In a relief to e-commerce firms, the Income Tax Appellate Tribunal (ITAT) in Bengaluru on Wednesday invalidated the revenue department’s treatment of their marketing expenditure as well discounts offered to retain market share as asset-creating capital expenditure that are “not deductible” from income.
In a relief to e-commerce firms, the Income Tax Appellate Tribunal (ITAT) in Bengaluru on Wednesday invalidated the revenue department’s treatment of their marketing expenditure as well discounts offered to retain market share as asset-creating capital expenditure that are “not deductible” from income. The ITAT decision came in the case of Flipkart, which was asked last year to pay Rs 110 crore as tax for FY16, while the company claimed nil tax liability as it had posted a loss of close to Rs 800 crore.
The tribunal has accepted Flipkart’s plea that it needed to spend on discounts and marketing every year to retain market share and such revenue expenditure could be legitimately deducted. The tax department, the home-grown e-commerce firm said, was levying tax on “fictional income”.
The latest ITAT order seeks to settle the debate over defining capital expenditure for the purpose of taxation. However, the department, which has sent notices on similar grounds to other e-commerce firms like Amazon also, is unlikely to budge and is likely to challenge the tribunal’s order in the appropriate high court.
The department had claimed that such expenses created “brand value” and “marketing intangibles” for Flipkart and so has to be capitalised.
“This ruling also underscores importance of the fact that a businessman can only understand the true nature and purpose of expenditure incurred by him in the course of his business and a tax officer cannot be allowed to step into the shoes of businessman to re-characterise the nature of any expenditure,” Rakesh Nangia, managing partner, Nangia & Co, said.
He added: “This ruling is important from the perspective that product discounting, advertisement and marketing expenses constitute a major portion of expenses of e-commerce companies, which such e-commerce companies incur on day-to-day basis. This is an essential feature of the e-commerce business model, primarily dealing with consumer products and selling directly to end consumers.”
While e-commerce firms, even as they are making losses, have been burning cash with the aim of expanding customer base and earning profits in the long run, the tax man viewed these moves with suspicion. The aggressive discounts and marketing costs, the tax man feels, are part of their brand-building exercise and such spending should be classified as capital expenditure, which is taxable. The counsel for the tax department also alleged that such aggressive discounts were tantamount to “predatory
The reclassification of the marketing expenses and discounts as capital expenditure allowed the tax man to add about Rs 1,000 crore to Flipkart’s bottom line and ask for tax of Rs 110 crore.
While e-commerce firms have challenged such tax demands at various fora including commissioners (appeal) and the tribunals, the Bengaluru ITAT ruling is the first one that went against the department, a tax practitioner said.