Last year, 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. according to them, the money spent on discounting and marketing is a cost incurred to increase the company’s brand value.
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.
In February, while disposing of the stay petition, the same bench asked Flipkart to deposit Rs 55 crore and provide bank guarantees to the tune of Rs 55 crore.
With this order, the income tax department will now have to refund the Rs 55 crore tax that was deposited by Flipkart and revoke the bank guarantee pursuant to the February 6 order of the ITAT.
Before the authorities, the Assessee explained that sale through the electronic form (e-commerce) as against the traditional sale through retail outlets had just begun in 2012. Since e-commerce was in its nascent stage, it was very difficult to create trust and awareness of sale through e-commerce. The volume of sales was very low. One of the ways to increase the volume of sales and attract buyers to e-commerce was to offer discounted prices. The higher volume of sales will lead to economies of scale.
The division bench comprising Judicial Member N. V Vasudevan and Accountant Member JASON P BOAZ observed that “One cannot proceed on the basis of the presumption that the profit foregone is expenditure incurred and further that expenditure so incurred was for acquiring intangible assets like brand, goodwill etc,”Subscribe Taxscan AdFree to view the Judgment