Flipkart Challenges IT Appellate Tribunal; Triggers Tax War With Govt!

Income Tax Dept. wants Flipkart to classify discounts and promotional schemes as capital expenditure.

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Flipkart Challenges IT Appellate Tribunal

Flipkart has triggered a new tax war with the Govt., which can redefine the way Internet companies are taxed. The matter is concerning Rs 110 crore tax demand on Flipkart, for the financial year 2015-16.

The verdict of this case is keenly followed by digital companies, as a new precedent will be soon set regarding taxation.

Flipkart: We Won’t Pay Tax on Fictional Income!

After Income Tax Dept. asked Flipkart to pay a tax of Rs 110 crore for the financial year 2015-16, they approached Income Tax Appellate Tribunal, challenging the tax demand.

The case is right now underway, as lawyers from both the sides are arguing and debating the said tax clauses for Internet companies.

In the regard, Flipkart has clearly stated that they won’t pay tax on fictional income.

As per TaxSutra, Percy Pardiwala, senior advocate appearing for Flipkart said,

“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,”

Flipkart Challenges IT Appellate Tribunal: What Is The Controversy All About?

Income Tax Dept. wants Flipkart to classify discounts and promotional schemes as capital expenditure; whereas Flipkart and all other Internet firms classify discounts as revenue expenses.

Patents, Intellectual Properties etc are other expenses which are termed as capital expenditure right now.

Now, in case Flipkart does classify discounts as capital expenditure, then instead of being a loss-making company, they will suddenly turn profitable, and will be liable to pay the taxes of Rs 110 crore for the financial year 2015-16 and subsequent years as well.

This case is regarding the financial year 2015-16, for which Income Tax Dept. is claiming taxes of Rs 110 crore, against profit of Rs 408 crore. Whereas as per Flipkart, they incurred a loss of Rs 798 crore for the same period.

Reclassifying discounts as capital expenditure will turn the tables for Flipkart and all other Internet firms.

Should Discounts Be Termed As Capital Expenditure?

As per tax experts, this is wrong, and Income Tax Dept. should actually reconsider their appeal for forcing Flipkart to convert discounts as capital expenditure.

The reason is, that discount just like marketing and advertisements helps a brand to create consumer trust and branding. In case discounts are classified as capital expenditure, then any brand offering discounts and promotions will think twice before launching such campaigns.

Vaibhav Parikh, a corporate lawyer said,

“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.”

On the other hand, Judges on the panel of Income Tax Appellate Tribunal argue that discounts are benefitting Flipkart, and helping them churning more revenues. Hence, they should be taxed.

Revenue counsel CH Sundar Rao said,

“Flipkart received an enduring benefit by incurring losses because of aggressive discounts (cash discounts to the extent of 3% of the turnover).”

Startups and tax firms are monitoring this case, and the verdict can set a new precedent for taxation of Internet firms. We will keep you updated, as we receive more inputs.

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