SULEKHA.COM NEW MEDIA P. LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

:-2-: ITA No.1418/Mds/2017

Prior to survey, the case was selected for scrutiny through CASS and a notice u/s. 143(2) was issued on08.08.2013 and the assessment was completed u/s 143(3) on 30.03.2015. On examination of records the Principal Commissioner of Income Tax (PCIT) noticed that during the survey it was reported that on verifying the return and the annexure, it was found that the assessee paid Rs.29 92 crores to M/s Mercado On line P Ltd (M/s India Plaza) during F.Y. 2011-12 and 2012-13 which seems to be a related enterprise of the assessee Company by virtue of two of its Directors being the Directors of M/s. India Plaza. It was found in the survey that the transactions entered into between the assessee and Mercado were bogus as the place of business of Mercado was continuously shifted and was elusive to the Department. It was opined that the genuineness of the payments has to be explained by the assessee only and after verification of payments, the entire payment of Rs.29.92 crores requires to be disallowed. However, during the assessment, the e-commerce cost of Rs.90,30,782/- was disallowed. Out of the total payment of Rs.29.92 crores, it is understood that an amount of Rs. 11,81,09,557/- pertains to AY 2012-13. As per the survey report, the :-3-: ITA No.1418/Mds/2017 transactions with the aforesaid entity were bogus. The bogus transaction was discussed during scrutiny assessment and also there was a mention that M/s Mercado to whom payments have been made is a non-traceable Company. In such a case, the entire payments claimed to have been made to M/s Mercado by the assessee required to be disallowed. If this is considered, there would be a potential tax effect of Rs.3,53,90,609/- on Rs.11.81 cr. - 0.90 cr. In view of the above, the PCIT issued a show cause notice u/s 263 on 05.01.2017.

The assessee filed its written submission. After considering the assessee’s plea etc, the PCIT held that the Assessing Officer has failed to make a complete verification with respect to bogus transactions entered into with the related party M/s. Mercado during the Accounting Year in question and has passed the assessment order without proper and diligent application of mind.

The assessment order so passed is both erroneous and prejudicial to the interest of the revenue. Accordingly, he set aside the assessment order, with a direction to the Assessing Officer to examine the exact quantum of disallowance to be made with respect to the bogus transactions entered into with the related party M/s. Mercado during the Accounting Year and pass a fresh order after granting opportunity to the assessee within stipulated time.

The assessee can furnish documents which were not available at the time of assessment in the records of the Assessing Officer for fresh examination.

Aggrieved, the assessee filed this appeal with following grounds :

:-4-: ITA No.1418/Mds/2017 “ 1. The order under section 263 is contrary to law and the facts of the case.

2. The impugned order is barred by limitation.

3. The impugned order has been passed in violation of the principal of natural justice inasmuch as the appellant was not provided with the basis of factual assertions in the show cause notice nor a copy of the survey report relied on by the Principal Commissioner of Income Tax nor a personal hearing.

4. The order under section 263 is invalid and illegal since it seeks to reopen matters considered in detail during the original assessment.

5. The learned Principal Commissioner of Income Tax ought to have appreciated that the assessment order cannot be said to be erroneous merely because another view of the matter considered in the assessment proceedings is possible.

6. The learned Principal Commissioner of Income Tax erred in reversing an assessment on issues which are already pending in appeal before the CIT (Appeals).

7. The learned Principal Commissioner erred in setting aside the assessment with a direction to re-do the assessment after conducting further enquiry.

“ From the records available before the undersigned, it is noticed that the assessee had paid totally Rs. 29.92 crores to M/s. Mercado Online P. Ltd. (M/s. India Plaza) out of which Rs. 11,81,09,557/- pertains to assessment year 2012-13. M/s. Mercado Online P Ltd., is a related enterprise of the assessee company by virtue that two directors of the assessee company being the :-6-: ITA No.1418/Mds/2017 directors of M/s. Mercado Online P. Ltd., also. During the course of survey, it was established that the transactions between the two companies are bogus for the reason that M/s, Mercado Online P. Ltd., was in the habit of shifting its principle place of business very often and was very elusive for the department. During the survey operation and during the course of scrutiny proceedings, the assessee company failed to explain the genuineness of the payments made to M/s. Mercado Online P. Ltd., The Assessing Officer while passing order u/s. 143(3) dated 30.03.2015 had very much discussed and had come to a conclusion that M/s. Mercado Online P. Ltd., to whom payment of Rs. 11.81 crore were made is a bogus and non traceable company. Such being the case, the Assessing Officer ought to have disallowed the payment of Rs. 11.81 crores made to M/s. Mercado Online P. Ltd., and brought it into the taxnet, which he failed to do. For the reasons stated above, I am of the view that the order passes u/s. 143 rws 147 on 30.03.2015 without considering the above issue is erroneous in so far as also prejudicial to the interests of Revenue. Therefore, the order of the assessment u/s. 143 passed by the Assessing Officer, Corporate Circle -6(2) Chennai, is proposed to be taken up u/s. 263 of the IT Act, 1961 to pass appropriate revision orders, after giving opportunity to the assessee.”

4.1 Thereafter, the DR submitted that it is clear from the order u/s. 263 that the assessee has not laid any material to say that the payment of Rs. 11.81 crores made to M/s. Mercado Online P. Ltd., a non-traceable company, was ever examined by the A O and the assessee has not laid any material to prove that this transaction was ever explained by it to the AO and on such explanation the impugned transaction was considered as a genuine one .

The DR further submitted that even before the PCIT, the assessee has not laid any such material. In the facts and circumstances, the conclusion

:-7-: ITA No.1418/Mds/2017 drawn by the PCIT is unassailable and hence the order passed u/s. 263 is meritorious.

Mercado Online P Ltd., is a related enterprise of the assessee company by virtue that two directors of the assessee company being the directors of M/s.

Mercado Online P. Ltd., also. During the course of survey, it was established that the transactions between the two companies are bogus for the reason that M/s, Mercado Online P. Ltd., was in the habit of shifting its principle place of business very often and was very elusive for the department. During the survey operation and during the course of scrutiny proceedings, the assessee company failed to explain the genuineness of the payments made to M/s.

Mercado Online P. Ltd.The Assessing Officer while passing order u/s. 143(3) dated 30.03.2015 had very much discussed and had come to a conclusion that M/s. Mercado Online P. Ltd., to whom payment of Rs. 11.81 crore were made is a bogus and non traceable company. Such being the case, the Assessing Officer ought to have disallowed the payment of Rs. 11.81 crores made to M/s. Mercado Online P. Ltd., and brought it into the taxnet, which :-8-: ITA No.1418/Mds/2017 he failed to do. Now, let us examine the relevant portion of the assessment order which is extracted as under :

“3. Disallowance of E -Commerce cost: The assessee has claimed expenses of Rs.90,30,787/- as e-commerce transaction costs. The AR was asked to explain the nature of the transactions. The AR explained the modus operandi of the e-business The assessee has entered in to e- commerce business with M/s. Mercado online P Ltd (hereafter referred as M/s Mercado) in which the M/s. Sulekha will post the advertisements regarding the various products or its website. Since Sulekha.com being a popular website. the customers normally log on to the website and place order for the products. The details of the bookings were forwarded to M/s Mercado, which procures and delivers the products to the customers, The payments received from the customers were paid to M/s Mercado on the basis of the invoices raised by M/s Mercado. The assessee offers discounts to customers depending on the daily, weekly analysis of competitive prices set up by leading e- sellers like FlipKart, Snap deal etc. During the A.Y 2012-13, it is seen that the assessee has made payments of Rs.11,81,09,557/- to M/s Mercado for the products sold retaining its profit margin. The question that arises is who fixes the prices of the products delivered to the customers. During the scrutiny proceedings the AR of the assessee stated that the bills are raised by M/s Mercado and payments are made by Sulekha. Hence from the above, it is clear that the prices are fixed by M/s. Mercado. The e-commerce cost claimed by the assessee is the discount offered by the assessee to the customers. The assessee claims it as e- commerce cost because it promotes its website and hence it can be equated with advertising expenses. The assessee's argument is not acceptable because of the following reasons: The prices are fixed by Mercado and the same is provided to Sulekha for putting it in website. The question that arises how can M/s. Sulekha offer discount or fix price for the goods supplied by M/s. Mercado .Profit is nothing but Selling price - Cost price of the goods. If discount is offered on cost price itself, then the result will always be loss. Nobody will do a business to make a Loss.

:-9-: ITA No.1418/Mds/2017

M/s. Mercado is a related party and two directors of both M/s. Sulekha and M/s Mercado are same. The AR was asked about the payment made to M/s Mercado of Rs.11,81,09,557/- and whether the same has been reflected in the return of income of M/s Mercado. The AR of the assessee vide his letter filed on 16.3.2015 stated that M /s. Mercado has netted the receipts received from Sulekha and the payments it had made to vendors from which it had purchased the goods, that being the reason that only its profit margin being shown as income. However theassessee has made the payments la Mercado through RTGS. Bank Payments etc. M/s. Mercado is a non traceable company and frequently it has shifted its Address. On investigation, it is seen that the company is presently in Bangalore. The AR of the assessee was asked to produce the details why the goods purchased from the Mercado cannot be more than the market price. The assessee could not furnish the details in spite of the fact that two of the directors of both the companies are the same. The assessee could not produce the market price as on the date of sale/purchase , but instead produced a few market prices list available on the internet. The e- commerce transaction cost depends upon the purchase price as well as selling price. If both the prices are increased or decreased, then the e- commerce cost changes and hence it is a dependent variable. If the purchase price is increased from Mercado (being a related party) and the sale price is reduced by giving discounts to customer, then the e-commerce cost which is actually a loss increases and the same is claimed expenses. Loss can never be claimed as expenses. The market price of the goods purchased has not been established by the assessee. Since the e- commerce transaction cost is dependent on the purchase price (market price of purchase), which the assessee is not able to establish with proof. The company M/s Mercado being a related party and also its whereabouts are not known points to the fact that there is a possibility of boosting the purchase price of the goods .The assessee gets a benefit, by the increase in e-commerce cost claimed as expenses. If we assume that M/s Mercado being a related party, the goods are purchased at less than the market price In reality, though payment was made in equal to market price, the back routing of the money is a possibility. In this case, if the goods are received at less than rnarket price, there is always a profit because the selling price is :-10-: ITA No.1418/Mds/2017 always more even after giving discount. The assessee makes a profit which is escaped from tax, and the loss is claimed as e-commerce costs. Hence, the amount of Rs. Rs.90,30,782/- claimed as e- commerce transaction costs is disallowed and added back to the total income.”

The A R of the assessee replied that M /s. Mercado has netted the receipts received from the assessee and the payments it had made to vendors from whom it had purchased the goods and only its profit margin being shown as income and the assessee has made the payments to Mercado through RTGS. Bank Payments etc. The AO taking cognizance of M/s Mercado being a non traceable company has required the AR of the assessee to produce the details why the goods purchased from the Mercado cannot be more than the market price. The assessee could not furnish the details in spite of the fact that two of the directors of both the companies are the same. The :-11-: ITA No.1418/Mds/2017 assessee could not produce the market price as on the date of sale/purchase , but instead produced a few market prices list available on the internet.

6.1 In such situation , the AO rightly concludes that the market price of the goods purchased has not been established by the assessee . Further, the AO concludes that the assessee is not able to establish the e- commerce transaction cost is which is dependent on the purchase price (market price of purchase) with proof. He deduces that the company M/s Mercado being a related party and its whereabouts being not known that there is a possibility of boosting the purchase price of the goods. If the goods are purchased at less than the market price in reality, though payment was made in equal to market price, the back routing of the money is a possibility. If the goods are received at less than market price, there is always a profit because the selling price is always more even after giving discount. The assessee makes a profit which is escaped from tax. But , thereafter the AO has not addressed this issue of the purchase price at Rs.11,81,09,557/- at all in the assessment order as there is no discussion about the impugned purchase at all in the assessment order, supra, but jumped immediately to the other issue(e –commerce cost) and concluded the assessment. Thus, it is clear that the AO has failed to apply his mind on this issue (purchase price paid at Rs.11,81,09,557/-) as to whether such transactions are genuine or not , if it was genuine transactions up to what extent they were genuine etc and the :-12-: ITA No.1418/Mds/2017 consequences thereof, which clearly attracts the scope of provisions of section 263 of the Act and hence we hold that the PCIT has correctly invoked the jurisdiction. The assessee’s appeal grounds fail .

Order pronounced on Thursday, the 09th day of November, 2017 at Chennai.