Flipkart loses appeal on Rs 110 crore tax demand, asked to pay up by Feb-end

E-commerce giant Flipkart has lost an appeal over a tax demand of Rs 110 crore in connection with the classification of marketing expenditure and discounts.

The Income Tax Appellate Tribunal (ITAT) refused to stay an earlier ruling pertaining to the practice of e-commerce companies of classifying capital spending on deep discounts as marketing expenses. 

The IT department had said that such market expenditure and discounts come under the category of capital expenditure, not costs which can be deducted from revenues. This classification would make Flipkart profitable and therefore liable to tax.

The ITAT in Bengaluru has now directed Flipkart to deposit Rs 55 crore and provide bank guarantees for the remaining Rs 55 crore by February 28, according to The Economic Times.

According to the revenue authhorities, Flipkart is liable to pay taxes to the tune of Rs 110 crore on an estimated profit of Rs 408 crore for the financial year 2015-16. India's largest e-commerce company had originally reported losses of Rs 796 crore for the same period.

Flipkart had lodged an appeal to stay the order on the grounds that it would cause "financial hardships". Turning down this appeal, the tribunal said prima facie it does not appear that the tax demand will cause any such trouble.

According to the report, while the tax assessment is only for 2015-16 in this case, the IT department may also look at subsequent years. Further hearings on the issue are expected to take place after February 28.

The ruling may have implications for other e-commerce companies such as Amazon as well as the likes Ola and Uber. These companies have been been posting losses on account of classifying spending on discounts as marketing expenses and deducting it from revenues.

Both Flipkart and Amazon had approached the Commissioner of Income Tax (Appeals) in Bengaluru, in August last year when the Bengaluru IT office directed them to reclassify the marketing expenditure as capital expenditure. 

The CIT (Appeals) hearing the Flipkart case, subsequently ruled against the company in December.

According to the I-T department, capital expenditure has to be spread over four to 10 years. As per the ruling, e-commerce companies including Flipkart and Amazon will be considered profitable and therefore liable to pay 30% tax.

Email queries sent to Amazon and Flipkart did not elicit a response till the time of publishing this report.