Flipkart Receives Rs 1,700 Crore Income Tax Relief
Income foregone cannot be assumed as expenditure to create goodwill, says the ITAT in Flipkart's case.
In a major relief for the e-commerce platform, the Bengaluru bench of the Income Tax Appellate Tribunal allowed Flipkart India Pvt.’s appeal against a Rs 1,700 crore tax demand made by the revenue authority for assessment year 2017–2018.
At the heart of the issue were two demands: disallowance of expenditure incurred on the issue of the Employee Stock Option Scheme and addition of money spent on the creation of market intangibles. While Flipkart reported a loss of Rs 139 crore for the year, these additions brought the tax liability of the company to Rs 1,723 crore.
The Commissioner of Income Tax (Appeal), while allowing the disallowance of ESOP charges, directed the department to delete the addition made on account of the creation of market intangibles.
Consequently, both Flipkart and the revenue department filed appeals with the appellate authority.
According to Flipkart, the decision of the commissioner to disallow the ESOP expenditure amounting to Rs 15.5 crore was erroneous as the expenditure is actual and not fictitious, contingent or notional as claimed by the tax department. It’s not a service provided by the holding company to its subsidiary. There’s no profit element involved in the transaction, and is therefore not liable to be taxed under the Income Tax Act, it said.
Flipkart’s holding company had issued shares to the employees of its Indian subsidiary and had cross-charged the same to the Indian subsidiary. According to the revenue department, as the issuance of shares is an expense that should be borne by the holding company, Flipkart could not claim a tax deduction for the expense incurred.
The appellate court relied on the judgment of the Karnataka High Court to determine the issue. In the case of Biocon Ltd., the court had expanded the definition of 'expenditure' to include any loss accrued on the issuance of shares. Such an expense, according to the court, is therefore eligible to be deducted from the total taxable income of the company
Revenue Department’s Appeal
The department appealed the decision of the commissioner to disallow the addition of Rs 1,708 crore incurred by the company in the creation of market intangibles.
According to the revenue department, Flipkart deliberately incurred losses for creating market intangibles and goodwill. The company sold the goods at a price less than its cost price, thereby incurring a loss of around Rs 161 crore.
This loss must be considered a capital expenditure and therefore be deducted from the loss incurred from the return of income, it said.
The ITAT relied on its own ruling in Flipkart's case for the assessment year 2015-2016 to hold that the revenue department cannot assume the income forgone as an expenditure incurred on creating intangible or goodwill. The department cannot ignore the book results of the company and resort to a different methodology for calculating the income of the company, it said.
Earlier this year, the Karnataka High Court, too, on a similar issue for different assessment years had granted interim relief to Flipkart in a tax demand of Rs 1,100 crore.