TaxTMI 
TaxTMI 
2019 (6) TMI 987
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....nd immediately selling the goods to retail sellers like M/S.WS Retail Services 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 resellers at Rs. 80/-. The purchases during the relevant previous years relevant to AY 2012-13 to 1014-15 after excluding closing stock of unsold goods, the purchase and sales figure were as follows:- Description AY 2012-13 2013-14 2014-15 Purchases 248,36,00,000 1311,50,00,000 3369,82,16,926 Less: Stock Unsold 26,74,00,000 78,51,00,000 318,26,52,318 221,62,00,000 1232,99,00,000 3051,55,64,608 Less: Sale Value 199,75,00,000 1150,65,00,000 2804,94,67,845 Gross Loss 21,87,00,000 82,34,00,000 246,60,96,763 4. The loss in terms of percentage was 10%, 15% & 8.80% for AY 2012-13 to 2014-15 respectively. 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....
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....Assessee was to create marketing intangibles assets and therefore the loss to the extent it is created due to predatory pricing should be regarded as capital expenditure incurred by the Assessee and should be disallowed. The AO 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%. 10. The AO called upon the Assessee to explain why the difference between higher purchases and lower sales should not be inferred as a pricing strategy leading to enduring benefits; and hence leading to generation of capital asset. The Assessee replied that no part of purchases by an enterprise carrying on trading business can be considered as capital expenditure. The Assessee submitted that expenses incurred does not create any asset of an enduring advantage. 11. The AO held that the business of the Assessee is different from traditional way of understanding the business. He was of the view that in traditional business if an enterprise incurs loss no investor will come forward to invest in such business but in spite of huge losses international exp....
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....9.90%. On perusal of the comparables, it is seen that none of them has an abnormally negative gross profit margin. It can be concluded that these comparable wholesalers follow a profit-based business model. In any case, averaging irons out the differences in these market comparables. Had assessee not followed a predatory pricing policy, its (market-average) sale price would have been Rs. 221,62,54,482/- plus 19.90% of Rs. 221,62,54,482/-, i.e. Rs. 265,72,89,124/-. Assessee's real sales is Rs. 199,75,27,876/-. The reduction in sales due to following assessee's strategy of cost cutting on an estimation, is Rs. 65,97,61,248/-. This is the value of expenses incurred by assessee towards cost of marketing intangibles in the year. 3.20. Assessee has cross-subsidized its marketing intangible and trademark value creation with reduction in sale price. However, as already stated in great detail, marketing intangibles and trademark are 'assets. Any expense/cost incurred due to it is capital expenditure and has to be capitalized. Hence addition to the extent of Rs. 65,97,61,248/- is made on account of intangibles. Assessee's operation has commenced (after takeover of business ....
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....elling at a price lower than cost, the difference of Rs. 763,84,84,964 between the price at which the assessee is selling and the price the normal wholesaler would have sold is the value of expenses incurred by assessee towards cost of marketing intangibles in the year. 3.21. Assesses had cross-subsidized its marketing intangible and brand value with reduction in sale price. However, as already stated in great detail, marketing intangibles and brand value are assets. Any expense/cost incurred due on creation of the same is capital expenditure and has to be capitalized. Hence addition to the extent of Rs. 763,84,84,964 is made on account of intangibles. Hence depreciation on intangibles is allowed 25 % of this amount, i.e. Rs. 190,96,21,241 and the balance is add the returned income. Hence the addition is Rs. (763,84,84,964- Rs. 190,96,21,241) Rs. 572,88,63,723." 15. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). The CIT(A) noticed that on identical addition made in AY 2015-16, the ITAT Bangalore Bench in Assessee's own case reported in [2018] 92 taxmann.com 387 (Bangalore - Trib.) Fliipkart India (P.) Ltd. Vs. Assistant Commissioner of Income-....
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.... the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." 17. The grounds of appeal for AY 2013-14 & 2014-15 are identical but these grounds are slightly different from AY 2012-13. The grounds of appeal for AY 2013-14, reads thus:- "1. The Order of the learned CIT(A) is opposed to law and facts of the case. 2. The CIT (A) has placed reliance on the Order of the Tribunal which has recorded a finding that the loss claimed by the Assessee cannot be disallowed, as the same was not claimed as an expenditure. However the Assessee has accepted/admitted that the goods were sold at lower than the cost price in order to attract customers to purchase goods through e-commerce (Flipkart portal) which would be in the nature of acquiring/creating intangible asset in the form of goodwill/brand value and loss is capital in nature. 3. The Attention of the ITAT was not drawn to the fact that the Assessee and the Retailer WS Retail Pvt. Ltd were associated and controlled by the Assessee company itself wherein ear....
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....ribunal in Assessee's own case for AY 2015-16, was rightly followed by the CIT(A) in deleting the addition made by the AO. 19. We have given a careful consideration to the rival submissions. On identical addition made in AY 2015-16, this Tribunal held that the starting point for computing income from business is the profit or loss as per the profit and loss account of the Assessee, which cannot be disregarded unless certain provisions [Section 145(3)] of the IT Act are invoked. Since the AO has not invoked such provisions, the AO is not empowered to go beyond the book results. It was held that it is settled law 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" and "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". It was held that "the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total....