ITAT Clears Flipkart in Marketing Intangibles and ESOP Cross-Charge Expenses Disputes

The Income Tax Appellate Tribunal (ITAT), Bangalore, ruled in favour of Flipkart, a well-known e-commerce operator, by deleting disallowances related to marketing intangibles and ESOP cross-charge expenses for the assessment years 2020-21 and 2021-22.

The assessee company, Flipkart, filed its Income Tax Return (ITR) for AY 2020-21 at Nil but carried forward the current losses of Rs 3121 crores. The case was selected for scrutiny, during which the AO disallowed the carry forward of business, saying that Flipkart is creating marketing intangibles. Accordingly, the AO made a net addition of Rs 5141 Crores.

The AO also noted that the assessee had claimed a deduction of Rs 147 Crores as ESOP expenditures. Flipkart submitted that these were the payments to employees through the cost charge of expenditure by the holding Singapore company to Flipkart. The company submitted that it has recognised the cost and the liability based on the debit note raised from the holding company, and the same was claimed as expenditure. However, the AO contended that this is not an allowable expense under section 37 of the Income Tax Act, as it is a contingent liability. The said amount was disallowed.

The same issue occurred for AY 2021-22, where the AO had made an addition of Rs 4016,81,72,341 and Rs 159,34,47,545 against the capitalisation of marketing intangibles and ESOP cross charge, respectively.

Flipkart approached the CIT(A) for both orders, which ruled in favour of the company, holding that the issues were covered in the assessee’s own case for the previous assessment years. Therefore, the Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT), Bangalore, challenging the order of CIT(A).

Regarding the first issue, the ITAT cited the decision of the tribunal in the assessee’s earlier case, which concluded that the loss declared by the assessee should be accepted by the AO. Holding the same, the Tribunal said that the discounts given by the assessee cannot be treated as capital expenditure incurred for creating marketing intangibles. Therefore, the ITAT rejected the Revenue’s plea.

Regarding ESOP costs, the Tribunal found no change in the facts and issues regarding the decision of the Bench in the assessee’s own case for earlier AYs. Therefore, the Tribunal held that ESOP expenditure is cross-charge expenses paid to its holding company, which is not a contingent liability and is allowable under section 37(1) of the Income Tax Act. It also ruled that no tax deduction at source under Section 195 is required on such charges.

Therefore, both the appeals filed by the Revenue were rejected.