TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 337
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....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 and awareness of sale through e-commerce. The volume of sales was very l....
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.... 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 juncture it is important to stress that the predatory pricing strategy of assessee is a long term strategy and ....
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....ch 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 marketing intangibles. The cost incurred by assessee in generation of marketing intangibles is basically the difference in price between 'sa....
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....any 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). The CIT(A) confirmed the order of the AO. The CIT(A) in exercise of his powers of enhancement u/s.251(2) of the Act also withdrew depreciation of 25% on the intangible assets allowed by the AO while computing total income, for the ....
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....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 adjournment of hearing and conclude the hearing on the given date. The Hon'ble High Court has also directed that the Tribunal shall decide the appeal within 3 months from 15.2.2018. 18. First we shall take up for consideration the appeal by the As....
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....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 larger sums cannot be regarded as income of the Assessee for the relevant previous year. On further appeal to the Hon'ble Supreme Court on a certificate by the Hon'ble High Court as a fit case for reference u/s.66A(2) of the Income Tax Act, 1922 (1922 Act....
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....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 modified after insertion of provisions of Sec.40A(2)(a) of the Act which lays down that if the parties are related to each other than the fair price paid for the goods can be scrutinized by the revenue. Also it needs to be noted that none of the transactions ....
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....nted." (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 passed on the benefit to this concern, which also operates from the adjacent premises. Therefore, the Assessing authority proceeded under Section 145(3) of the Income tax Act and rejected the accounts maintained by the assessee. Thereafter, he proceeded to value 408.495....
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....e 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 80IA(10); (iv) Transactions referred to under S.10AA or (v) Any others as maybe prescribed. It was submitted that none of the above conditions exist in the case of the Assessee and therefore the action of the revenue authorities cannot be sustained. 25. His next submission was that wherev....
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....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 deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it. If this is established the deduction must be allowed provided that there is no provision against it, express or implied, in the Act (See Badridas Daga vs. CIT (1958) 34 ITR 10). In that case loss sustained b....
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....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 existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances....
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....nue." (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 sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but y....
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....on 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, but such increase or decrease is not like the periodic waxing and waning of the moon nor is it like the tide which regularly ebbs and flows twice in twenty-four hours. Goodwill built up over the years can be destroyed in a matter of days, if not much less. Goodwill is never constant. Proteus-like it changes constantly, and as goodwill changes from time to time so does its value. It is possible to....
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.... 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 expressed by these High Courts. Amongst them is the decision of this High Court in CIT vs. Home Industries & Co. (supra), which has already been referred to by us earlier in another context. In that case, Tulzapurkar, Actg. C.J. (as he then was), speaking for the Court, said as follows (at pp. 6312): "However, the aspects that in the case of self-created or selfgenerated goodwill it is impossible to....
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.... 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 to develop brand for its business and this is a business strategy knowingly employed by the Assessee. The profits foregone to the extent it is below the cost of purchases should be regarded as expenditure incurred for building brand for its business. There is therefore nothing wrong in concluding that the Assessee passively incurred expenditure to build brand for its business. 40. The learned DR with the af....
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....cision 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 value of intangibles as done by the AO was reasonable and has to be upheld. 43. In rejoinder the learned counsel for the Assessee submitted that the AO is not empowered under the Act to tamper with my cost of purchase price when he admits or does not dispute that such price is at market price. Similarly if sale is at a price less than the purchase price, the AO is not empowered under the Act to tamper with the sale price, unless the provisions of S....
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....itted 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 subsidiary. Therefore the fact that huge share premium is paid does not in any way help the case of the revenue. Besides the above the transaction of purchase of shares have undergone scrutiny by the Reserve Bank of India and does not in any way have any implications on the case of the revenue in the present appeal. 47. With regard to the argument of the learned DR that the expenditure incurred by the Assessee actually benefited a third party, the learned counsel fo....
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....ch 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 in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a fiscal statute by intendment, if the expressed words do not apply. This contention of the appellants has merit and deserves acceptance. There is no doubt that, where necessary, the Courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of the DTAC have been made applicable by reason of s. 90 even ....
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....y 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 electronically. The products are delivered physically to the customers at their desired place. The payment is also made electronically or by cash at the point of deliver to the customers. As far as the Assessee is concerned it deals only with retailers. On sale to the retailers the Assessee incurs loss. The case of the AO is that a wholesale trader normally sells his products at cost + his mark-up (margin) + indirect costs incurred in the business of wholesale trading. The plea of the Asse....
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....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 computation of total income has to be classified under the following heads of income viz., Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Sec.28 of the Act lays down various categories of income that shall be chargeable to income-tax under the head "Profits and gains of business or profession". The income of the Assessee in the present case would fall within Sec.28(i) of the Act viz., "the profits and gains of....
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....ble 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., where the parties to the transaction are related. Following the aforesaid decisions, we hold that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total income of the Assessee in the manner in which he did. We find force in the submission of the learned counsel for the Assessee that what can be taxe is only income that accrues or arises as laid down in Sec.5 of the Act. Nothing beyond Sec.5 of the Act can be brought to....
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....dded 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), for creation of intangibles like say goodwill it is not possible to ascertain in terms of money the cost of acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value. It is therefore not possible to say that profits foregone created goodwill or any other intangibles or brand to the Assesssee. The argument of the learned DR on the existence of intangibles/brands or goodwill wa....