February 13, 2018

IT panel refused to stay the Rs 110 Cr demand on Flipkart


An income tax panel refused to stay a demand of Rs 110 crore on Flipkart, India's largest online retailing platform, after it was asked to reclassify discounts and marketing spend as capital expenditure. This may have implications for rival Amazon, which faces a similar liability, and others.

The Bengaluru-based e-commerce player has been asked by the income tax panel to deposit Rs 55 crore as tax and Rs 55 crore as a bank guarantee by February 28. While the tax assessed is for 2015-16, similar demands may be made for subsequent years. Hearings will continue in March 2018.

At present, the latest development may have serious implications on rival Amazon, which faces a similar liability, and others.

In 2017, the I-T department had asked e-commerce firms to restructure their marketing expenses under capital expenditure. E-commerce companies deduct discounts and marketing expenditure from their revenue, which leads to losses.

The I-T department has, however, clarified that money spent on marketing is not a cost but capital expenditure because it creates intangibles and potentially generates revenue.

If discounts are classified as capital expenditure, Flipkart, which otherwise incurs a loss, becomes a profit-making entity and liable to pay domestic taxes. Taxi-hailing companies Uber and Ola follow a similar model of offering discounts to consumers, although there is no such tax demand on them, the financial daily said.

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

In February, Flipkart approached ITAT and pleaded the demand be stayed, stating it would cause "financial hardships" for the company.

"To say that discounts are capital expenditure since they result in enduring benefit may be a little farfetched," Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP, told ET. "In this industry, discounts are necessary to survive and typically do not result in any enduring benefit to these companies."

Speaking in the same vein, Sanjay Sanghvi, Partner (tax) at law firm Khaitan & Co, said, "If the tax department starts treating discounts or marketing spend as capital expenditure/brand building capex, then several other businesses using similar business strategies could also come under the tax cloud."

(Credits: ET Now)

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