In what could come as a huge relief to ecommerce major Flipkart, the income tax appellate tribunal (ITAT) rejected the government’s demand to reclassify discounts as capital expenditure and not claim tax deductions on it.
According to a Mint report, the Bengaluru bench rejected the Rs 110 crore tax demand made by the IT department from Flipkart for FY16.
This is a major boost for Flipkart as it can continue to classify marketing and discount expenses as revenue expenditure and claim tax deductions on them.
The entire issue revolved around whether the money spent by Flipkart on marketing and discounts counts are revenue expenditure of capital expenditure.
The Income TAX (Appeals) commissioner, in December last year, said that these expenses were capital in nature and deductions for them were permitted under the Income Tax Act, 1961. According to the tax department, the spending created intangibles such as brand value for Flipkart.
However, Flipkart’s argument was that it needed to incur these expenses to be able to sell products and maintain its market share in the competitive ecommerce market. It further said that it cannot pay taxes on fictional income, an argument accepted by the ITAT.
The IT department can now further challenge the ruling by ITAT in the high court.
Some experts are of the opinion that the ruling is justified because discounts are a recurring costs with a long gestation period unlike capital expenditure, which is a one-time cost. It is also likely to set a precedent for taxation of ecommerce firms and comes as a major relief to other ecommerce companies incurring similar costs.
Economic Times quotes TC Meenakshisundaram, MD of IDG Ventures, which is an investor in Flipkart, as saying that while this decision is not likely to drive the behavior of entrepreneurs in chaling their business, it will keep tax treatment in line with business reality.