The Income Tax Appellate Tribunal has set aside the revenue department’s Rs 109.52 crore tax demand on Flipkart, ruling that discounts doled out by the e-commerce major should not be accounted for as capital expenditure.
The income tax department will now have to refund the Rs 55 crore tax that was deposited by Flipkart and revoke the bank guarantee pursuant to the Feb. 6 order of the ITAT. The tax department, while raising the demand, had treated the Rs 796 crore loss incurred by Flipkart for the assessment year 2015-16 as capital expenditure.
The tax department had contended that the loss in the form of discounts offered to customers is intended to build up brand value or primacy in the online market.
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 etcBengaluru Bench of ITAT
The company had pleaded before the ITAT that since e-commerce was in its nascent stage, it was very difficult to create trust and awareness of sale through this mode. “The volume of sales was very low. One of the ways to increase volume of sales and attract buyers to e-commerce was to offer discounted prices,” it said.
However, the IT department said it should be treated as capital expenditure since it helped in creating brand value and “marketing intangibles” for Flipkart.
As per the Feb. 6 interim order passed by the ITAT, Flipkart was asked to deposit 50 percent of the tax demand and furnish bank guarantees for balance demand for a six month period.
“In order to give effect to the ITAT's favourable ruling, the revenue authorities will have to refund the demand already paid by Flipkart,” said Nangia & Co. Managing Partner Rakesh Nangia. “This refund shall come with interest at half a percent per month for each completed month.”
The revenue authorities may choose to file appeal against the ITAT order before the High Court, but that shall not in anyway impact the refund of tax demand already paidRakesh Nangia, Managing Partner, Nangia & Co.
Flipkart was fighting its case with the income tax department regarding tax treatment of substantial expenditure incurred by it in the nature of product discounts, advertisement and marketing expenses.
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.