E-commerce firm Flipkart on Thursday received a major relief from a Rs 1,700 tax demand in a case related to the valuation of its marketing intangibles and ESOP expenses.
The Bangalore IT Appellate Tribunal (ITAT) on Thursday dismissed an appeal by the revenue department against a Commissioner of Income Tax (Appeal) order asking the revenue department to delete the tax addition on account of the valuation of marketing intangibles.
Flipkart had filed a loss return of Rs.139.61 crore against which the revenue department raised a tax demand of Rs 1708.39 crore on account of the valuation of marketing intangibles and Rs15.80 crore on account of ESOP expenses.
In its order on marketing tangibles, the ITAT relied on an earlier case of Flipkart for the assessment year 2015-16, wherein it was held that the profit margin foregone by the assessee cannot be held to be an incurred expenditure in creating intangible or goodwill.
Based on the past order, ITAT refused to interfere with CIT(A)'s order and dismissed the revenue department’s appeal.
On the issue of ESOP expenses, ITAT cited a special bench ruling in the case of Biocon (which was upheld by the high court) to hold that expenditure incurred towards ESOP is eligible for deduction under Section 37 (1) of the Income Tax Act.
In the Biocon case, it was held that the term ‘expenditure’ also includes a loss and therefore, issuance of shares at a discount where an 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 purpose of Section 37(1).
"ESOP expenses qualify the relevant conditions prescribed under Section 37 and are an unascertained liability but not a contingent liability. These expenses are recognised in accordance with IND AS 102 by following a consistent accounting method", explained Abhishek A Rastogi, founder of Rastogi Chambers.