Karnataka HC Grants Interim Relief To Flipkart Against INR 1,100 Cr Tax Demand

The Karnataka High Court on Wednesday (February 8) reportedly granted interim relief to Flipkart India on the Commissioner of Income Tax (Appeals) demand of over INR 1,100 Cr for assessment years 2016-17 and 2018-19. 

As per a CNBC report, Flipkart argued that the Income Tax Appellate Tribunal (ITAT), Bengaluru had already decided in favour of the company capitalising marketing intangibles for assessment year 2015-16, which was the main bone of contention.

Besides the issue of Flipkart capitalising marketing intangibles, the Commissioner of Income Tax (Appeals) also asked Flipkart to pay the amount over Employee Stock Ownership Plan (ESOP) cross charges. However, its counsel reportedly cited a coordinate bench ruling by the Karnataka High Court in the case of Biocon to allow ESOP cross charges. The ecommerce giant also cited the rulings of the Madras High Court and the Delhi High Court in PVP Ventures and NDTV cases, respectively, for the same.

Flipkart was given only four days to deposit INR 1,100 Cr pertaining to both the issues raised against the company. However, it filed writ petitions in the High Court against the demand notices of the Commissioner of Income Tax (Appeals), who upheld the addition of capitalising discounts as marketing intangibles, disallowing ESOP cross charges amounting to about INR 4,500 Cr and INR 180 Cr, respectively, for the assessment years 2016-17 and 2018-19.

Flipkart told the Karnataka High Court that it was not provided reasonable time to deposit the tax demand and there was no justification behind the four days timeline, which also restricted the company from appealing to the ITAT. 

As per the report, the Karnataka High Court has granted protection to Flipkart against coercive measures until the next hearing on February 24, 2023.

It must be noted that capital expenditure (capex) versus revenue expense has always been an argued topic between ecommerce companies and the Income Tax department in India.

The issue dates back to 2018 when Flipkart lost an appeal against the Income Tax department over reclassification of marketing expenditure and discounts as capex. The tax department then demanded a tax of INR 110 Cr from the ecommerce major. Later in the same year, Flipkart filed a petition with ITAT and the tribunal rejected the revenue department’s argument that Flipkart’s discounts should be reclassified as capex.

While the 2018 case is still pending, the tax department has continued to issue fresh notices to the ecommerce giant on the same issue in the subsequent years as well.