2019 (4) TMI 1612 - AT - Income Tax

Tribunal Upholds Assessee's Pricing Practice; Rejects Predatory Pricing Allegation

Joint Commissioner of Income-Tax Versus M/s. Flipkart India Private Limited

The Tribunal upheld the Assessee's practice of selling goods below cost price, emphasizing that taxing authorities cannot disregard actual transaction ... Rectification u/s.254(2) - uncontrolled transaction - Assessee and M/S.WS Retail Services Pvt.Ltd. and the terms of the said agreement provide that M/S.WS Retail Pvt.Ltd., shall sell the products sold by the Assessee to it only through the web portal “Filpkart.com” - there was a supply agreement and license and service agreement between parties (which parties is not spelt out in the MA) which prohibits/controls W/S.Retail Services Pvt.Ltd., from either purchasing or procuring goods from any other person other than the Assessee and also to sell the goods other than to the customers placing orders in the “Flipkart” portal - allegation in the MA is that the above Agreements were not placed by the Assessee before the Tribunal - further averment in the M.A. is that existence of the above agreements, indicate some hidden transaction, which requires examination by the Tribunal by lifting the corporate veil - further allegation in the MA is that the revenue could not bring the above facts to the knowledge of the Tribunal at the time of hearing of appeals because of suppression of the above facts by the Assessee HELD THAT:- DR was unable to explain the relevance of the documents now sought to be filed before us for deciding the issue that was for consideration before the AO. As we have already mentioned these documents were neither the basis of assessment or the basis of conclusions by the CIT(A) for its conclusions on the addition that was in challenge before the Tribunal. These documents were never sought to be relied upon by the learned DR when the appeal was heard nor was there any allegation of any hidden transaction requiring examination by the Tribunal after lifting the corporate veil. These documents could not have been relied upon by the learned DR when the appeal was argued for the reason that these documents were not the basis on which the assessment and the addition challenged before the Tribunal were made by the AO and confirmed and enhanced by the CIT(A). Even in the allegation in the MA is that the Assessee has failed to place the documents now sought to be filed before Tribunal by the Revenue. The conclusions drawn by the Tribunal which have been extracted in Paragraph-5 of this order, will hold good and these documents will have no impact on the conclusions drawn by the Tribunal. Therefore, there exists no relevancy of these documents now sought to be filed with regard to the issue that was decided by the Tribunal. The revenue cannot seek to raise a totally new basis of assessment in an MA and on a possibility of existence of a hidden transaction after lifting corporate veil. It cannot therefore be said that there was mistake apparent from the record which calls for rectification u/s.254(2) of the Act. The power of the Tribunal u/s. 254(2) of the Act is only to rectify mistakes apparent on the face of the record. The Tribunal does not have power to review its own orders. Power of review is not an inherent power but must be conferred by law either specifically or by necessary implication. The present MA filed by the Revenue is devoid of any merit and is liable to be dismissed as without any basis and virtually seeking a review of the order of the Tribunal on a possible hidden transaction which requires examination after lifting the corporate veil when there those were neither the basis of assessment by the AO or CIT(A) or the Tribunal. Issues Involved:1. Legitimacy of the Assessee's practice of selling goods below cost price.2. Consideration of the Assessee's sales strategy as predatory pricing.3. Determination of whether the Assessee created intangible assets and the valuation of such intangibles.4. Treatment of the expenditure for creating intangibles as capital expenditure.5. Tribunal's jurisdiction to review its own orders under Section 254(2) of the Income Tax Act.Issue-wise Detailed Analysis:1. Legitimacy of the Assessee's Practice of Selling Goods Below Cost Price:The Assessee, a wholesale trader, reported a significant loss for AY 2015-16. The AO observed that the Assessee sold goods to retailers at prices lower than the purchase cost, which was deemed not a normal business practice. The Tribunal, however, held that the starting point for computing income is the profit or loss as per the Assessee's profit and loss account, which cannot be disregarded unless specific provisions (Section 145(3)) are invoked. The Tribunal emphasized that 'where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bonafide 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.'2. Consideration of the Assessee's Sales Strategy as Predatory Pricing:The AO concluded that the Assessee's practice of selling below cost was a strategy to create marketing intangibles and brand, thereby engaging in predatory pricing. This strategy was seen as a method to establish market monopoly by generating consumer goodwill. The Tribunal, however, rejected this view, stating that the AO was not right in ignoring the book results and estimating total income based on hypothetical higher sale prices. The Tribunal maintained that 'income which has accrued or arisen can only be subject matter of total income and not income which could have been earned but not earned.'3. Determination of Whether the Assessee Created Intangible Assets and the Valuation of Such Intangibles:The AO embarked on valuing the intangibles created by the Assessee by comparing the Assessee's profit margin with the average gross profit margin of other wholesalers. The difference was treated as the value of expenses incurred towards creating intangibles. The Tribunal, however, found no basis for this assumption, stating that there was no expenditure incurred by the Assessee for acquiring intangible assets like brand or goodwill. The Tribunal concluded that the valuation of intangibles was academic since it rejected the Revenue's basic position.4. Treatment of the Expenditure for Creating Intangibles as Capital Expenditure:The AO treated the expenditure for creating intangibles as capital expenditure and allowed depreciation at 25%. The CIT(A) not only confirmed this but also held that the Assessee was not entitled to depreciation on the capitalized value of intangibles. The Tribunal, however, held that the action of the Revenue in presuming that the Assessee had incurred expenditure for creating intangible assets/brand or goodwill was without any basis. The Tribunal directed the AO to accept the loss declared by the Assessee in the return of income.5. Tribunal's Jurisdiction to Review Its Own Orders Under Section 254(2) of the Income Tax Act:The Revenue filed a Miscellaneous Application (MA) under Section 254(2), alleging suppression of material facts by the Assessee and seeking a recall of the Tribunal's order. The Tribunal noted that the documents presented by the Revenue were neither the basis of the assessment nor the conclusions by the CIT(A). The Tribunal emphasized that its power under Section 254(2) is limited to rectifying mistakes apparent on the face of the record and does not extend to reviewing its own orders. The Tribunal cited the Supreme Court's ruling in ITO Vs Volkart Brothers, stating that 'an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record.'Conclusion:The Tribunal dismissed the MA filed by the Revenue, reaffirming its original decision and emphasizing that there was no mistake apparent from the record that warranted rectification under Section 254(2). The Tribunal concluded that the Revenue's attempt to introduce new documents and arguments was essentially a request for a review, which is beyond the Tribunal's jurisdiction under the said provision.