Can’t pay tax on fictional income: Flipkart to Income Tax Appellate Tribunal

Flipkart has challenged the income-tax department’s demand that it reclassify marketing expenses and discounts as capital expenditure, arguing before the Income Tax Appellate Tribunal (ITAT) that tax cannot be levied on “fictional income”.
The panel was hearing Flipkart’s appeal against a Rs 110 crore tax demand for the financial year 2015-16 following the tax department’s reclassification order that could impact how other consumer internet startups, too, are taxed.
“Nothing in the IT Act mandates that a product has to be sold at a particular price, and revenue not earned (by virtue of giving discounts) cannot be treated as capital expenditure,” said Percy Pardiwala, senior advocate appearing for Flipkart, according to a summary of the hearing sourced from Taxsutra, a website focused on tax-related matters.
The revenue department’s rationale for requiring Flipkart India’s marketing expenses and discounts to be capitalised is that the company enjoys high valuations driven by its marketing intangibles despite its recurring losses and low fixed-assets base.
Can’t pay tax on fictional income: Flipkart to Income Tax Appellate Tribunal Revenue counsel CH Sundar Rao said Flipkart India, despite being a wholesaler selling popular goods, reported losses at the gross-profit level. He argued that the company’s motive was to capture market by creating marketing intangibles in terms of customer base, brands and trademarks, which, in turn, resulted in its high valuations.
“Flipkart received an enduring benefit by incurring losses because of aggressive discounts (cash discounts to the extent of 3% of the turnover),” said Rao, leading to one of the judges on the tribunal bench asking if this was a case of “predatory pricing”.
Flipkart’s counsel argued that the company’s strategy was to earn profits in the long-run and the discounts were required as part of its marketing strategy. Flipkart did not immediately respond to queries from ET.
Currently, companies categorise discounts and marketing costs as revenue expenses, while spending on a patent, machinery or building, among others, is categorised as capital expenditure. If discounts are classified as capital expenditure, Flipkart, which otherwise incurs a loss, could become a profit-making entity and would be liable to pay domestic taxes. 
Revenue authorities have demanded tax of about Rs 110 crore on an estimated profit of Rs 408 crore for the financial year 2015-16, whereas Flipkart reported a loss of Rs 796 crore for that period. The online marketplace currently has a post-money valuation of $14.2 billion. The tribunal has reserved its judgement in the case.
Tax and startup industry experts say a verdict against Flipkart could fundamentally change how internet and other companies in India are taxed.
“Asking for significant discounts to be treated as capital expenditure because it helps in building the brand, will affect anyone who offers discounts, even infrequently, including offline players. In fact, this can mean that any expense towards brand-building will be capital expenditure,” said Vaibhav Parikh, corporate lawyer at Nishith Desai Associates. “In the past, there were such cases made against some companies over advertisements, but several have been ruled in favour of the company.”
Another issue brought by the revenue counsel was of transfer pricing — which is the price at which divisions of a company transact with each other. Rao said the discounts by Flipkart India benefitted another party — Flipkart Internet, to which the Flipkart brand and internet platform were transferred from Flipkart India. “In the absence of any specific provision to counter such seeming transactions, it could be difficult to bring them under the transfer pricing net,” said Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP.

Trending News

Xiaomi pumps Rs 3,500 crore into India business

BlackBuck's out to raise $150M in new round, valuation likely to jump to $800 M

With $21 Billion, Azim Premji among world’s top philanthropists

Google agreed on a $45M exit package for India-origin exec accused of sex abuse

HSBC pegs Zomato's valuation at $3.6 billion ahead of Swiggy

PayU in talks to acquire online payments firm Wibmo for $60M

Quikr close to acquiring refurbished goods marketplace Zefo in all-stock deal

What life looks like after a layoff from an IT company

General Atlantic & Tencent pump in another Rs 80 Cr in ed-tech unicorn Byju's

US Senator Warren vows to break up Amazon, Facebook, Google

SoftBank extends tech reach with $5B Latin American fund

Coverfox hits the market to raise $50M in new financing round

Cognizant faces US lawsuit alleging discrimination

China's Huawei sues US over federal ban on using its products

Germany's Delivery Hero acquires Zomato's UAE biz, invests in India ops

Ahead of deadline, debate rages on e-commerce policy

Flipkart rejigs reporting of Myntra-Jabong head Amar Nagaram

Grofers raises fresh funds from existing investors, valuation hits $425M

Sachin Bansal invests Rs 250 Cr each in NBFCs Altico & IndoStar: Report

I-bank Wolet files $800k suit over Flipkart’s Upstream buy

Flipkart FY18 revenue up 50%, but losses grow 5x

Pine Labs in talks to acquire Amazon-backed Qwikcilver for $100M

India can become 2nd largest 5G market in 10 years: Huawei

Alibaba rival Pinduoduo seeks to raise $1.5B

Twitter Q4 revenue grows to $909M as video ad sales surge

Mukesh Ambani to invest $1.4B in West Bengal, will help e-commerce expansion

Etail may lose Rs 40,000 crore, retail to get a 3rd of it

Steadview Capital invests $74M in Ola valuing it at around $6B

Byju’s ups revenue to Rs 490 cr in FY 18, losses drop by half

Agritech startups Sabziwala and LivLush merge their business under new entity Kamatan

Avail Finance lands $17.2M from Matrix Partners & Ola, Freecharge and Flipkart founders

RBI suggests tax sops, self-regulation to build fintech space

Swiggy hires new CEO for its Access Service, gets new CFO

Logistics company Delhivery registers 44% increase in FY17 revenues

WeWork to acquire one of the oldest social networks, Meetup

Qualcomm rejects Broadcom's $103 billion offer

EasyRewardz gets $2 million Series-A funding

'Anemic' iPhone 8 demand drags Apple shares lower

Lending platform Lenden Club gets Rs 3.5cr in Equity Investment

On festive sales, Flipkart says 65% clients from Tier-II cities