New Delhi: The income tax appellate tribunal (ITAT) on Wednesday rejected the government’s move to reclassify discounts offered by Flipkart as capital expenditure, a move that would have prevented the online retailer from claiming tax deductions.

This is a shot in the arm for e-commerce companies, which now classify discounts on products as tax-deductible advertisement and marketing expenses.

The Bengaluru bench of the tribunal rejected the Rs110 crore additional tax sought by the tax department from Flipkart for the year ended 31 March 2016, lawyers and tax analysts said.

Flipkart argued that it needs to incur such expenses every year to sell its products and retain its market share and thus the entire amount is tax-deductible. The tax department, on the other hand, had treated such expenses as capital expenditure and said such spending created brand value and marketing intangibles for Flipkart.

ITAT pronounced its judgement on Wednesday and the final order has not been uploaded on its website. The tax department has the option of challenging the order in a higher court. Tax officials said the department cannot offer a comment as the order has not reached them yet.

Rakesh Nangia, managing partner at law firm Nangia & Co., said the ruling will set a precedent for taxation of e-commerce firms. “Product discounting, advertisement and marketing expenses constitute a major portion of expenses of e-commerce companies, which such e-commerce companies incur on a day-to-day basis. This is the first favourable ruling from the tax tribunal on this litigative matter and will certainly give relief to e-commerce companies across the country incurring similar expenditure," he said.

Flipkart did not respond to an email seeking comment.

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