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 margin forgone" as capital expenditure. Following the assessee's own earlier year, the Tribunal held there was no legal or factual basis to presume any such expenditure or to rework the returned loss into taxable income; the returned loss had to be accepted and the addition was deleted. Disallowance of ESOP cross-charge under s. 37(1) was tested on whether share issue discount constitutes "expenditure"; applying the settled view affirmed by the HC that "expenditure" includes loss, the ESOP discount was held deductible and the disallowance was deleted. Appeal allowed.

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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, 1961

The 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 intangibles

The 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.

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