The Joint Commissioner of Income Tax Special Range-3 Main , Bangalore V. M/s Flipkart India Private Limited , Bangalore

ITA 2846/BANG/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1349 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 06-06-2019
• Assessment Year: 2014-2015
• Appeal Filed On: 15-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKA RAN , ACCOUNTANT MEMBER ITA NO S . 2846 , 2847 & 2728 /BANG/2018 ASSESSMENT YEAR S : 2014 - 15, 2013 - 15 & 2012 - 13 THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 3, BANGALORE. VS. FLIPKART INDIA PVT. LTD., VAISHNAVI SUMMIT, GROUND FLOOR, 7 TH MAIN, 80 FEET ROAD, KORAMANGALA LAYOUT, BANGALORE 560 034. PAN: AABCF 8078M APPELLANT RESPONDENT APP E LLANT B Y : SHRI PRADEEP KUMAR, CI T(DR)( ITAT), BANGALORE RESP ONDENT BY : SHRI PERCY PARDIWALA, SR. ADVOCATE DATE OF HEARING : 06. 0 6 .2019 DATE OF PRONOUNCEMENT : 14 . 0 6 . 2 0 1 9 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THESE ARE APPEALS BY THE REVENUE AGAINST THREE ORD ERS DATED 23.7.2018, 7.8.2018 & 7.8.2018, ALL BY CIT(APPEALS) -3, BENGALURU, RELATING TO ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15. 2. THE ASSESSEE IS A COMPANY. DURING THE RELEVANT PREVIOUS YEARS RELEVANT TO AYS 2012-13 TO 2014-15, IT WAS ENGAGED IN THE BUSINESS OF WHOLESALE TRADER/DISTRIBUTOR OF BOOKS, MOBILES, COM PUTERS AND RELATED ACCESSORIES. IT FILED A RETURN OF INCOME FOR AYS 2012-13, 2013-14 & ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 2 OF 14 2014-15 DECLARING LOSS OF RS.107,35,11,463, RS.270, 39,22,480/- AND RS.358,81,84,343/- RESPECTIVELY. 3. THE AO NOTICED THAT THE ASSESSEE WAS A WHOLESALE DEALER AND ACQUIRED GOODS FROM VARIOUS PERSONS AND 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 I NTERNET PLATFORM UNDER THE NAME FLIPKART.COM. THE AO FURTHER NOTICED TH AT THE ASSESSEE HAS BEEN PURCHASING GOODS AT SAY RS.100/- AND SELLING T HEM TO THE RESELLERS AT RS.80/-. THE PURCHASES DURING THE RELEVANT PREVIOU S 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 PURCHA SES 248,36,00,000 1311,50,00 ,000 3369,82,16,926 LESS: STOCK UNSOL D 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: SA LE 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 PRI CE WAS NOT A NORMAL BUSINESS PRACTICE. HE THEREFORE CALLED UPON THE AS SESSEE TO EXPLAIN THE PURPOSE OF SELLING GOODS AT LESS THAN COST PRICE. 5. THE ASSESSEE EXPLAINED THAT SALE THROUGH ELECTRO NIC FORM (E- COMMERCE) AS AGAINST THE TRADITIONAL SALE THROUGH R ETAIL 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 THR OUGH E-COMMERCE. THE VOLUME OF SALES WAS VERY LOW. ONE OF THE WAYS TO I NCREASE VOLUME OF SALES ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 3 OF 14 AND ATTRACT BUYERS THROUGH E-COMMERCE IS TO OFFER D ISCOUNTED PRICES. HIGHER VOLUME OF SALES WILL LEAD TO ECONOMIES OF SC ALE. 6. ON THE ABOVE SUBMISSION THE AO OBSERVED THAT THE VOLUME OF SALES OF THE ASSESSEE WAS RS.199.75 CRORES IN AY 2012-13 AND INCREASED TO RS.9351.75 CRORES IN AY 2015-16. HE OBSERVED THAT THE VOLUME OF INCREASE IN SALES WAS 45 TIMES OVER A PERIOD OF 3 Y EARS. HE WAS THEREFORE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT SALE AT DISCOUNTED PRICE TO RETAILERS WAS TO INCREASE VOLUME OF SALES CANNOT BE ACCEPTED. 7. THE AO EXAMINED THE SENIOR VICE-PRESIDENT AND FI NANCE CONTROLLER OF THE FLIPKART GROUP SRI.RAJNISH BAWEJA, BY ISSUIN G SUMMONS TO HIM BY VIRTUE OF HIS POWER TO SUMMON WITNESS U/S.131 OF TH E INCOME TAX ACT, 1961 (ACT). THE SUM AND SUBSTANCE OF THE STATEMENT OF T HE VICE-PRESIDENT ACCORDING TO THE AO WAS THAT THE STRATEGY OF SELLIN G AT A PRICE LOWER (PREDATORY PRICING) THAN THE COST PRICE IS TO CAPTU RE MARKET SHARE AND TO EARN PROFITS IN THE LONG RUN. ACCORDING TO THE AO THE BENEFIT TO THE ONLINE BUYER IN THE SHORT RUN IN THE FORM OF LOWER PRICE I S TO CREATE INDIRECT BENEFIT TO THE ASSESSEE IN THE LONG RUN. 8. THE AO THEREAFTER CONCLUDED THAT THE STRATEGY OF SELLING GOODS AT LOWER THAN COST PRICE WAS TO ESTABLISH CUSTOMER GOO DWILL AND BRAND VALUE IN THE LONG RUN AND REAP BENEFITS IN THE LATER YEARS. THE AO IN THIS REGARD REFERRED TO THE FACT THAT THE ASSESSEE DURING THE P REVIOUS YEAR RELEVANT TO AY 2015-16 SOLD ITS SHARES AT A HUGE PREMIUM (EQUIT Y SHARES OF FACE VALUE OF RE.1/- WAS SOLD AT A PREMIUM OF RS.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 FL OWS IN FUTURE AND USES APPROPRIATE DISCOUNTING FACTORS TO ARRIVE AT T HE CURRENT ENTERPRISE VALUE. THIS WAS ONE REASON FOR THE AO TO CONCLUDE THAT THE STRATEGY OF ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 4 OF 14 INCURRING LOSS IN THE PRESENT WAS TO REAP BENEFIT O F SUCH LOSS IN FUTURE BY CAPTURING E-COMMERCE MARKET. 9. THE AO THEREAFTER CONCLUDED THAT THE LOSSES INCU RRED BY THE ASSESSEE WAS TO CREATE MARKETING INTANGIBLES ASSETS AND THEREFORE THE LOSS TO THE EXTENT IT IS CREATED DUE TO PREDATORY PRICIN G SHOULD BE REGARDED AS CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE AND SH OULD BE DISALLOWED. THE AO WAS HOWEVER GRACIOUS IN HOLDING THAT THE VAL UE OF MARKETING INTANGIBLES SHOULD BE CONSIDERED AS AN ASSET USED F OR 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 BUSI NESS CAN BE CONSIDERED AS CAPITAL EXPENDITURE. THE ASSESSEE SUBMITTED THA T EXPENSES INCURRED DOES NOT CREATE ANY ASSET OF AN ENDURING ADVANTAGE. 11. THE AO HELD THAT THE BUSINESS OF THE ASSESSEE I S DIFFERENT FROM TRADITIONAL WAY OF UNDERSTANDING THE BUSINESS. HE WAS OF THE VIEW THAT IN TRADITIONAL BUSINESS IF AN ENTERPRISE INCURS LOSS N O INVESTOR WILL COME FORWARD TO INVEST IN SUCH BUSINESS BUT IN SPITE OF HUGE LOSSES INTERNATIONAL EXPERT INVESTORS ARE INVESTING IN CAPITAL AT HIGH P REMIUM WITH THE ASSESSEE. HENCE THE ENTIRE WAY OF VIEWING THIS NEW BUSINESS H AS TO HAVE A DIFFERENT APPROACH IN ACCOUNTING AND TAXING PRINCIPLES. THE ASSESSEE CONTENDED BEFORE THE AO THAT SELLING AT A PRICE BELOW COST PR ICE DOES NOT LEAD TO GENERATION OF ANY IDENTIFIABLE ASSET. THE AO HOW EVER HELD THAT INTANGIBLE ASSETS ARE ASSETS WITHOUT PHYSICAL PRESENCE AND THE FACT THAT THE ASSESSEE ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 5 OF 14 FOLLOWED PREDATORY PRICING IN ORDER TO CREATE MARKE TING INTANGIBLES AND BRAND. ACCORDING TO HIM THE ENHANCED VALUATIONS AT WHICH VENTURE CAPITALISTS INVEST IN THE ASSESSEE IS NOT VALUATION OF ANY TANGIBLE ASSET OR PROFITABILITY, BUT THAT VALUATION IS MOSTLY BASED O N INTANGIBLES GENERATED BY ASSESSEE. HENCE, SELLING AT A PRICE BELOW PRICES I S NOT AN IRRATIONAL ECONOMIC BEHAVIOR. IT IS A CLEARLY THOUGHT STRATEG Y TO ESTABLISH A MONOPOLY IN MARKET BY BRAND BUILDING BY GENERATING CONSUMER GOODWILL. THIS STRATEGY NATURALLY LEADS TO GENERATION OF INTANGIBL E ASSETS AND ENDURING BENEFITS THAT ASSESSEE HAS FAILED TO ACKNOWLEDGE AN D RECOGNIZE. 12. THE AO THEREAFTER EMBARKED UPON METHOD OF VALU ATION OF INTANGIBLES. THE FIRST OBSERVATION OF THE AO WAS T HAT E-COMMERCE BUSINESS DOES NOT FOLLOW THE TRADITIONAL METHODS FOR EARNING INCOME AND HENCE ASSESSMENT OF INCOME IN THE CASE OF E-COMMERCE BUSI NESS ALSO CANNOT BE DONE BY FOLLOWING TRADITIONAL METHODS. THE AO REFE RRED TO THREE APPROACHES OF VALUATION OF INTANGIBLES PRESCRIBED B Y OECD IN ITS CONVENTION OF BASE EROSION AND PROFIT SHIFTING (BEP S) VIZ., COST APPROACH, INCOME APPROACH AND MARKET APPROACH. THE AO ADOPTE D COST APPROACH IN WHICH A REASONABLE PROFIT MARGIN IS ATTRIBUTED TO T HE COST OF PURCHASES AND TO THE EXTENT THE PROFIT IS FOREGONE BY THE ASSESSE E WAS TO BE CONSIDERED 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 EL ECTRONIC GOODS. HE TOOK THE AVERAGE PROFIT MARGINS OF COMPANIES ENGAGE D IN WHOLESALE BUSINESS IN CONSUMER ELECTRONIC GOODS AND COMPARED THE SAID PROFIT MARGIN WITH ASSESSEES PROFIT MARGIN OF LOSS. ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 6 OF 14 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 FO R WHOLESALERS IS 19.90%. ON PERUSAL OF THE COMPARABLES, IT IS SEE N 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 TH E DIFFERENCES IN THESE MARKET COMPARABLES. HAD ASSESSEE NOT FOLLOWED A PREDATORY PRICING POLICY, ITS (MARKET-AVERAGE) SALE PRICE WOU LD 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. 199,7 5,27,876/-. THE REDUCTION IN SALES DUE TO FOLLOWING ASSESSEE'S STRA TEGY OF COST CUTTING ON AN ESTIMATION, IS RS. 65,97,61,248/-. TH IS IS THE VALUE OF EXPENSES INCURRED BY ASSESSEE TOWARDS COST OF MARKE TING INTANGIBLES IN THE YEAR. 3.20. ASSESSEE HAS CROSS-SUBSIDIZED ITS MARKETING INTANGIBLE AND TRADEMARK VALUE CREATION WITH REDUCTION IN SALE PRI CE. HOWEVER, AS ALREADY STATED IN GREAT DETAIL, MARKETING INTANGIBL ES AND TRADEMARK ARE 'ASSETS. ANY EXPENSE/COST INCURRED DUE TO IT IS CAPITAL EXPENDITURE AND HAS TO BE CAPITALIZED. HENCE ADDITI ON TO THE EXTENT OF RS. 65,97,61,248/- IS MADE ON ACCOUNT OF INTANGI BLES. ASSESSEE'S OPERATION HAS COMMENCED (AFTER TAKEOVER OF BUSINESS FROM THE CONCERN FLIPKART ONLINE SERVICES PVT LTD) AFTER 30T H OF SEPTEMBER, 2011. HENCE DEPRECIATION ON INTANGIBLES IS ALLOWED @ 12.5% OF THIS AMOUNT, I.E. 8,24,70,156/- AND THE BALANCE IS ADDED BACK TO THE RETURNED INCOME. ADDITION: RS. 65,97,61,248 - RS. 8,24,70,156/- = RS . 57,72,91,092/- AY 2013-14 3.19. THE MARKET AVERAGE OF GROSS PROFIT MARGIN FOR WHOLESALERS IS 19.36%. ON PERUSAL OF THE COMPARABLES, IT IS SEE N THAT NONE OF THEM HAS AN ABNORMALLY NEGATIVE GROSS PROFIT MARGIN . IT CAN BE CONCLUDED THAT THESE COMPARABLE WHOLESALERS FOLLOW A PROFIT-BASED ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 7 OF 14 BUSINESS MODEL. IN ANY CASE, AVERAGING IRONS OUT TH E DIFFERENCES IN THESE MARKET COMPARABLES. HAD ASSESSEE NOT FOLLOWED A PREDATORY PRICING POLICY, ITS (MARKET-AVERAGE) SALE PRICE WOU LD HAVE BEEN RS. 1232,99,50,807/- PLUS 19.36% OF RS. 1232,99,50,807/ -, I.E. RS. 1471,70,29,283/-. ASSESSEE'S REAL SALES IS RS. 1150 ,65,79,357/-. THE REDUCTION IN SALES DUE TO FOLLOWING ASSESSEE'S STRATEGY OF COST CUTTING ON AN ESTIMATION, IS RS. 321,04,49,926/-. T HIS IS THE VALUE OF EXPENSES INCURRED BY ASSESSEE TOWARDS COST OF MA RKETING INTANGIBLES IN THE YEAR. 3.20. ASSESSEE HAD CROSS-SUBSIDIZED ITS MARKETING INTANGIBLE AND TRADEMARK VALUE CREATION WITH REDUCTION IN SALE PRI CE. HOWEVER, AS ALREADY STATED IN GREAT DETAIL, MARKETING INTANGIBL ES AND TRADEMARK ARE ASSETS. ANY EXPENSE/COST INCURRED DUE TO IT IS CAPITAL EXPENDITURE AND HAS TO BE CAPITALIZED. HENCE ADDITI ON TO THE EXTENT OF RS. 321,04,49,926/- IS MADE ON ACCOUNT OF INTANG IBLES. HENCE DEPRECIATION ON INTANGIBLES IS ALLOWED @ 25% OF THI S AMOUNT, I.E. RS. 80,26,12,481/- AND THE BALANCE IS ADDED BACK TO THE RETURNED INCOME. ADDITION: RS. 321,04,49,926 RS. 80,26,12,481/- = RS. 240,78,37,445/- AY 2014-15 3.20. THE MARKET AVERAGE OF GROSS PROFIT MARGIN F OR 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 FOLLO W A PROFIT- BASED BUSINESS MODEL. IN ANY CASE, AVERAGING IRONS OUT THE DIFFERENCES IN THESE MARKET COMPARABLES. HAD ASSESS EE NOT FOLLOWED A PREDATORY PRICING POLICY, ITS (MARKET AV ERAGE) SALE PRICE WOULD HAVE BEEN RS. 3051,55,64,608 + (16.95% OF RS. 3051,55,64,608 I.E. RS. 3568,79,52,809. ASSESSEE'S REAL SALES IS RS. 2804,94,67,845. THE REDUCTION IN SALES DUE TO FOLLO WING ASSESSEE'S STRATEGY OF SELLING AT A PRICE LOWER THAN COST, THE DIFFERENCE OF RS. 763,84,84,964 BETWEEN THE PRICE AT WHICH THE ASSESS EE IS SELLING AND THE PRICE THE NORMAL WHOLESALER WOULD HAVE SOLD IS THE VALUE OF EXPENSES INCURRED BY ASSESSEE TOWARDS COST OF MARKE TING INTANGIBLES IN THE YEAR. ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 8 OF 14 3.21. ASSESSES HAD CROSS-SUBSIDIZED ITS MARKETING I NTANGIBLE AND BRAND VALUE WITH REDUCTION IN SALE PRICE. HOWEVER, AS ALREADY STATED IN GREAT DETAIL, MARKETING INTANGIBLES AND B RAND VALUE ARE ASSETS. ANY EXPENSE/COST INCURRED DUE ON CREATION O F THE SAME IS CAPITAL EXPENDITURE AND HAS TO BE CAPITALIZED. HENC E ADDITION TO THE EXTENT OF RS.763,84,84,964 IS MADE ON ACCOUNT OF IN TANGIBLES. HENCE DEPRECIATION ON INTANGIBLES IS ALLOWED 25 % O F THIS AMOUNT, I.E. RS. 190,96,21,241 AND THE BALANCE IS ADD THE R ETURNED INCOME. HENCE THE ADDITION IS RS. (763,84,84,964 RS. 190,9 6,21,241) 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 IDENTICA L ADDITION MADE IN AY 2015-16, THE ITAT BANGALORE BENCH IN ASSESSEES OWN CASE REPORTED IN [2018] 92 TAXMANN.COM 387 (BANGALORE - TRIB.) FLIIP KART INDIA (P.) LTD. VS. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-3 (1) (1), BANGALORE IT APPEAL NOS. 202 & 693 (BANG.) OF 2018 FOR ASSESSMEN T YEAR 2015-16 ORDER DATED APRIL 25, 2018 DELETED THE ADDITION MADE BY THE REVENUE AUTHORITIES HOLDING THAT WHERE A TRADER TRA NSFERS HIS GOODS TO ANOTHER TRADER AT A PRICE LESS THAN MARKET PRICE AN D TRANSACTION IS A BONA FIDE ONE, TAXING AUTHORITY CANNOT TAKE INTO ACCOUNT MARKET PRICE OF THOSE GOODS, IGNORING REAL PRICE FETCHED TO ASCERTAIN PRO FIT FROM TRANSACTION. THE TRIBUNAL FURTHER HELD THAT EVEN OTHERWISE, SINCE AS SESSEE HAD NOT INCURRED ANY EXPENDITURE TO ACQUIRE MARKETING INTANGIBLES OR FOR CREATION OF GOODWILL, THE ORDER PASSED BY ASSESSING OFFICER WAS NOT SUSTA INABLE. FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, THE CIT(A) DELETED THE ADDITION MADE BY THE AO. 16. AGGRIEVED BY THE ORDERS OF THE CIT(A), THE REVE NUE HAS PREFERRED THE PRESENT APPEALS BEFORE THE TRIBUNAL. THE GROUND S OF APPEAL IN AY 2012-13 READS THUS:- ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 9 OF 14 1 THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LA W AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LEARNED CIT(A) ERRED IN PLACING RELIANCE ON THE ORD ER 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/ADMI TTED THAT THE GOODS WERE SOLD AT LOWER THAN THE COST PRICE IN ORD ER TO ATTRACT CUSTOMERS TO PURCHASE GOODS THROUGH E-COMMERCE(FLIP KART PORTAL) WHICH WOULD BE IN THE NATURE OF ACQUIRING/CREATING INTANGIBLE ASSET IN THE FORM OF GOODWILL/BRAND VALUE AND LOSS IN CAP ITAL IN NATURE. 3. THE ATTENTION OF THE ITAT WAS NOT DRAWN TO THE F ACT THAT THE ASSESSEE AND THE RETAILER WS RETAIL PVT LTD WER E 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 RE LATED COMPANY M/S FLIPKART ONLINE SERVICES PVT LTD AS MENTIONED I N THE ORDER ITSELF IS BOUND TO HAVE AN EFFECT ON THE JUDGEMENT OF THE TRIBUNAL ON WHICH RELIANCE HAS BEEN PLACED ONCE THE MATTER I S 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 AND TH AT 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 2012-1 3. THE GROUNDS OF APPEAL FOR AY 2013-14, READS THUS:- ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 10 OF 14 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/ADMI TTED THAT THE GOODS WERE SOLD AT LOWER THAN THE COST PRICE IN ORD ER TO ATTRACT CUSTOMERS TO PURCHASE GOODS THROUGH E-COMMERCE (FLI PKART PORTAL) WHICH WOULD BE IN THE NATURE OF ACQUIRING/CREATING INTANGIBLE ASSET IN THE FORM OF GOODWILL/BRAND VALUE AND LOSS IS CAP ITAL IN NATURE. 3. THE ATTENTION OF THE ITAT WAS NOT DRAWN TO THE F ACT THAT THE ASSESSEE AND THE RETAILER WS RETAIL PVT. LTD WE RE ASSOCIATED AND CONTROLLED BY THE ASSESSEE COMPANY ITSELF WHERE IN EARLIER AND DURING CURRENT AY 2013-14, THE FOUNDERS OF FLIPKART WERE THE DIRECTORS OF THE COMPANY AND THEREBY DECIDING THE O PERATIONS OF THE WS RETAIL PVT LTD. 4. THE FACTUAL ASPECT THAT ASSESSEE AS A WHOLESALER SUPPLIED MAJORITY OF THE TOTAL GOODS SOLD ON ITS PORTAL FLIP KART TO ITS OWN RETAIL ARM WS RETAIL PVT LTD AS MENTIONED IN THE OR DER AS WELL IS BOUND TO HAVE AN EFFECT ON THE JUDGEMENT OF THE TRI BUNAL ON WHICH RELIANCE HAS BEEN PLACED ONCE THE MATTER IS HIGHLIG HTED BEFORE THE TRIBUNAL. 5. THE TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE RETAILER, WS RETAIL BRINGING FORTH THE FACT THAT TH E TRANSACTION BETWEEN ASSESSEE AND THE WS RETAIL WAS NOT AN INDEP ENDENT TRANSACTION AS THE SUPPLY AGREEMENT AND LICENSE AND SERVICE AGREEMENT BETWEEN THE PARTIES, PROHIBITS / CONTROLS THE WS RETAIL EITHER TO PURCHASE / PROCURE GOODS FROM ANY PERSON OTHER THAN THE ASSESSEE AND ALSO TO SELL THE SAID GOODS OTHER THAN , TO THE CUSTOMERS PLACING ORDERS IN THE FLIPKART PORTAL, WO ULD ONLY LEAD TO ANALOGY THAT ENTIRE TRANSACTION IS AN COLORABLE DEV ICE TO CLAIM THE COST OF CREATING INTANGIBLE ASSET AS BUSINESS LOSS AND THE SAME IS BOUND TO HAVE AN EFFECT ON THE JUDGEMENT OF THE TRI BUNAL ON WHICH RELIANCE HAS BEEN PLACED ONCE THE MATTER IS HIGHLIG HTED BEFORE THE TRIBUNAL. ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 11 OF 14 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 TH AT 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 ASSES SEE 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 WI TH REGARD TO THE ASSESSEE HAVING CONTROL OVER WS RETAIL PVT.LTD., WA S NOT THE BASIS OF ASSESSMENT AND THERE IS NO FACTUAL BASIS FOR THE RE VENUE 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 PV T.LTD., AND THE ASSESSEE BEING NOT BETWEEN UNRELATED PARTIES, IS ALSO WITHOU T ANY BASIS. THE REVENUE HAS NOT BROUGHT ON RECORD ANY MATERIAL TO S UBSTANTIATE ITS CASE IN THE AFORESAID GROUNDS AND THEREFORE THE DECISION RE NDERED BY THE TRIBUNAL IN ASSESSEES 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 RI VAL SUBMISSIONS. ON IDENTICAL ADDITION MADE IN AY 2015-16, THIS TRIBUNA L HELD THAT THE STARTING POINT FOR COMPUTING INCOME FROM BUSINESS IS THE PRO FIT OR LOSS AS PER THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, WHICH CANN OT BE DISREGARDED UNLESS CERTAIN PROVISIONS [SECTION 145(3)] OF THE I T ACT ARE INVOKED. SINCE THE AO HAS NOT INVOKED SUCH PROVISIONS, THE AO IS N OT EMPOWERED TO GO BEYOND THE BOOK RESULTS. IT WAS HELD THAT IT IS SET TLED LAW THAT WHERE A TRADER TRANSFERS HIS GOODS TO ANOTHER TRADER AT A P RICE LESS THAN THE MARKET PRICE AND THE TRANSACTION IS A BONAFIDE ONE, THE TA XING AUTHORITY CANNOT TAKE INTO ACCOUNT THE MARKET PRICE OF THOSE GOODS, IGNOR ING THE REAL PRICE FETCHED ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 12 OF 14 TO ASCERTAIN THE PROFIT FROM THE TRANSACTION AND INCOME WHICH HAS ACCRUED OR ARISEN CAN ONLY BE SUBJECT MATTER OF TOTAL INCOM E AND NOT INCOME WHICH COULD HAVE BEEN EARNED BUT NOT EARNED. IT WAS HEL D 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 O F THE ASSESSEE IN THE MANNER IN WHICH HE DID, WHAT CAN BE TAXED IS ONLY I NCOME THAT ACCRUES OR ARISES AS LAID DOWN IN SEC.5 OF THE ACT. NOTHING BE YOND SEC.5 OF THE ACT CAN BE BROUGHT TO TAX. IT WAS HELD THAT THERE IS N O 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 A N ASSESSEE AND PROCEED TO ENHANCE THE SALE PRICE WITHOUT ANY MATER IAL BEFORE HIM TO SHOW THAT THE ASSESSEE HAS IN FACT REALIZED HIGHER SALE PRICE. IN FACT, WHENEVER, THE LEGISLATURE INTENDED TO TAX INCOME NOT EARNED, THEY HAVE MADE A PROVISION TO THIS EFFECT. IT WAS HELD THAT THERE WA S NO EXPENDITURE WHICH WAS INCURRED BY THE ASSESSEE AND ONE CANNOT PROCEED ON THE BASIS OF A PRESUMPTION THAT PROFIT FORGONE IS EXPENDITURE INCU RRED AND FURTHER THAT EXPENDITURE INCURRED WAS FOR ACQUIRING INTANGIBLE A SSETS LIKE BRAND, GOODWILL ETC. IT WAS ALSO HELD THE VALUATION OF INT ANGIBLES IS ACADEMIC SINCE IT REJECTED THE BASIC POSITION ADOPTED BY THE REVEN UE AND HELD THAT THE ASSESSING OFFICER SHOULD ACCEPT THE LOSS DECLARED B Y THE ASSESSEE. THE TRIBUNAL CONCLUDED THAT THE ACTION OF THE REVENUE I N DISREGARDING THE BOOKS RESULTS CANNOT BE SUSTAINED AND THE FURTHER C ONCLUSION THAT THE ACTION OF THE REVENUE IN PRESUMING THAT THE ASSESSE E HAD INCURRED EXPENDITURE FOR CREATING INTANGIBLE ASSETS/BRAND OR GOODWILL IS WITHOUT ANY BASIS. ACCORDINGLY, THE LOSS DECLARED BY THE ASSESS EE IN THE RETURN OF INCOME SHOULD BE ACCEPTED BY THE AO AND THE ACTION OF DISALLOWING THE EXPENSES IN WITHOUT ANY BASIS. ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 13 OF 14 20. WE ARE OF THE VIEW THAT THE AFORESAID CONCLUSIO N 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 M ADE IN AY 2015-16. THE ALLEGATION OF THE REVENUE REGARDING THE ASSESSE E AND M/S.WS RETAIL PVT.LTD., BEING RELATED PARTIES DOES NOT EMANATE FR OM 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 T HESE APPEALS BY THE REVENUE. RESPECTFULLY FOLLOWING THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR AY 2015-16, WE UPHOLD THE ORDERS OF TH E CIT(A) AND DISMISS, THESE APPEALS BY THE REVENUE. 21. IN THE RESULT, APPEALS BY THE REVENUE ARE DISM ISSED. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF JUNE, 2019. SD/- SD/- ( B.R. BASKARAN ) ( N.V . VASUDEVAN ) AC COUNTANT M EMBER VICE PRESIDENT BANGALORE, DATED, THE 14 TH JUNE, 2019. / D ESAI S MURTHY / ITA NOS.2846, 2847 & 2728/BANG/2018 PAGE 14 OF 14 COPY TO: 1. A PP ELL ANT 2. RESPONDENT 3. CIT 4. CI T(A ) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.