AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 337
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....s Pvt.Ltd. and others, who subsequently would sell those goods as sellers on internet platform under the name 'Flipkart.Com'. The AO further noticed that the Assessee has been purchasing goods at say Rs. 100/- and selling them to the retailers at Rs. 80/-. The purchases during the relevant previous year was Rs. 10335,73,05,882/- and sales was Rs. 9351,75,05,319/-. After excluding closing stock of unsold goods, the purchase and sales figure were as follows: Purchases Rs.10335,73,05,882 Less: Stock Unsold Rs. 741,83,06,836 Rs. 9593,89,99,046 Less: Sale value Rs. 9351,75,05,319 Gross Loss Rs. 242,14,93,727 4. The loss in terms of percentage was 2.52% of the cost of purchase value. The AO was of the view that the action of the Assessee in selling goods at less than cost price was not a normal business practice. He therefore called upon the Assessee to explain the purpose of selling goods at less than cost price. 5. The Assessee explained that sale through electronic form (e-commerce) as against the traditional sale through retail outlets had just begun in 2012. Since e commerce was in its nascent stage, it was very difficult to create trust an....
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....was however gracious in holding that the value of marketing intangibles should be considered as an asset used for the purpose of business for which the Assessee should be eligible to claim depreciation at 25%. In coming to this conclusion, the AO made the following observations in his order.: "3.9. Assessee is following a business model of creating marketing intangible assets for long-term benefits. Various evidences of same can be summarized as under: A. Assessee sells its goods at a price lower than cost price B. Assessee has made losses consistently for the last 5 years. Yet it has a high valuation. What could be the rationale for high valuation other than the value of business model the marketing intangible and consumer goodwill. C. Assessee has not made profit even once till date. Its equity is being eroded. Yet it gets fresh investments from venture and angel investors at a high valuation. Fund managers and investors make detailed verification and analysis of the business model and approve a valuation. These fund managers accept that Assessee inspite of incurring losses, has generated huge marketing intangible, brand. 3.10. At this....
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....d Profit Shifting (BEPS) viz., cost approach, income approach and market approach. The AO adopted cost approach in which a reasonable profit margin is attributed to the cost of purchases and to the extent the profit is foregone by the Assessee was to be considered as the value of intangible. The following was the relevant observations of the AO: "3. 18. For this purpose, the calculation of expense on intangible assets is as under: (a) What would be the sale price of' good had it not followed predatory pricing and sold with a profit motive? Had assessee not followed predatory pricing, it would have sold the goods at market price and made a gross profit on cost of goods. Assessee's gross profit margin is (-) 2.52 % on cost (cost for assessee is Rs. 9593,89,99,046). The gross margin of comparable wholesalers is extracted from public databases and their average gross margin is to be computed, Say it is Y % on cost. Assessee's sale price in a fair business marketing situation would be cost plus + Y% of Rs.9593.89 crores. (b) Assessee has shown sales of Rs. 9351,75,05,319. This sale price is at a discount and subsidizes generation of value for marke....
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....,54,065 - Rs. 467,07,88,5 16) Rs. 1401,23,65,549. 4. Further a similar capitalization was made in A.Y 2012-13, A.Y 2013 - 14 and AY 20 1415 the assessee company is eligible for depreciation on these capital asset in the current year as follows. A.Y:2012-13 - Rs. 8,18,81.560 A.Y:2013-l4 - Rs. 45,14,69,521 A.Y:2014-15 - Rs. 143,22,15,931 After allowing the above deduction for AN 2012-13, 2013-14 and 2014-15 the addition to be made works out as under: 1401,23,549 Less : Amortisation of A. A.Y.: 2012-13 8,18,81,560 Less : Amortisation of A.Y : 2013-14 45,14,69,521 Less : Amortisation of A.Y. 2014-2015 143,22,15,931 Balance Addition 1204,67,98,537 Further as the assessee has furnished in accurate particulars of income penalty proceedings U/s 271(1)(c) are initiated separately. The amount of Rs. 1204,67,98,537 as computed above is added to assessee's declared income and taxable income of assessee company is computed as under. Issue demand notice and penalty notice accordingly." 14. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Th....
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....le generated would not he benefitting the appellant but the other person. In view of this the appellant would not be eligible to claim any depreciation on the value of intangible generated." 16. Thereafter the CIT(A) gave certain directions in the matter of quantification of the value of intangible and the addition to be made to the total income. The revenue is aggrieved by these directions as this will reduce the profit margin on cost of purchases while working out the valuation of intangibles and therefore the revenue has preferred appeal against that part of the CIT(A)'s order. The Assessee is aggrieved by the order of the CIT(A) in its conclusion that the Assessee incurred expenses for creating intangibles and those expenses are capital expenditure and have to be added to the total loss declared by the Assessee, the Assessee has preferred appeal against the order of the CIT(A). 17. The Hon'ble Karnataka High Court in W.P.No.6533 of 2018 (T-IT) by its order dated 15.2.2018 has directed the Tribunal to hear the appeal filed by the Assessee on 9.4.2018 itself on which date the appeal was fixed for final hearing. The Hon'ble High Court has directed the parties not to seek any....
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....cted as managing agents agreed to the two private limited companies floated by the Assessee to act as managing agents at 2.50% commission on freight received. As a result, the assessee- firm gave up 75 per cent of its earnings during the relevant years of account. In the assessment which followed, the ITO and the AAC came to the conclusion that the amount of larger commission had already accrued during the previous year ending 31st March, 1948, and was thus assessable. Assessee made an alternate claim that the amount given up was also claimed by the assessee-firm as an expenditure under s. 10(2)(xv) of the Indian IT Act, but was disallowed. On appeal to the Tribunal, the majority view of the Tribunal was that even though the actual reduction took place after the year of account was over, there was, in fact, an agreement to reduce the commission even during the currency of the account year, and the larger income neither accrued nor was received by the assessee-firm. In accordance with the opinion of the President, the assessment was reduced by deleting the extra commission from the computation. The Hon'ble High Court agreed with the majority view of the Tribunal and held that the la....
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....e High court. On further appeal by the revenue the Hon'ble Supreme Court held that the authorities under the Act have come to the conclusion that the transaction between the assessee and its subsidiary company was a bona fide transaction and the assessee had not made any secret profits out of the transaction in question. It may be that the assessee had transferred its valuable shares at cost price to its subsidiary in order to so arrange its affairs as to reduce its tax burden. It is a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden. Hence, if the assessee in this case has arranged its affairs in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus forgoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible under law. When one trader transfers his goods to another trader at a price less than the market price, the taxing authority cannot take into consideration the market price of those goods, ignoring the real price fetched. Now this position of law will stand modi....
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....efore it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the IT Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be voted, but it may lawfully be circumvented." (emphasis supplied) 22. The learned counsel placed reliance on the decision of the Hon'ble Karnataka High Court in the case of A.Khadar Basha Vs. ACIT (2015) 232 Taxman 434(Karn.). This decision was rendered in the context of provisions of Sec.40A(2) of the Act. The facts of the case were that the assessee purchased 139.24 MT of rice bran from M/s. Nicko Agro Industries, Omalur for a total sum of Rs. 5,41,695/-. The average purchase price comes to Rs. 3,890/- per MT. During the same year, the assessee sold 408.495 MT of rice bran to M/s. Nicko Agro Industries for a sum of Rs. 9,30,080/- and the average selling price comes to Rs. 2,277/- per MT. The Assessing Authority was of the view that the assessee purchased rice bran from M/s.Venkata Padmavathi Paddy & Rice, Nellore at a higher rate and sold the rice bran to M/s. Nicko Agro Industries at a very low rate. By such sales, the assessee reduced the profit and pass....
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....the Act. Nothing beyond Sec.5 of the Act can be brought to tax. His submission was that there was nothing to show accrual of income so as to disregard the loss declared by the Assessee in the return of income filed. His further submission was that indirectly the AO has attempted to apply the provisions of Sec.92 of the Act. He submitted that the provisions of Sec.92 and chapter X of the Act, applies only to transactions between related parties and where one of the party to the transaction is a non-resident. He pointed out that in the present case the retailers to whom the Assessee sold goods were unrelated parties and therefore there was no question of invoking either the provisions of Sec.92 or invoking the rationale behind those provisions. Even domestic transfer pricing provisions u/s.92(2A) of the Act are not applicable as the Assessee has not undertaken any transaction with a related party as laid down in Sec.40A(2)(b) of the Act. Besides the above the domestic Transfer Pricing provisions are applicable to the following Domestic transactions only viz., (i) Any expenditure u/s 40A(2)(b); (ii) Any transactions referred to in S. 80A, (iii) Transactions referred to u/s 80IA(8) and....
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....sence of such a specific deeming provision, the revenue authorities do not have power to consider revenue not earned as income of an Assessee. His submission was that what the revenue authorities have sought to do in the present case was to bring to tax revenue which was not earned by the Assessee as income of the Assessee without the authority of law. 27. The learned counsel drew attention to the decision of the Hon'ble Supreme Court in the case of CIT Vs. S.C.Kothari 82 ITR 794 (SC) wherein the Hon'ble Supreme Court has explained as to how the AO should compute income. He relied on the following observations of the Hon'ble Court: "Now while s. 10(1) of the Act of 1922 imposes a charge on the profits or gains of a business it does not provide how these profits are to be computed. Sec. 10(2) enumerates various items which are admissible as deductions. They are, however, not exhaustive of all allowances which can be made in ascertaining the profits of a business taxable under s. 10(1). It is undoubtedly true that profits and gains which are liable to to be taxed under s. 10(1) are what are understood to be such under ordinary commercial principles. The loss for which the....
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....diture or revenue expenditure. The Hon'ble Court held that the Assessee merely obtained an advantage of more working time and no enduring benefit was obtained by the assessee and therefore the expenditure incurred was a revenue expenditure. Our attention was drawn to the following passage of the said judgment: "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), where the learned Law Lord stated : "....when an expenditure is made, not only once and for all, but with a view to bringing into existen....
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....hs and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue." (emphasis supplied) 31. According to the learned counsel for the Assessee, the expenditure on intangibles/brand, even assuming that it was incurred by the Assessee merely facilitates the Assessee carrying on his business and cannot be said to be any enduring nature so as to say that the expenditure in question was capital expenditure. 32. The learned counsel for the Assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of SA Builders Vs. CIT 288 ITR 1(SC) wherein the Hon'ble Supreme Court was dealing with a case of disallowance of interest paid on loans borrowed which were given to the sister concern without charging interest. The Hon'ble Supreme Court held that the High Court and other authorities should have enquired as to whether the interest-free loan was given to the....
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....e. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business." 35. Our attention was also drawn to a decision of the Hon'ble Bombay High Court in the case of Evans Fraser & Co. Vs. CIT 137 ITR 493(Bom) which again explains the nature of goodwill in the following terms: "Does this, however, make any difference ? As we have seen earlier, goodwill is a fluctuating thing. It increases and it decreases, bu....
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..... 4,00,000 in the second case can be taken either as fluctuation in the market value of goodwill, with the goodwill remaining constant, or as the cost of improving or adding to the quality of the goodwill. Such increase is really due to the fact that by further selfgeneration the goodwill has increased. The argument of Mr. Joshi, that the ratio of the Supreme Court decision in the case of B. C. Srinivasa Setty (supra) applies only where there is no cost of acquisition is, therefore, not correct and cannot be accepted. In the judgment in that case the Supreme Court referred to the two views which had prevailed until it finally settled the law, the preponderance of judicial opinion being the same as the view taken by the Supreme Court in B. C. Srinivasa Setty's case, the only two High Courts to have taken a contrary view being the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393, and the Calcutta High Court in K. N. Daftary vs. CIT 1976 CTR (Cal) 23 : (1977) 106 ITR 998 (Cal). The Supreme Court has also mentioned in its judgment the decisions of High Courts which had earlier taken the same view as the Supreme Court did, and obviously approved of the view express....
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....by the AO/CIT(A). 39. The learned DR submitted that the Assessee is a wholesaler. He submitted that a wholesaler buys goods at a price and adds to such price indirect costs and profits and the sale price is determined accordingly. The Assessee in the present case incurs loss at the gross level. According to him such loss at gross level in the case of a wholesaler is exceptional. It can happen only when the wholesaler is dealing in perishable goods and the Assessee admittedly is not dealing in goods of a perishable nature. The Assessee has itself admitted that it incurs loss at the gross profit level (gross level) only to capture market. The Assessee's personnel admitted in his statement that the Assessee indulges in predatory pricing only to capture market and help its retailers to survive in the recently developing ECommerce. It was further brought to our notice that over and above the sale price being below its cost of purchase, the Assessee has also offered cash discount at 3% of its sales. These circumstances according to him show that the Assessee's business model is not normal business model. The Assessee by sacrificing its profits by indulging in predatory pricing intends....
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....the argument of the learned counsel for the Assessee regarding methodology of determining income, the learned DR submitted that when predatory pricing methodology is employed to create intangibles for an Assessee there is nothing wrong in treating the profits foregone as an expenditure incurred for creating intangibles and regarding the same as capital expenditure. In this regard it was argued by the learned DR that the tests laid down in the decision of the Hon'ble Supreme Court in the case of Empire Jute case (supra) would be satisfied in the present case. According to him indulging in predatory pricing expands the profit making apparatus and therefore the profits foregone can be regarded as capital expenditure. 41. The learned DR therefore submitted that the approach adopted by the AO was justified in the facts and circumstances of the case and was well within his powers while determining total income under the Act. 42. With regard to the manner of determination of valuation of intangibles and depreciation on intangibles allowed by the AO but withdrawn by the CIT(A), he relied on the orders of the AO and CIT(A) respectively. According to him the manner of determination of ....
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....allowable as deductible expenditure." 44. According to him what the revenue has sought to do in the present case by bifurcating the difference between an assumed sale price and the actual sale price and attributing the difference to an expenditure incurred by the Assessee on acquiring intangibles is contrary to the aforesaid ruling of the Hon'ble Supreme Court. 45. On the argument of the learned DR on the cash discounts offered by the Assessee, it was submitted by him that cash discount are revenue expenses and cannot be disallowed. It was submitted by him that predatory pricing is a business strategy and time will tell whether it results in generation of goodwill or brand or any other intangible. If the business model of the Assessee fails where is goodwill or brand or other intangible that has come or will come into existence. Therefore it is premature to say that the Assessee has incurred expenditure to build goodwill or create intangibles or brand. 46. With regard to the contention of the learned DR on sale of shares of the Assessee at a premium, the learned counsel for the Assessee submitted that shares are acquired by the holding company. It is one way of funding sub....
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....third State should be precluded from the benefits of the DTAC, then a suitable term of limitation to that effect should have been incorporated therein. Art. 24 of the Indo-US Treaty on Avoidance of Double Taxation specifically provides the limitations subject to which the benefits under the Treaty can be availed of. One of the limitations is that more than 50 per cent of the. beneficial interest, or in the case of a company more than 50 per cent of the number of shares of each class of the company, be owned directly or indirectly by one or more individual residents of one of the Contracting States. Art. 24 of the Indo-U.S. DTAC is in marked contrast with the Indo-Mauritius DTAC. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in art. 24 of the Indo-U.S. Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder. They also urge that motives with which the residents have been incorporated in Mauritius are wholly irrelevant and cannot in anyway affect the legality of the transaction. They urge that there is nothing like equity....
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....dvertising Marketing and Promotion Expenses (AMP expenses), it was not permissible to invoke chapter X of the Act. 49. As far as the appeal by the revenue is concerned, the issue involved is with regard to quantification of the profit margin of comparable companies chosen by the AO. On the revenue's appeal, the learned DR relied on the order of the AO and pleaded that the computation of expenses on creating intangibles as done by the AO should be restored. 50. We have given a very careful consideration to the rival submissions. As far as the Assessee's appeal is concerned, the issue that arises for consideration is as to whether the determination of total income as done by the AO was justified in the facts and circumstances of the case. The Assessee as we have seen is a wholesale trader. He purchases goods for the purpose of trading at say Rs. 100/- from unrelated parties. He sells it to retailers at Rs. 80/-. The retailers are also unrelated parties. The retailers sell the goods through the Assessee's web portal "flipkar.com". The trading by the retailers to the end user is through ECommerce. The customers browse the website and see the various products and place orders elec....
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....respect of the total income of the previous year of every person. Section 5 of the Act lays down the scope of total income under the Act and it lays down that total income of any previous year of a person who is a resident includes all income from whatever source derived which(a) is received or is deemed to be received in India in such year by or on behalf of such person; or(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or(c) accrues or arises to him outside India during such year. Sec.2(24) of the Act defines income by laying down that income includes and lists out several categories of receipts which can be characterised as income. The definition is inclusive definition and therefore what can be regarded by ordinary connotation of the said term as income can be regarded as income even though they do not fall within any of the categories of income set out in various sub-clauses of Sec.2(24) of the Act. The aspect to be noted is that there should be income and its receipt or accrual because it is only income which accrues or arises that can be subject matter of total income u/s.5 of the Act. Sec.14 lays down that income for the purpose of co....
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....other trader at a price less than the market price, the taxing authority cannot take into consideration the market price of those goods, ignoring the real price fetched. As laid down by the Hon'ble Supreme Court in the case of A.Raman & Co. (supra), 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. The decision of the Hon'ble Karnataka High Court in the case of A.Khader Basha (supra) is squarely applicable to the facts of the present case. The facts of the Assessee's case and the facts of the case decided by the Hon'ble Karnataka High Court were identical. The Hon'ble Karnataka High Court held following Hon'ble Supreme Court decision in the case of Calcutta Discount Co. Ltd., reported in 1973(91) ITR 8 (SC) 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. The Hon'ble Court explained that the only exception was if Section 40(A)(2)(a) of the Act applies viz.,....
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....ionale for incurring loss by a wholesale trader at the gross level was very peculiar. Since such a pricing was done keeping in mind the long run profits of the Assessee which will grow because of the intangible/brand or goodwill which will be generated in the long run. Therefore to the extent profits are foregone by the Assessee, the Assessee can be deemed to have incurred expenditure on creating intangibles/brand or goodwill and such expenditure has to be regarded as capital expenditure and added to the total income of the Assessee. 55. We find no basis for the above conclusions of the AO. The first presumption of the AO is that the Assessee had incurred expenditure. As rightly contended by the learned counsel for the Assessee there was no accrual of any liability on account of any expenditure or actual outflow of funds towards expenditure. One cannot proceed on the basis of presumption that the profit foregone is expenditure incurred and further that expenditure so incurred was for acquiring intangible assets like brand, goodwill etc. As pointed by the Hon'ble Supreme Court and the Hon'ble Bombay High Court in the case of B.C.Srinivasa Setty (supra) and Evans Frazer(supra), fo....