Predatory pricing under Income Tax Act

Dilip K Raina 
on 19 August 2019


The dictionary meaning of the word PREDATORY PRICING: A pricing method of selling certain goods at a lower price than is required, or to give away goods for free, generally done so ...

The case law in reference during this article will be M/s Flipkart India Private Limited Vs Assistant Commissioner of Income Tax; ITA No. 93/Bang/2018 order dated 25-04-2018.

The question for discussion in this article will be Predatory Pricing and its impact on Income Tax  Assessment.

In the above referred case the assessee being a trading company filed its income tax return declaring loss as per the audited accounts. The assessing officer while processing the return for assessment found that during the year the assessee has sold goods at a price which was lower than the cost price- technically termed as Predatory Pricing . In simple words the assessee purchased goods at a higher price and sold the same at a lower price. On enquiry by the assessing office it was established that assessee sold goods at a predatory price with an intention to increase its turnover and to eliminate the competitors and to capture a sizable market share. By doing so company earned a huge loss with an intent to earn profits in future once it reaches to a targeted turnover after capturing a sizeable market share.

Assessing officer was not agreeable to the explanation given by assessee but concluded with an opinion that the difference between the selling price and the market price of the company’s product is an investment for a better future of the company. He corelated his opinion with the fact that despite heavy losses to the company which had almost eroded the whole equity the company’s shares were being acquired by many including venture capitalists at a higher primum. Assessing officer calculated an amount being difference between the market price and the selling price of the company and treated it as capital expenditure for generating a tangible asset like goodwill, brand etc thus disallowed by not treating it as revenue expenditure. He added back an amount calculated on certain valuation methods to arrive at taxable income.  While doing so the Assessing Officer was kind enough to allow depreciation @ 25% of such value of the tangible asset. Assessing Officer also rejected the submission of the assessee that “expenses on purchase in the business of wholesale cannot and does not create any asset of an enduring advantage.”

“The AO however concluded that the Assessee followed predatory pricing in order to create marketing intangibles and brand. According to him the enhanced valuations at which venture capitalists invest in the Assessee is based on intangibles generated by Assessee. Hence, selling at a price below prices is not an irrational economic behaviour. It is a clearly thought strategy to establish a monopoly in market by brand building by generating consumer goodwill. This strategy naturally leads to generation of intangible assets and enduring benefit.”

Aggrieved by the order of Assessing Officer (AO) the assessee preferred an appeal before CIT (A). CIT(A) not only confirmed the order of AO but also withdrew depreciation on so called tangible asset while computing the total income based on the submission of the assessee that no tangible asset was created or owned by the asseessee as stated before the AO. CIT(A) exercised his powers without giving notice to assessee u/s 251(2) which he was bound to follow.

To prove that the assessee had submitted a wrong statement CIT (A) relied on the agreement when the assessee purchased the current business in a slump sale during FY 2012-13 which stated that it also sold intellectual property/brand to the company now in question. CIT (A) in his order noted “Since the brand including Flipkart getting promoted by the business strategy of the appellant is not owned by the appellant and goodwill generated for the same is also not accruing to it thus the expenditure to that extent needs to be considered for non-business purposes as the intangible generated would not be benefitting the appellant but the other person. In view of this the appellant would not be eligible to claim any depreciation on the value of intangible generated."

"Thereafter the CIT(A) gave certain directions in 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."

While arguing the case before ITAT the assessee brought certain facts before the bench which are:

Revenue authorities while assessing the income did not proceed according to the provisions of the Act. “Income from Business or Profession” has to be computed in accordance with Sec. 28 to Section 44DB.  of the Act.

AO has not rejected the books and accounts as produced before him thus AO cannot resort to a process of estimating income of the Assessee. 

AO cannot tax a hypothetical income based on his estimates which has not accrued or materialised. CIT Vs. Shoorji Valladhdas & Co. 46 ITR 144 (SC)

Arguing the case reference was made to section 10(1), 10(2) , 10(2)(xi) which speaks about the computation of profits and imposes a charge on the profits or gains.

Subsequent argument was that even assuming that the Assessee has incurred expenses in creating intangibles/brands, the same is allowable as revenue expenditure and such expenditure cannot be regarded as capital expenditure. In this regard he relied on the decision of the Hon'ble Karnataka, Gujarat and Delhi High Courts in the following cases wherein a view has been taken that expenses incurred for developing brand is not capital expenditure:

(i) (2013) 217 Taxman 95 (Karn.) CIT Vs. Indo Nissin Foods Ltd.
(ii) 308 ITR 263 (Guj.) DCIT Vs. Core Healthcare Ltd.
(iii) (2012) 210 Taxman 161 

The case was argued from both sides mainly highlighting the points related to whether cash discount at the time of sale must be treated as revenue expenditure. How can an assessing officer ascertain with certainty that there will be profit to the company in future years? DR pleaded that the AO order be upheld as the assessment order is most logical and reasonable. Since the business model is based on new concept thus AO be allowed to follow a creative method to complete the assessment etc. Etc.

The case was decided in favour of assessee by concluding that “the action of AO in disregarding the books results cannot be sustained and that the further conclusion that the action of the AO is presuming that the assessee had incurred expenditure for creating intangible assets/brand or goodwill is without any basis….. We hold that the loss as declared by assessee in return of income should be accepted by AO and his action in disallowing expenses and arriving at a positive total income by assuming that there was an expenditure of capital nature incurred by the assessee 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.”

Note: The above article has been carved out of the Judgement in Filpkart India Pvt Limited and study of sections of Income Tax Act 1961 referred by the learned Advocates and DR.

The author is a B.Com; FCA (ICAI); PGDFM; PGDCA; DBM; Cert. IFRS (ICAEW); NCFM Capital Market (Dealers Module); Microsoft Certified IT Professional: Application for Microsoft Dynamics NAV (ERP) & AXAPTA (ERP): LL.B.


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