Flipkart Gets Interim Relief Against Rs 1,100-Crore Tax Demand

Flipkart incurred losses to create an intangible asset, says the tax department in recent notices to the e-commerce company.

<div class="paragraphs"><p>The Flipkart logo is pictured on its headquarters in Bengaluru. (Photo: Reuters) </p></div>
The Flipkart logo is pictured on its headquarters in Bengaluru. (Photo: Reuters)

The Karnataka High Court has granted interim relief to Flipkart India Pvt. against a Rs 1,179-crore tax demand raised by the revenue department for assessment years 2016-17 and 2018-19.

The demand pertains to two issues—alleged creation of marketing intangible; and ESOP cross charges.

On the first, the tax department has alleged that Flipkart's sold goods at lower than cost price to establish goodwill and brand value in the long run. The department's case is that the benefit to the online buyer in the short run in the form of lower price is to create indirect benefit to the company in the long run.

These losses incurred by Flipkart were to create marketing intangible assets. So the loss to the extent created due to predatory pricing should be regarded as capital expenditure and would go to reduce the loss declared by the company in the return of income. 

The same issue was raised by the department against Flipkart for AY 2015-16, where the loss declared by the company was converted into positive income by disallowing expenditure. In 2018, the Income Tax Appellate Tribunal had dismissed the revenue department's case saying the loss declared by the company has to be accepted and the manner in which the department determined the total income was not in accordance with law.

On the allegation that Flipkart has incurred expenses to created intangible or brand or goodwill, there should be either accrual of liability or actual outflow in the form of payment, ITAT had noted. There was no such accrual of liability or actual outflow in the present case, it had pointed out. The revenue department's appeal in this case is pending before the Karnataka High Court.

Even as the 2018 case is pending, the tax department issued fresh notices to Flipkart for subsequent years on the same issue.

The second point of contention pertains to employee costs. Flipkart India's employees were given stock options in the Singapore holding company. This expense, cross charged to the domestic entity by the Singapore holding company, was rejected by the revenue department on grounds that it's not a "certain liability" and is not in relation to the company's business.

The e-commerce major was given four days to deposit the demand on account of both the issues.

On Monday, the high court noted Flipkart's argument that during the process of appeal, no coercive action can be taken. Affirming this, the high court listed the case for hearing on Feb. 24.