ITAT backs Flipkart, says discounts are deductible expense

In a relief to Flipkart, the Income Tax Appellate Tribunal (ITAT) in Bengaluru on Tuesday rejected the revenue department’s argument that discounts given by the ecommerce major should be reclassified as capital expenditure and taxed as such.

The I-T Department had demanded a tax of Rs110 crore from Flipkart after it was asked to reclassify discounts and marketing spend as capital expenditure.
In its tax return, Flipkart had claimed that it needs to incur such expenses on a year on year basis to sell its products and retain its market share, thus entire amount of such expenses is deductible as expense. But the Income Tax Department treated such expenditure as capital expenditure, claiming that such expenses created ‘brand value’ and ‘marketing intangibles’ for Flipkart and thus the entire amount of such expenses was not deductible as expense and has to be capitalized.
The issue of whether money spent by ecommerce companies on marketing or dishing out discounts to customers is whether this is a revenue expense or a capital expenditure is a critical one for many companies
The income tax department had questioned Flipkart for posting losses year on year and not paying taxes.
The tax department, in its assessment orders, had opined that the marketing and advertising (including discounts) incurred by ecommerce companies is a capital expenditure, and should not be allowed to be deducted from revenues, as this is deferred revenue expenditure or capital expenditure and not revenue expenditure.
Flipkart had first approached the Commissioner of Income Tax (Appeals) but lost the appeal in December. Later in January it had approached ITAT regarding the issue.
The ITAT panel in February had refused to stay the demand of Rs110 crore on Flipkart after it was asked to reclassify discounts and marketing spend as capital expenditure. The company was also asked to deposit Rs55 crore and provide bank guarantees to the tune of Rs55 crore by 28 February this year.
The income tax department could still challenge the ITAT ruling in the high court, say experts.
The revenue authorities demanded taxes of about Rs110 crore on an estimated profit of Rs408 crore for the financial year 2015-16, when Flipkart reported a loss of Rs796 crore.