ITAT Mumbai sets aside Section 263 order on ESOP cost and Facebook advertisement payments
1. Background of the dispute
Play Games 24X7 Pvt. Ltd. Vs PCIT-13 (ITAT Mumbai) concerns the exercise of revisionary powers under Section 263 of the Income Tax Act 1961 for Assessment Year 2013-14.
The assessee, M/s. Play Games 24X7 Pvt. Ltd., challenged the order dated 28.03.2018 passed by the Principal Commissioner of Income Tax-13, Mumbai (PCIT), whereby the PCIT invoked Section 263 and held that the original assessment order was:
- Erroneous, and
- Prejudicial to the interests of the Revenue
The PCIT’s objections related to two principal aspects:
- Deduction of
Rs.1,53,88,418claimed as Employee Welfare Cost under an Employee Stock Option (ESOP) scheme, and - Non-deduction of tax at source on advertisement payments of
Rs.1,76,29,464made to Facebook Ireland Ltd. (FB Ireland), allegedly attracting disallowance underSection 40(a)(i).
The assessee argued that both issues had been fully examined by the Assessing Officer (AO) in the scrutiny proceedings and that a mere difference of opinion could not justify revision under Section 263.
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT Mumbai) accepted the assessee’s contentions and quashed the Section 263 order.
2. Assessment history and initiation of Section 263 proceedings
2.1 Original return and assessment
- The assessee filed its return of income declaring total income of
Rs.1,63,72,570. - A revised return was also filed on 25.10.2013, reflecting the same total income of
Rs.1,63,72,570. - The AO completed the assessment under
Section 143(3).
In the assessment, the AO made only two disallowances:
Rs.10,46,126(20% ofRs.52,30,632) out of travelling and conveyance expenses, andRs.5,15,532(20% ofRs.25,77,660) out of miscellaneous expenses.
Thus, the assessed income was computed at Rs.1,89,30,410.
2.2 Issues flagged in Section 263 notice
The PCIT later initiated revisionary proceedings under Section 263. In the show cause notice, the PCIT alleged that the assessment order was erroneous and prejudicial to the interests of the Revenue because:
ESOP discount claim
- The assessee had claimed deduction of
Rs.1,53,88,418as Employee Welfare Cost under its ESOP scheme, computed as:- Total ESOP discount:
Rs.7,25,18,244 - Less: amount carried forward to subsequent years:
Rs.5,71,29,826 - Net amount claimed for the year:
Rs.1,53,88,418
- Total ESOP discount:
- According to the PCIT, the AO had not properly examined the allowability or computation of this claim.
- The assessee had claimed deduction of
Payments to Facebook Ireland
- The assessee had made payments of
Rs.1,76,29,463to Facebook Ireland towards advertisement expenses. - The PCIT alleged that the AO failed to examine:
- Whether tax was required to be deducted at source under
Section 195, and - Whether disallowance under
Section 40(a)(i)was warranted on account of non-deduction of TDS.
- Whether tax was required to be deducted at source under
- The assessee had made payments of
Relying on these two perceived omissions, the PCIT set aside the original assessment and directed the AO to reframe the assessment after fresh examination of these issues.
The assessee appealed to the ITAT Mumbai against this Section 263 order.
3. Grounds raised by the assessee before ITAT
The assessee’s appeal primarily challenged the validity of the Section 263 action on both legal and factual grounds. In substance, the assessee contended that:
On ESOP cost
- The AO had issued queries and the assessee had filed detailed submissions on the ESOP accounting and the claim of
Rs.1,53,88,418as Employee Welfare Cost. - The method of amortisation of ESOP discount over the vesting period was fully aligned with the Special Bench ruling in
Biocon Ltd. vs. DCIT, (2013) 35 taxmann.com 335 / (2014) 144 ITD 21 (Bangalore – Trib.) (SB) / (2013) 155 TTJ 649. - The AO had taken one of the legally permissible views; hence, the order could not be termed “erroneous” merely because the PCIT preferred another view.
- The AO had issued queries and the assessee had filed detailed submissions on the ESOP accounting and the claim of
On Facebook advertisement payments
- Complete particulars of payments to Facebook Ireland had been placed before the AO during assessment proceedings.
- The AO accepted the claim after due enquiry, and the issue was subsequently adjudicated in the assessee’s own case for AY 2015-16 (
ITA No.1533/M/2019, order dated 23.03.2022), where the Tribunal held that such payments did not constitute royalty or fees for technical services and were not taxable in India, as Facebook Ireland did not have a Permanent Establishment in India.