Background:

It has been reported[1] that e-commerce giant Flipkart has lost an appeal against the Income Tax department (hereinafter referred as ‘I.T. dept.’) for classification of marketing expenditure and discounts. The Commissioner of Income Tax (Appeals) after hearing the arguments opined that such marketing expenditure and discounts cannot be treated as revenue expenditure because the same are expenses done to build the brand value of the corporation and thus, should be reclassified as capital expenditure.

Creation of market intangibles:

The I.T. dept. has been reported in the media[2] to claim that apart from influencing customer behavior, such high spending by e-commerce operators results in improving the goodwill and thereby creating intangible assets for the company, and hence, should be reclassified as capital expenditure. The I.T. dept. was also reported to be of the opinion that the discounts to customers, marketing expenses and advertising expenses create market intangibles for the company and therefore, such expenses should be considered as capital expenses for the company.

If such are expenses are allowed to be treated as revenue expenditure, it shall reduce the net income of the company which in effect will show that there have been losses on the sale of products and thus, will reduce the taxable income. Flipkart had thus, been treating such expenses as revenue expenditure. However, as per the tax department’s standpoint, since the expenditure is building goodwill, it is a capital expenditure and it should not be deducted from revenue. It should rather be shown as assets in the balance sheet from which only depreciation should be deducted.

Flipkart is expected to soon challenge this ruling at Income Tax Appellate Tribunal.

Remarks:

Such ruling could also seriously impact how much e-commerce players are spending towards their marketing cost and how much discounts are availed by such e-commerce players to the final consumers.