AT - Income Tax

Marketing intangibles and ESOP cross-charge deductions u/s37(1) challenged; alleged profit-margin forgone addition and disallowances deleted.

Disallowance for alleged creation of marketing intangibles/brand goodwill was examined on whether the AO could disregard the books and treat 'profit ... Addition on account of valuation of marketing intangibles of assessee - CIT(A) deleted the addition by relying on assessee’s own case for AY 2015-16 [2018 (5) TMI 337 - ITAT BANGALORE] where the Tribunal has held that the profit margin forgone by the assessee cannot be held to be expenditure in creating intangible or goodwill - HELD THAT:- As decided in assessee own case [supra] 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/brand or goodwill is without any basis, we do not think it necessary to deal with the arguments that even assuming that expenditure was incurred by the Assessee the expenditure for building brand or creating intangible or goodwill is revenue expenditure and allowable as deduction. It is also not necessary for us to go into the 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 price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act.” Thus we hold that the expenditure towards ESOP is eligible for deduction u/s 37. Assessee appeal allowed. Issues Involved:1. Disallowance of ESOP expenses under Section 37(1) of the Income-tax Act, 1961.2. Addition on account of valuation of marketing intangibles.Summary:Issue 1: Disallowance of ESOP expenses under Section 37(1) of the Income-tax Act, 1961The assessee challenged the disallowance of ESOP expenditure amounting to INR 15,50,70,000. The CIT(A) had upheld the disallowance, distinguishing it from binding precedents. The assessee argued that the ESOP expenses were not notional, fictitious, or contingent, were in accordance with recognized accounting standards, and were actual costs incurred by the appellant. The assessee also contended that there was no liability to withhold tax on cost-to-cost reimbursement.The Tribunal referred to the coordinate bench's decision in the case of Novo Nordisk India P. Ltd. v. DCIT, which held that ESOP expenses are revenue expenditures and should be allowed as deductions. The Tribunal also noted that the issue was already decided in favor of the assessee in the case of Biocon Ltd., which was affirmed by the Hon'ble Karnataka High Court. Following these precedents, the Tribunal held that the ESOP expenditure is eligible for deduction under Section 37 of the Act and allowed the appeal of the assessee.Issue 2: Addition on account of valuation of marketing intangiblesThe revenue appealed against the CIT(A)'s deletion of the addition made on account of valuation of marketing intangibles. The AO had made an addition based on the observation that the assessee sold goods to retailers at a price less than the cost price, considering it as a basis for marketing intangibles.The CIT(A) had deleted the addition by relying on the decision of the coordinate Bench in the assessee's own case for AY 2015-16, where it was held that the profit margin forgone by the assessee cannot be considered as expenditure in creating intangible or goodwill. The Tribunal, after reviewing the submissions and the material on record, upheld the CIT(A)'s order, noting that the issue was covered by the earlier decision and there was no change in the facts for the current year.Conclusion:The Tribunal allowed the appeal of the assessee regarding the ESOP expenses and dismissed the revenue's appeal concerning the addition on account of valuation of marketing intangibles. The judgment was pronounced in the open court on March 9, 2023.