Income Tax Appellate Tribunal (ITAT) Appeal in High Court

The income tax (I-T) department has taken Flipkart to High Court over Rs.110 crore demand. The case relates to the treatment of discounts offered by flipkart to its customers. The matter was first moved to Income Tax Appellate Tribunal which gave the ruling in favour of Flipkart. Below are the facts of the case, explanation and ruling of ITAT Banglore in a summarized manner:

Issue under Consideration

Whether discount offered by Assesse on goods sold to retailers created an intangible asset/ goodwill for the Assesseie capital expenditure or revenue expenditure deductible from income

Facts of the case

• Flipkart India (assesse) was engaged in the business of wholesale trader/distributor of books, mobiles, computers and related accessories
• Assesse filed its return of income for AY 2015-16 declaring a loss of Rs. 7,96,34,36,863
• The assesse was selling goods to retailers at a price less than their cost price,which was not a normal business practice, so he called upon assesse to explain the same
• Assesse was of the view that sale on discounted prices was to increase its sales as it was very difficult to create trust and awareness of sale through e-commerce
• Assessing Officer was of the view that sale of Flipkart increased over 45 times in 3 years and the strategy of selling at lower price was to establish customer goodwill and brand value in the long run and reap benefits in the later yearsand therefore the loss to the extent it is created due to predatory pricing should be regarded as capital expenditure incurred by the Assesse and should be disallowed.

Contentions of the assesse

• Assesse was of the view that Section 145 of Income Tax Act ,1961 provides how income u/h Profits and Gains of business or professionshould be computed and Assessing Officer cannot disregard the profit or loss as computed by assesse , unless he invokes Section 145(3) of the act which are not applicable in the present case.
• Assesse sold all its goods to related parties, hence Section 40(A)(2)(a) of Income Tax Act cannot be invoked . Even domestic transfer pricing provisions are not applicable as the assesse has not undertaken transactions with related parties, henceAssessing Officer cannot ignore the books results of the assesse.
• Presumption of Assessing Officer that assesse incurred expenditure to create goodwill or brand name, assesse argued that there was no actual outflow of cash. As per the judgement of CIT V.B.C .SrinivasaSetty it is not possible to ascertain the value cost of acquisition of intangibles mentioned u/s 55 of Income Tax Act,1961 in money, unless there is actual outflow of money and it is not possible to say profits forgone created goodwill
• As held in Supreme Court vs Empire Jute Co. Ltd that test of enduring benefit not to be conclusive test to determine whether an expenditure is capital or revenue. Discounts offered to customers merely facilitates the assesse in 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.

Ruling of the Banglore ITAT

• ITAT held that action of the AO in disregarding the books results cannot be sustained
• 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
• ITAT held that the loss as declared by the Assesse in the return of income should be accepted by the AO and his action in disallowing expenses and arriving at a positive total income by assuming that there was an expenditure of a capital nature incurred by the Assesse in arriving at a loss as declared in the return of income and further disallowing such expenditure and consequently arriving at a positive total income chargeable to tax is without any basis and not in accordance with law and the said manner of determination of total income is hereby deleted.

ITAT has provided relief in to assesse and concluded the appeals in favour of the assesse and held that discount offered to retailers is allowable as revenue expenditure.

This post is written by Parul Aggarwal.

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