2019 (6) TMI 987 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on Assessee's losses, rejects Revenue's appeals for multiple assessment years.

The Joint Commissioner of Income Tax, Special Range 3, Bangalore Versus Flipkart India Pvt. Ltd.

The Joint Commissioner of Income Tax, Special Range 3, Bangalore Versus Flipkart India Pvt. Ltd. - [2019] 73 ITR (Trib) 392 (ITAT [Bang]) Issues Involved:1. Legitimacy of selling goods below cost price.2. Nature of losses incurred by the Assessee.3. Classification of losses as capital expenditure.4. Valuation of intangible assets.5. Relationship between the Assessee and WS Retail Pvt. Ltd.Detailed Analysis:1. Legitimacy of Selling Goods Below Cost Price:The Assessee, engaged in the wholesale business of books, mobiles, and computers, sold goods at prices lower than the cost price. The AO questioned this practice, suggesting it was not a normal business practice. The Assessee justified this by explaining that e-commerce was in its nascent stage, and selling at discounted prices was a strategy to increase sales volume and attract buyers.2. Nature of Losses Incurred by the Assessee:The Assessee reported significant losses for AYs 2012-13, 2013-14, and 2014-15. The AO argued that these losses were due to a strategy of selling goods below cost price to create customer goodwill and brand value, which would benefit the Assessee in the long run. The AO concluded that these losses were intended to create marketing intangibles and should be considered capital expenditure.3. Classification of Losses as Capital Expenditure:The AO classified the losses as capital expenditure, arguing that the strategy of selling below cost was to create intangible assets like brand value and goodwill. The AO allowed depreciation on these intangibles but added the remaining amount back to the Assessee's income. The Assessee contended that no part of the purchases should be considered capital expenditure, as the expenses did not create any asset of enduring advantage.4. Valuation of Intangible Assets:The AO adopted the cost approach for valuing intangibles, based on OECD's BEPS guidelines. He compared the Assessee's profit margins with market averages and concluded that the difference in sales due to the Assessee's strategy should be considered the value of marketing intangibles. The AO made significant additions to the Assessee's income for each assessment year based on this valuation.5. Relationship Between the Assessee and WS Retail Pvt. Ltd.:The Revenue raised concerns about the relationship between the Assessee and WS Retail Pvt. Ltd., suggesting that the transactions were not at arm's length. The Assessee argued that this was not the basis of the assessment and that the Revenue had not provided any material evidence to support this claim.Tribunal's Findings:1. Tribunal's Previous Ruling:The CIT(A) referred to a previous ITAT ruling in the Assessee's case for AY 2015-16, where the Tribunal held that the AO cannot disregard the real price fetched in bona fide transactions. The Tribunal had concluded that the AO should accept the loss declared by the Assessee, as there was no provision to disregard the loss or enhance the sale price without evidence.2. Application to Current Assessment Years:The Tribunal found that the same principles applied to AYs 2012-13 to 2014-15. The Revenue's concerns about the relationship between the Assessee and WS Retail Pvt. Ltd. were not supported by the assessment order or any factual basis. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO and dismissed the Revenue's appeals.Conclusion:The Tribunal concluded that the AO's actions in disregarding the book results and presuming the creation of intangible assets were without basis. The losses declared by the Assessee should be accepted, and the Revenue's appeals were dismissed. The judgment emphasized that only actual income accrued or arisen can be taxed, and speculative or potential income cannot be considered.