Tribunal rules in favour of Flipkart on Rs 110 cr tax demand

Flipkart can heave a sigh of relief after the Income Tax Appellate Tribunal (ITAT) rejected the revenue department’s demand that discounts offered by the e-commerce giant should be re-classified as capital expenditure, according to multiple media reports. 

The development comes two months after Flipkart 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) had then 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 latest order is yet to be made public by the ITAT and further details are awaited.

The ruling is likely to have far-reaching effects on the e-commerce industry as a whole, with favourable implications for the likes of ride-hailing firm such as Uber and Ola as well. These companies have been posting losses on account of classifying spending on discounts as marketing expenses and deducting it from revenues.

“This will favourably impact the cash flow of e-commerce marketplaces,” said Amit Singal, founder and chief executive of Startup Buddy, a firm which offers legal assistance to startups. "Otherwise, it would have been a burden on cash flow. Now, when these companies have real profits, only then they need to pay tax."

An email query sent to Flipkart did not elicit a response till the time of publishing this report. 

According to the revenue authorities, Flipkart was 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 had said prima facie it does not appear that the tax demand will cause any such trouble.

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. 

However, Singal says that the I-T department can still challenge the ITAT order in the high court.