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Reclassification of Discounts and Marketing Expenses as Capital Expenditure: ITAT Asks Flipkart to pay 55 crores for Stay [Read Order]

Flipkart

The Income Tax Appellate Tribunal (ITAT), Bangalore bench has refused to stay a demand of Rs 110 crore on Flipkart, wherein India’s largest online retailing platform was asked to pay tax by the Revenue by disallowing the claim for expenses under the head discounts and marketing expenses incurred by the Company.

In December, the Commissioner of Income Tax (Appeals) observed that the said expenses are capital in nature for which deduction is not permissible under the Income Tax Act, 1961.

While disposing of the stay petition, the bench asked Flipkart to deposit Rs 55 crore and provide bank guarantees to the tune of Rs 55 crore by February 28. While the tax assessed is for 2015-16, similar demands may be made for subsequent years. Hearings will continue after February 28.

In the instant case, the department took a view that e-commerce companies should restructure their marketing expenses and discounts as capital expenditure and not as revenue expenditure. According to them, the Capital expenditure has to be spread over four to 10 years.

The money spent on discounting and marketing is a cost incurred to increase the company’s brand value, the department observed.

The decision would be a major setback to online trading portals like Amazon, Snapdeal etc who spend big bucks and offer discounts not just to increase sales but change customer behavior, that is, get customers to start shopping online rather than go to retail stores.

Currently, the companies treat the said expenses as revenue expenditure. The result of the decision would be that the substantial marketing costs incurred by these Companies could be deemed as being profitable and therefore liable to pay 30% tax.

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

To Read the full text of the Order CLICK HERE

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