On Wednesday, the Income Tax Appellate Tribunal (ITAT) in Bengaluru struck down the Indian tax authority’s contention that discounts offered by Flipkart, as well as its advertising and marketing costs, should be classified as capital expenditure.
The authorities had been demanding taxes of around Rs 110 crore from Flipkart for the financial year 2015-16, whereas the company claimed nil liability because it had posted a loss of almost Rs 800 crore.
The ruling, which is being seen as a significant win for e-commerce companies more generally, upheld Flipkart’s claim that such expenditure should be treated as tax-deductible, Livemint reported.
Flipkart had argued that it needs to incur such expenses each year to sell its products and retain its market share, and therefore the entire amount should be tax-deductible.
Rakesh Nangia, managing partner at law firm Nangia & Co., said the ruling would set a precedent for the taxation of e-commerce firms in India.
“Product discounting, advertisement and marketing expenses constitute a major portion of expenses of e-commerce companies, which such e-commerce companies incur on a day-to-day basis,” he said.
“This is the first favourable ruling from the tax tribunal on this litigative matter and will certainly give relief to e-commerce companies across the country incurring similar expenditure.”
He added that the ruling also underscores the importance of the fact that only a businessman can understand the true nature and purpose of expenditure incurred by him in the course of his business.
Meanwhile, a tax officer “cannot be allowed to step into the shoes of businessman to re-characterise the nature of any expenditure”.
Sourced from Livemint; additional content by WARC staff