Flipkart won respite from the Income-Tax Appellate Tribunal in Bengaluru, which rejected the revenue department’s contention that discounts doled out on India’s largest online retailing platform two years ago should be reclassified as capital expenditure and are not eligible for deduction. 

The tax department had demanded Rs 110 crore from Flipkart as tax assessed for 2015-16 after reclassifying the discounts and spending on marketing as capital expenditure. The company told the tribunal that it cannot pay taxes on ‘fictional income’ and the ITAT accepted the argument, according to people familiar with the matter. 

“This development will keep tax treatment in line with business reality as the tax department was attempting to attribute artificial income to be taxed,” said TC Meenakshisundaram, MD of IDG Ventures, one of Flipkart’s investors. “However, I don’t think this decision is likely to drive the behaviour of entrepreneurs to scale their businesses — it just avoids unnecessary litigation.” 

I-T CAN CHALLENGE RULING IN HC 
Flipkart, which is being wooed by Walmart and Amazon, had claimed that expenses incurred to sell products and retain market share are tax-deductible. However, the incometax department said such spending should be treated as capital expenditure because it created brand value and marketing intangibles for Flipkart and that it was not deductible and had to be capitalised. 

“This ruling is very important from the perspective that product discounting, advertisement and marketing expenses constitute a major portion of expenses of ecommerce companies,” said Rakesh Nangia, managing partner of Nangia & Co, a tax firm. “This is an essential feature of ecommerce business model, primarily dealing with consumer products and selling directly to end consumers.” 

Flipkart did not respond to queries sent by ET. The income-tax department can challenge the ITAT ruling in the high court, industry experts said. The issue is whether the money spent on marketing and dishing out discounts to customers is a revenue or capital expenditure. The distinction could make all the difference between Flipkart remaining untaxed in India or paying millions of rupees in taxes. 

The tax department — in its assessment orders — was of the opinion that such spending is deferred revenue expenditure or capital expenditure and not revenue expenditure. The department had questioned Flipkart for making losses year on year and not paying taxes. 

Flipkart objected to the tax department’s rationale that discounts should be treated as capital expenditure, which in normal situations include building expenses or land and machinery costs. Companies categorise discounts and other marketing expenses as revenue expenses in their books. Percy Pardiwala was the lawyer for Flipkart, while CH Sundar Rao represented the revenue department. 

ET was the first to report on September 2 how Amazon and Flipkart were facing the heat from the tax department over the matter. The revenue authorities demanded taxes of about Rs 110 crore from Flipkart on an estimated profit of Rs 408 crore for 2015-16, when the company had reported a loss of Rs 796 crore. 

Flipkart first approached the Commissioner of Income Tax (Appeals) but lost the appeal in December. In January, it approached the ITAT regarding the issue. The ITAT panel refused to stay the demand of Rs 110 crore on Flipkart in February and asked the company to deposit Rs 55 crore and provide bank guarantees for the remainder by February 28, ET had reported on February 12. #casansaar (Source - Economic Times)