Flipkart, which was asked to reclassify discounts and marketing spend as capital expenditure and pay Rs 110 crore fine by the Income Tax Appellate Tribunal, has now challenged the IT department’s order saying that the tax cannot be levied on “fictional income”.
The panel was hearing Flipkart’s appeal against a Rs 110 crore tax demand, when the tribunal had asked home-grown e-tailer to deposit Rs 55 crore and provide bank guarantees to the tune of Rs 55 crore by February 28.
The matter is related 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 per cent at Rs 8,771.4 crore. The revenue of the company, however, grew by 29 per cent and stood at Rs 19,854.6 crore in the last fiscal.
Flipkart had said it would cause financial hardships for the company.
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,” said Percy Pardiwala, senior advocate appearing for Flipkart, reports ET.
Questioning on predatory pricing one of judges on the tribunal bench said that Flipkart received an enduring benefit by incurring losses because of aggressive discounts which include cash discounts to the extent of 3 per cent of the turnover.
In reply, Flipkart’s counsel argued that the company’s strategy was to earn profits in the long-run and the discounts were required as 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 as the price at which divisions of a company transact with each other.
“In the absence of any specific provision to counter such seeming transactions, it could be difficult to bring them under the transfer pricing net,” said Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP.
At present many online firms categorise discounts and marketing costs as revenue expenses. If the discount is explained as capital expenditure then it will liable the company to pay taxes.The tax demands will create trouble for companies such as Amazon, Snapdeal, Ola, and Uber, who also trade through discounting model.
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.