Is discount equal to capital expenditure? My answer is a big NO.


It was reported in the leading newspapers that Flipkart has recently lost an appeal wherein the income tax department has held that the heavy discounts offered by the e-marketing companies, which are at present classified as marketing expenditure are in the nature of capital expenditure. Flipkart along with other big e-commerce companies have been classifying such expenditure as marketing expenses and have been claiming it as a deduction from revenue, resulting in losses for tax purposes on a year on year basis.  The tax authorities have taken a view that discounts offered by Flipkart are in the nature of capital expenditure as the heavy discounts being offered is nothing but a brand building exercise which has an enduring benefit. On the other hand, Flipkart claims that discount offered by them is the cost to company and must be therefore deducted from the total revenue.

The moot question here is whether discounts being offered result in brand building and can discounts be characterised as capital expenditure which results in a benefit that is of an enduring nature. Discounts are given to achieve high volumes and thus directly hit the revenue for the period in which discount is given and depending upon the accounting treatment followed it could be accounted for as a separate line item of expenditure or netted off from revenue. The tax authorities cannot sit in the chair of the businessman to decide as to what price should a product be sold at. This principle is judicially very well settled, and it is unfortunate that the officers at the lower level do not follow the decisions of the higher courts.

When examining the question, whether expenditure is capital or revenue in nature, one has to be guided by commercial considerations and only when the advantage is in the capital field, the expenditure can be disallowed applying the enduring benefit test. If the advantage consists of merely facilitating trading operations or increasing profitability or enabling the management to conduct business more efficiently, while leaving the fixed capital untouched, the expenditure is still on revenue account. In the instant case the discounts given by Flipkart are unequivocally on the revenue account.

One also needs to bear in mind that the enduring benefit is not a conclusive test for holding an expenditure as capital expenditure. The Supreme court in the case of Empire Jute Co. limited had held that there can be an expenditure which gives enduring benefit, but the expenditure can still be classified as revenue expenditure. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable.

Thus, in my view the stand taken by the income tax department in Flipkart’s case is erroneous and based on a myopic view. On one hand the Government is trying to increase its position on index of ‘Ease of doing business’ and on the other hand the tax department is ensuring that the tax payer is harassed and drawn into needless litigation. It is very unlikely that the reasoning given by the tax department would stand the test of judicial scrutiny in higher courts.



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