Flipkart Says It Can’t Pay Tax On Fictional Income, Appeals Against 110 Crore Tax Demand

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Flipkart was asked to reclassify discounts and marketing spend as capital expenditure and pay Rs 110 crore fine by the Income Tax Appellate Tribunal. But it has now challenged the IT department’s order saying that the tax cannot be levied on “fictional income”, media reports suggest.


 


The panel was hearing Flipkart’s appeal against a Rs 110 crore tax demand, when the tribunal had asked homegrown e-tailer to deposit Rs 55 crore and provide bank guarantees amounting to another Rs 55 crore by February 28.


Background

The matter goes back to the financial year 2015-16. Flipkart had posted a profit of Rs 408 crore for the FY16 and reported a loss of Rs 796 crore.

In FY17, Flipkart reported a higher loss of 68 percent at Rs 8,771.4 crore. The revenue of the company, however, grew by 29 percent and stood at Rs 19,854.6 crore in the last fiscal.

Flipkart had said it would cause financial hardships for the company.


What are the accusations?

According to Percy Pardiwala, senior advocate appearing for Flipkart,

“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,”

Questioning on predatory pricing one of judges on the tribunal bench said that Flipkart received a consistent benefit in spite of incurring losses because of aggressive discounts which include cash discounts to the extent of 3 percent of the turnover.

Replying to this, Flipkart’s counsel argued that the company’s strategy was to earn profits in the long-run and the discounts a necessary part of its marketing strategy.

The tribunal also raised the issue of transfer pricing as the discounts by Flipkart India benefitted another party — Flipkart Internet, to which the Flipkart brand and internet platform were transferred from Flipkart India. Transfer price is defined is the price at which divisions of a company transact with each other.

However, Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP opines that with the absence of any specific provision to counter such seeming transactions, it could be difficult to bring Flipkart under the transfer-pricing net.


Why is this case important?

At present many online firms categorise discounts and marketing costs as revenue expenses. If the discount is explained as capital expenditure then the company is liable to pay taxes for that. The tax demands will create trouble for companies such as Amazon, Snapdeal, Ola, and Uber, who also trade through discounting model.

“Asking for significant discounts to be treated as a 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, a corporate lawyer at Nishith Desai Associates.

There have been previous cases on companies over advertisements but the ruling has always been in the favour of the companies.

In December last year, the govt has brought new rules for e-commerce companies, which also bans the practice of dual MRP for the same product for all packaged items.


Also Read: 4 Major Challenges That Every Indian E-Commerce Company Is Facing Nowadays!