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TMI Blog2019 (6) TMI 987X X X X Extracts X X X X X X X X Extracts X X X X ..... total income and not income which could have been earned but not earned . As 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 income of the Assessee in the manner in which he did, what can be taxed 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 tax . There is no provision to disregard the loss declared by the Assessee and also there is no provision by which the Revenue can ignore the sale price declared by an Assessee and proceed to enhance the sale price without any material before him to show that the Assessee has in fact realized higher sale price. Valuation of intangibles is academic since it rejected the basic position adopted by the Revenue and held that the Assessing Officer should accept the loss declared by the Assessee. The Tribunal concluded that the action of the Revenue in disregarding the books results cannot be sustained and the further conclusion that the action of the Revenue in presuming that the Assessee had incurred expenditure for creating intangible assets/brand or goodwill is without any basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the resellers at ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Re.1/- was sold at a premium of ₹ 18,999/- per equity shares) based on the valuation of those shares under the Discounted Cash Flow method (DCF Method). The DCF Method estimates the cash flows in future and uses appropriate discounting factors to arrive at the current enterprise value. This was one reason for the AO to conclude that the strategy of incurring loss in the present was to reap benefit of such loss in future by capturing E-Commerce market. 9. The AO thereafter concluded that the losses incurred by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as the value of intangible. 13. For the above purpose there was a need to find out average gross margin on cost for other wholesalers in the market. The AO took the database for wholesalers dealing in consumer and electronic goods. He took the average profit margins of companies engaged in wholesale business in consumer electronic goods and compared the said profit margin with Assessee s profit margin of loss. 14. On the basis of the above, the AO arrived at an addition to the total income for AY 2012-13 to 2014-15, as follows:- AY 2012-13 3.19. The market average of gross profit margin for wholesalers is 19.90%. 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 ₹ 221,62,54,482/- plus 19.90% of ₹ 221,62,54,482/-, i.e. ₹ 265,72,89,124/-. Assessee's real sales is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed @ 25% of this amount, i.e. ₹ 80,26,12,481/- and the balance is added back to the returned income. Addition: ₹ 321,04,49,926 - ₹ 80,26,12,481/- = ₹ 240,78,37,445/- AY 2014-15 3.20. The market average of gross profit margin for wholesalers is 16.95%. On perusal of the comparables it is seen that none of comparable has an abnormally negative gross profit margin. It can be included that these comparable wholesalers follow a profitbased 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 ₹ 3051,55,64,608 + (16.95% of ₹ 3051,55,64,608 i.e. ₹ 3568,79,52,809. Assessee's real sales is ₹ 2804,94,67,845. The reduction in sales due to following assessee's strategy of selling at a price lower than cost, the difference of ₹ 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 intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in 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 controlled by the assessee company itself where in fact during the A.Y.2012- 13, the founders of Flipkart were the Directors of the company and deciding the operations of the WS Retail Pvt Ltd. 4. The factual aspect that Assessee as a wholesaler supplied 94.5% of the total goods sold on portal Flipkart to its only retailer WS retail Pvt Ltd and the rest 4.5% to its other related company M/s Flipkart Online Services Pvt Ltd as mentioned in the order itself is bound to have an effect on the judgement of the Tribunal on which reliance has been placed once the matter is highlighted before the Tribunal. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal on which reliance has been placed once the matter is highlighted before the Tribunal. 6. For these and other grounds that may be urged at the time of hearing, it is prayed that 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. 7. The appellant craves leave to add, alter, amend and/ or delete any of the grounds mentioned above. 18. We have heard the submission of the learned DR, who relied on the order of the AO. The learned counsel for the Assessee while relying on the order of the CIT(A), further submitted that ground No.3 4 raised by the revenue in the appeal for AY 2012-13, the ground with regard to the Assessee having control over WS Retail Pvt.Ltd., was not the basis of assessment and there is no factual basis for the revenue to raise such a ground. With regard to Gr.No.3 to 5 in AY 2013-14 2014-15 with regard to allegation that transaction between WS retail Pvt.Ltd., and the Assessee being not between unrelated parties, is also without any basis. The revenue has not brought on record any material to substantiate its case in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal concluded that the action of the Revenue in disregarding the books results cannot be sustained and the further conclusion that the action of the Revenue in presuming that the Assessee had incurred expenditure for creating intangible assets/brand or goodwill is without any basis. Accordingly, the loss declared by the Assessee in the return of income should be accepted by the AO and the action of disallowing the expenses in without any basis. 20. We are of the view that the aforesaid conclusion of the Tribunal will equally apply to AY 2012-13 to 2014-15 also as the basis of making the addition in these AYs are also the same as it was made in AY 2015-16. The allegation of the revenue regarding the Assessee and M/S.WS Retail Pvt.Ltd., being related parties does not emanate from the order of assessment. The revenue cannot be permitted to take a stand which was not the factual basis on which addition was made by the AO. Even otherwise, there is no basis for the stand taken by the revenue in the grounds of appeal. We therefore find no merit in these appeals by the revenue. Respectfully following the order of the Tribunal in Assessee s own case f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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