TaxTMI 
TaxTMI 
2023 (3) TMI 1035
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns for e-commerce business. The assessee filed the return of income for AY 2017-18 on 30.11.2017 declaring a loss of Rs.139,61,48,741. The case was selected for scrutiny and statutory notices were duly served on the assessee. The AO completed the assessment by making following additions/disallowances:- (i) Addition on account of valuation of marketing intangibles of assessee - Rs.1708,39,07,538. (ii) Disallowance u/s. 37 towards ESOP expenses - Rs.15,80,70,000. 3. On further appeal, the CIT(A) deleted the addition made towards valuation of marketing intangible assets by relying on the decision of the coordinate Bench in assessee's own case. The CIT)(A) upheld the disallowance of ESOP expenses. The assessee and the revenue are in appeal against the order of the CIT(A). 4. The grounds raised by the assessee and by the revenue are as under:- Grounds of Assessee's appeal 1. That on the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax Appeals - 11, Bangalore ("Ld. CIT(A)") erred in upholding the action of the Learned Assessing Officer ("Ld. AO") in disallowing the ESOP expenditure amounting to INR 15,50,70,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts, in disregarding that the business profits, if any, of the Holding Company shall not be chargeable to tax in India in absence of a permanent establishment. 10. The Ld. CIT(A), against the principles of judicial discipline, has failed to follow the binding judgments and orders of Hon'ble Courts and this Hon'ble Tribunal, wherein it has been held that withholding obligations under Section 195 would not arise on reimbursement of expenses. Instead the Ld. CIT(A) has proceeded on extraneous considerations while relying on case laws decided in different context and not applicable to the facts of the Appellant. 11. The Ld. CIT(A), has erred in law and on facts, in failing to quash the penalty proceedings initiated under Section 270A of the Act by Ld. AO. 12. The Ld. CIT(A) has erred in law and on facts, in failing to delete interest levied under Section 234B of the Act. The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing to enable the Hon'ble Tribunal memb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hile computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of AccentureServices (P.) Ltd. (supra), we find that the facts of the case of Accenture Services (P.) Ltd. (supra)are identical. In the case of Accenture Services (P.) Ltd. (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P)Ltd. (supra) and the Hon'ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction." 9. We also 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. (supra) which has also been affirmed by the Hon'ble Karnataka High Court in [2021] 430 ITR 151 (Karnataka) 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on creating intangibles as done by the AO should be restored. 50. We have given a very careful consideration to the rival submissions. As far as the Assessee's appeal is concerned, the issue that arises for consideration is as to whether the determination of total income as done by the AO was justified in the facts and circumstances of the case. The Assessee as we have seen is a wholesale trader. He purchases goods for the purpose of trading at say Rs. 100/- from unrelated parties. He sells it to retailers at Rs. 80/-. The retailers are also unrelated parties. The retailers sell the goods through the Assessee's web portal "flipkar.com". The trading by the retailers to the end user is through E-Commerce. The customers browse the website and see the various products and place orders electronically. The products are delivered physically to the customers at their desired place. The payment is also made electronically or by cash at the point of deliver to the customers. As far as the Assessee is concerned it deals only with retailers. On sale to the retailers the Assessee incurs loss. The case of the AO is that a wholesale trader normally sells his products at cost + hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccrues or arises or is deemed to accrue or arise to him in India during such year; or(c) accrues or arises to him outside India during such year. Sec. 2(24) of the Act defines income by laying down that income includes and lists out several categories of receipts which can be characterised as income. The definition is inclusive definition and therefore what can be regarded by ordinary connotation of the said term as income can be regarded as income even though they do not fall within any of the categories of income set out in various subclauses of Sec. 2(24) of the Act. The aspect to be noted is that there should be income and its receipt or accrual because it is only income which accrues or arises that can be subject matter of total income u/s.5 of the Act. Sec.14 lays down that income for the purpose of computation of total income has to be classified under the following heads of income viz., Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Sec.28 of the Act lays down various categories of income that shall be chargeable to income-tax under the head "Profits and gains of business or profession". The in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned but not earned. The decision of the Hon'ble Karnataka High Court in the case of A. Khader Basha (supra) is squarely applicable to the facts of the present case. The facts of the Assessee's case and the facts of the case decided by the Hon'ble Karnataka High Court were identical. The Hon'ble Karnataka High Court held following Hon'ble Supreme Court decision in the case of Calcutta Discount Co. Ltd. (supra), that where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction. The Hon'ble Court explained that the only exception was if Section 40(A)(2)(a) of the Act applies viz., where the parties to the transaction are related. Following the aforesaid decisions, we hold that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total income of the Assessee in the manner in which he did. We find force in the submission of the learned counsel for the Assessee that what can ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....deemed to have incurred expenditure on creating intangibles/brand or goodwill and such expenditure has to be regarded as capital expenditure and added to the total income of the Assessee. 55. We find no basis for the above conclusions of the AO. The first presumption of the AO is that the Assessee had incurred expenditure. As rightly contended by the learned counsel for the Assessee there was no accrual of any liability on account of any expenditure or actual outflow of funds towards expenditure. One cannot proceed on the basis of presumption that the profit foregone is expenditure incurred and further that expenditure so incurred was for acquiring intangible assets like brand, goodwill etc. As pointed by the Hon'ble Supreme Court and the Hon'ble Bombay High Court in the case of B.C. Srinivasa Setty (supra) and Evans Frazer (supra), for creation of intangibles like say goodwill it is not possible to ascertain in terms of money the cost of acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value. It is therefore not possible to say that profit....