Adequate inquiry and permissible views limit revision; employee stock option discounts and standard online advertising access receive distinct tax treatment

Revision under section 263 of the Income-tax Act, 1961 is discussed in relation to two issues: employee stock option discount and payments for online banner advertising. The notes state that employee stock option discount represents employee cost deductible over the vesting period, and that disclosure of relevant computation and accounting details may establish adequate inquiry even where the assessment order lacks detailed discussion. They also explain that payments for access to a standard online advertising platform, without rights, control, possession, or use of foreign servers or equipment, are characterised as business expenditure rather than royalty or fees for technical services. Where the Assessing Officer examines the relevant material and adopts a legally permissible view, revision under section 263 is described as unavailable.

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Issues: (i) Whether the assessment order allowing deduction of employee stock option discount was erroneous and prejudicial to the interests of the Revenue so as to warrant revision under section 263 of the Income-tax Act, 1961; (ii) whether payments made to Facebook Ireland for online banner advertising constituted royalty or otherwise attracted tax deduction at source, rendering the assessment order erroneous and prejudicial to the interests of the Revenue.

Issue (i): Whether the assessment order allowing deduction of employee stock option discount was erroneous and prejudicial to the interests of the Revenue so as to warrant revision under section 263 of the Income-tax Act, 1961.

Analysis: The assessment records showed that the assessee had furnished complete details regarding the computation and accounting of the employee stock option cost, and the Assessing Officer had examined the claim during the assessment proceedings. Applying the principle that the discount granted under an employee stock option scheme represents employee cost deductible over the vesting period, the allowance of the claim reflected a legally permissible view. Mere absence of detailed discussion in the assessment order did not establish lack of inquiry. Consequently, the assessment order was neither erroneous nor prejudicial to the interests of the Revenue on this issue.

Conclusion: Revision under section 263 was invalid in respect of the deduction claimed for employee stock option discount.

Issue (ii): Whether payments made to Facebook Ireland for online banner advertising constituted royalty or otherwise attracted tax deduction at source, rendering the assessment order erroneous and prejudicial to the interests of the Revenue.

Analysis: The payment was for using Facebook Ireland's standard advertising platform and did not confer on the assessee any right, control, possession, or use of the servers or equipment. The servers were located outside India, and Facebook Ireland had no permanent establishment in India. The payment was therefore in the nature of business expenditure and did not constitute royalty or fees for technical services. The Assessing Officer had considered the relevant details and adopted a legally permissible view, so the assessment order could not be treated as erroneous and prejudicial to the interests of the Revenue.

Conclusion: Revision under section 263 was invalid in respect of the payments made to Facebook Ireland for advertising.

Final Conclusion: Both grounds invoked for revision failed, and the order passed under section 263 was quashed, leaving the assessment order undisturbed.

Ratio Decidendi: Revision under section 263 cannot be exercised where the Assessing Officer has made inquiry and adopted one legally permissible view; employee stock option discount is deductible over the vesting period, and payment for standard online advertising access without rights in or control over foreign servers is not royalty.

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