By Archishman Chakraborty, Symbiosis Law School, Pune.
In September, 2014, the Tax authorities in Karnataka barred Amazon India from selling electronics and several other products from its warehouse in the State, by cancelling the licences of third-party merchants who were working with the local unit of the world’s largest online retailer. Notice was served to more than a hundred third party merchants disallowing them to register Amazon’s warehouse as their ‘additional place of business’.
Amazon India provides a service known as ‘Fulfilled by Amazon’, based on its ‘Marketplace Model’ wherein the company uses cutting edge technologies like data mining and critically examines the available data to predict consumer behaviour, the preference and popularity of certain products and gets the sellers to store his products in one of the warehouses provided by Amazon in India, known as ‘Fulfilment Centres’, thus helping them in the quick delivery of goods in case of same-day or next-day deliveries. To ensure the quick availability of products, the sellers are required to amend their registration to include the companies’ ‘Fulfilment Centre’ as ‘an additional place of business’, based on the agreement entered into between the sellers and the e-commerce companies.
The dispute in Karnataka revolves around the ‘Fulfilled by Amazon’ services by the company, wherein the tax authorities in the State opine that in such cases, e-commerce companies are involved in supplying and distribution of goods, and therefore would qualify as dealers u/s 2(12) of the Karnataka Value Added Tax Act, 2003. They are also of the view that these companies serve as consignment agents or sellers, thereby bringing them within the definition of the term ‘dealers’. The Tax Authorities in Karnataka also assert that the companies register their premises/warehouse and undertake other compliances like maintenance of statutory records and filing of returns.
Section 2(12) of the Karnataka Value Added Tax Act, 2003 defines a ‘dealer’ as “any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration” and interalia includes:
“a commission agent, a broker or del credere agent or an auctioneer or any other mercantile agent by whatever name called, who carries on the business of buying, selling , supplying or distributing goods on behalf of any principal”.
The Karnataka Tax Authorities contend that these E-commerce companies qualify within the meaning of the term ‘dealer’ as commissioning agents, and hence are liable to pay VAT to the State Government u/s 3(1) and (2) of the Act. However, before venturing into the Tax Department’s contention regarding the same, one primary question that needs to be answered is regarding the existence of the ‘taxable event/incidence of tax’ itself.
According to S. 3(1) of the Act, a taxable event can be described as “every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act.” Thus, to constitute a taxable event, ‘sale of goods’ by a registered dealer or a dealer liable to be registered is a sine qua non. The word ‘sale’ has been defined in S. 2(29) of the Act and interalia includes:
“a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration”. Explanation (3) to the provision further elucidates that two independent sales or purchases shall be deemed to have taken place, when interalia, the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser. Therefore, it becomes clear from the above stated proviso that in case a selling agent is employed, the law shall consider two independent sales – one from the principal to the selling agent, another from the selling agent to the buyer.
In the instant case, the ownership of the goods is in no time with the company and remains with the TPM throughout and hence it is not possible for them to transfer the ownership to the end consumers. The E-com companies like Amazon India, it must be understood, are merely charging a commission for storage and logistics services, and do not qualify as selling agents for any particular TPM. Thus, the purchase of goods via Amazon, cannot be said to constitute two distinct instances of sale. Also, it must be noted, that the E-commerce companies can in no way be said to be selling any goods to the end consumer as it is the TPM who are raising the invoice on end consumers and paying applicable taxes to the government u/s 29 of the Act, and hence it is they who can be termed as ‘dealers’. If E-com companies are brought within the purview of the term ‘dealer’, they will be required to raise a tax invoice on the customer as well, which will quite preposterously lead to the double taxation of the same item. Besides this, the E-commerce companies will also be liable to pay a service tax, for their logistics services. This will raise the cost of the product by a great deal, and shall not only prove to be an unfair tax burden on the consumer, but also affect the future of the e-commerce industry, as faced with the high cost, the consumer might shy away and look for cheaper, local alternatives.
The Tax Authorities of the State argue that the E-commerce companies qualify as ‘commission agents’ u/s 2(12) of the Act. Such a claim becomes essential to prove, for the Tax Department, to make the companies liable to pay the tax under S. 8 of the Act. S. 8 casts a specific liability on an agent to pay taxes for any sale affected by him S. 8 states that “every person who, for an agreed commission or brokerage, buys or sells on behalf of any principal who is a resident of the State shall be liable to tax under this Act at the rate or rates leviable thereunder in respect of such purchase or sale, notwithstanding that such principal is not a dealer or that the turnover of purchase or sale relating to such principal is less than the minimum specified in sub-sections (1), (2) and (3) of Section 22.” Here, it is relevant to refer to the Indian Contract Act, 1872 which defines an agent as a “person employed to do any act for another or to represent another in dealings with third persons.”. In the present case, Amazon India is merely providing a platform which enables the buyer to meet the sellers, and thereafter, if needed, provide logistic services to the sellers to ensure that the goods are delivered to the buyer in quick time and cannot be described as an agency, representing the TPM with no contract between the parties to that effect.
However, even if it may appear difficult to describe the E-commerce companies as selling agents, the tax department might find some ground in their attempt to describe Amazon as a ‘dealer’, without trying to explain their role as that of a ‘commissioning agent’, as a dealer itself includes the activity of supplying or distributing the goods for a payment, commission or any other valuable consideration.
It is understood that in this case the laws of the country have failed to keep pace with the new age business model that enable a faster, convenient and nationwide access to customers for sellers, especially for small and medium businesses, at significantly low costs. The perils of the lack of a codified legislation regulating the E-commerce industry can be far reaching, causing inconvenience to all the stakeholders involved in the matter which include the Government, consumers, sellers, the E-Commerce companies themselves, and last but not the least, every citizen and non-citizen of India, who holds an interest in the country’s development.
Moreover, VAT and Sales Tax is a State subject, and hence laws differ from state to state. “Similar provisions may exist in most of the other states in regard to the definition of dealer and this fact can raise serious concerns in regard to taxability in all states on e-commerce industry if the matter is not expeditiously addressed by the revenue authorities.” In Delhi, for instance, the S. 2(1)(j) does not refer to supplying or distributing in the main part of the definition, though the part relating to commission agents bears similarity with the law in Karnataka, while the law in Haryana does. It would be interesting to note in this regard that going by the FDI rules, a foreign entity cannot invest in multi-brand retail in India. Therefore, if by the interpretation of law, if Amazon is identified as a dealer, it would not be able to continue its business in India.
Such diversity in the provisions of VAT laws from State to State can prove hugely problematic for the Companies in enforcing compliance. If the interpretation of law differs from State to State, the situation might be that in certain places VAT will be payable, and in others it will be not. It is imperative that a consensus be reached among states regarding the applicability of VAT laws to the E-commerce companies and if they could be described as ‘dealers’. Also, a uniform floor rate of taxation has to be decided on, to prevent bitter competition among States to seek investments from the E-com companies, which in turn might hit revenue collections of the respective states.