Flipkart gets interim HC relief over ₹1,100 cr tax demand

By Aman Rawat

  • 08 Feb 2023
Credit: Reuters

Walmart Inc-backed Flipkart on Wednesday won interim relief over a tax demand of more than ₹1,100 crore for assessment years 2016-17 and 2018-19. 

The Karnataka High Court granted protection to the online retailer from ‘coercive measures’ until the next hearing on 24 February, over a 31 January order by the Commissioner of Income Tax (Appeals) to make the payment within four days. 

The case pertains to Flipkart’s expenses related to marketing and employee stock ownership plan (Esop). The charges for marketing and Esop stood at around ₹4,500 crore and ₹180 crore, respectively, during the two assessment years. 

The bone of contention is whether companies such as Flipkart can leverage the loss for marketing intangibles and Esops for tax deductions, said Kumar Visalaksh, partner at Economic Laws Practice. 

“Flipkart was booking the massive discounts it offered to customers as well as its marketing costs in its profit and loss (P&L) statements. However, the tax department is of the view that these expenses should be added to its capex costs, not P&L, as the expenditures will help the company create goodwill in long term among its customers,” said Saurrav Sood, global tax advisor leader at SW India. 

Capex costs provide long-term benefits to a company, while operating expenses are costs that give returns for a shorter period of time, and are added to the P&L statements. 

Flipkart, which was required to submit the demand within four days, filed a writ petition against notices issued by CIT(A). The company submitted that the issue of capitalization of marketing intangibles was decided in its favour by Income Tax Appellate Tribunal (ITAT), Bangalore for the assessment year 2015-16. ITAT had allowed the company to treat the marketing expenses and discounts as a loss at the time. 

“On the Esop part, Flipkart, like other companies, books the difference between the market price of the stock and the issued price as an expense under employee benefits expense. It’s just a notional entry and not a real expense, hence was disallowed (by the CIT(A)),” said Sood. 

In its submission, Flipkart said previous court rulings involving Biocon, PVP Ventures and NDTV over allowability of ‘Esop cross-charges’ were in its favour. Esop cross-charges refer to the costs borne by a company with respect to its employees, which would be an actual business expense.  

“The heart of the dispute is disallowance of deduction of marketing intangibles by reclassifying them as capital expenditure and disallowance of Esop expenditure—both of which are contentious issues and appears to be a legacy issue for e-commerce operators,” said Economic Laws Practice’s Visalaksh. 

Flipkart argued that the appellate orders were passed in “gross violation of principles of natural justice” as the documents forming the basis of findings were not provided to it for rebuttal. It also claimed violation of judicial discipline and consistency as previous orders by ITAT for AYs 2012-13 to 2015-16 were in favour of the e-commerce firm on the same issues. CIT(A)’s order for AY 2017-18 also was in favour of Flipkart, it added. 

Flipkart also pointed out in his grievance that no reasonable time was provided to deposit the demand and there is no justification to provide only few days for this purpose, which also restricts the limitation period available to the assessee for preferring an appeal before ITAT.