In a relief to Flipkart the Income Tax Appellate Tribunal (ITAT) in Bengaluru on Tuesday rejected the revenue department’s argument that discounts dolled out by the e-commerce major should be reclassified as capital expenditure.
The tax department had demanded a tax of Rs 110 crore from India’s largest online retailing platform, after it was asked to reclassify discounts and marketing spend as capital expenditure.
In its tax return, Flipkart had claimed that it needs to incur such expenses on year on year basis to sell its products and retain its market share, thus entire amount of such expenses is deductible as tax expense. On the other side, the Income tax department treated such expenditure as ‘capital expenditure’ claiming that such expenses created ‘brand value’ and ‘marketing intangibles’ for Flipkart and thus entire amount of such expenses was ‘not deductible’ as tax expense and has to be capitalized.
“This ruling is very important from the perspective that, product discounting, advertisement and marketing expenses constitute a major portion of expenses of e-commerce companies, which such e-commerce companies incur on day to day basis. This is an essential feature of e-commerce business model, primarily dealing with consumer products and selling directly to end consumers,” said Rakesh Nangi, managing partner, Nangia and Co, a tax firm.
The issue is around money spent by e-commerce companies, on marketing or dishing out discounts to customers and whether is this revenue expense or a capital expenditure?
A distinction may make all the difference for companies. Either, continue not getting taxed in India or end up paying millions in taxes.
The income tax department had questioned Flipkart for making losses year on year and not paying taxes.
The tax department—in assessment orders—had opined that the marketing and advertising (including discounts) incurred by e-commerce companies is a capital expenditure. And hence this should not be allowed to be deducted from revenues. As this is deferred revenue expenditure or capital expenditure and not revenue expenditure.
ET was the first to report on September 2 last year how Amazon and Flipkart were facing heat from the tax department over the matter.
Flipkart had first approached the Commissioner of Income Tax (Appeals) but lost the appeal in December. Later in January it had approached ITAT regarding the issue.
The ITAT panel in February had refused to stay a demand of Rs 110 crore on Flipkart, after it was asked to reclassify discounts and marketing spend as capital expenditure. The company was also asked to deposit Rs 55 crore and provide bank guarantees to the tune of Rs 55 crore by February 28 this year, ET reported on February 12. While the tax assessed is for 2015-16, similar demands may be made for subsequent years, feared tax experts.
The income tax department could still challenge the ITAT ruling in the high court, say industry trackers.
The revenue authorities demanded taxes of about Rs 110 crore on an estimated profit of Rs 408 crore for the financial year 2015-16, when Flipkart originally reported a loss of Rs 796 crore.