In a major relief to e-commerce retailer Flipkart, the Income Tax Appellate Tribunal (ITAT) is learnt to have rejected the I-T Department’s tax demand of ₹110 crore from the company, which had claimed tax deductions on its marketing and discount expenses by classifying them as revenue expenditure.

In December 2017, the Commissioner of Income Tax (Appeals) had claimed that the expenses are capital in nature, for which deductions are not permissible under the Income Tax Act, 1961. Consequently, the I-T Department had asked Flipkart to pay ₹110 crore, claiming that the company should reclassify its discounted offerings and ad spends as capital expenditure, and not as revenue expenditure. According to it, capital expenditure has to be spread over a longer term of 4-10 years. However, Flipkart had claimed that the entire amount is deductible.

While disposing of the stay petition, the ITAT bench had asked Flipkart to deposit ₹55 crore and provide bank guarantees for a like amount by February 28. While the tax assessed is for 2015-16, similar demands may be made for subsequent years as well.

“The ruling is justified because unlike capital expenditure, which is a one-time cost, discounts are a recurring cost that are an integral part of the e-commerce business model, which entails a long gestation period,” said Riaz Thingna, Director, Grant Thornton Advisory Private Ltd.

Consumers take a long time to change their buying habits from offline to online, he said. In the interim, if it is a 20-year gestation period, e-commerce firms could see their valuations go up and changes in ownership even as the business continues to make losses.

Noting that the I-T Department is disputing the trade discounts given to customers, Gopal Bohra, Partner – Tax, NA Shah Associates LLP, said: “According to the Department, since these discounts give giving enduring benefits to the (company), such as gaining a larger market share and better brand value, it should be considered as capital expenditure.”

He, however, maintained that this ruling in favour of Flipkart, which will be binding in Karnataka on all the e-commerce players, will have a persuasive value in other jurisdictions (States) too. In August 2017, the Bengaluru I-T office had asked Amazon and Flipkart to reclassify their marketing expenditure as capital expenditure; both had approached the Commissioner of Income Tax (Appeals), Bengaluru, last August.

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