An income tax tribunal has permitted e-commerce player Flipkart to claim income tax deduction on discounts provided to customers as well as other advertising and marketing expenses, a ruling that will have a bearing on how online marketplaces treat this kind of expenses.
The ruling will also have repercussions for businesses in general.
The Income Tax Appellate Tribunal (ITAT), Bengaluru, on Wednesday ruled in favour of Flipkart’s appeal against the income tax department’s move to raise the tax demand of Rs 1.1 billion after adding its spend on discounts and advertisements and marketing to the company’s income for tax purposes for 2015-16.
The issue was whether these expenses are to be counted as capital or revenue expenditure. If these are revenue expenditure, all these sums will be deducted from income before tax liability is calculated. On the other hand, if these are treated as capex, the expenditure will be spread over four to 10 years and only a portion of the expenditure will be deducted from the company’s revenues to arrive at its tax liability.
The income tax officer had held that massive discounts provided by Flipkart create brand value and marketing intangibles and, hence, should be considered capital expenditure. Consequently, the income tax department made an addition which made Flipkart profitable to the tune of Rs 4.08 billion against a net loss of Rs 7.96 billion reported by the company in its returns.
In its tax return, Flipkart had claimed that it needed to incur such expenses, year on year, to sell its products and retain its market share and as such the entire amount of such expenses was deductible as expense.
The tribunal has accepted the claim of Flipkart of treating such expenditure as tax-deductible revenue expenditure and rejected the re-characterisation of such expenses as attempted by the income tax department.
Rakesh Nangia, managing partner, Nangia & Co LLP, said this ruling was important from the perspective that product discounting, advertisement and marketing expenses constitute a major portion of expenses of e-commerce companies. These expenses are incurred by these players on a day-to-day basis.
“This is an essential feature of the e-commerce business model, primarily dealing with consumer products and selling directly to end consumers. This being the first favourable ruling from the tax tribunal on this matter, will certainly provide relief to e-commerce companies across the country incurring similar expenditure,” he said.
This ruling also underscores the fact that a businessman can only understand the true nature and purpose of expenditure incurred in course of business and a tax officer cannot be allowed to step into the shoes of a businessman to re-characterise the nature of any expenditure, Nangia said. Earlier, Flipkart had lost an appeal against the income tax department in this case.
The Bengaluru income tax office had asked Flipkart to reclassify marketing expenditure as capital expenditure. The company approached the Commissioner of Income Tax (Appeals), Bengaluru, in August last year. The ITAT set aside the CIT (Appeals) order.business-standard.