Published on Sat, Oct 04,2014 | 17:56, Updated at Sat, Oct 04 at 17:56Source : Moneycontrol.com
By: Nand Kishore, Partner- Tax., HSA Advocates
The rapid pace of internet penetration, the booming Indian economy and a market of 1.2 billion has given entrepreneurs an opportunity to enter the seemingly highly lucrative e-commerce market. E-commerce, as understood, in its simplest form involves buying and selling of goods by businesses and consumers over the internet. However, recent issues raised by Karnataka VAT authorities with respect to the activities of Amazon India, a major e-commerce player, are likely to serve a major blow to the growth of Indian e-commerce industry.
Recently, the Karnataka VAT authorities have contended that Amazon India is a dealer under the Karnataka VAT Act and is liable to obtain registration, pay VAT and follow other compliances.
How the industry works currently:
Typically, an e-commerce company provides an online portal wherein the sellers including manufacturers, retailers etc. advertise their products along with product specifications and pricing. A buyer visits this portal and places orders directly with sellers. The e-commerce company thereafter picks the product from the seller's warehouse and delivers the same to the buyer at his doorstep. The e-commerce company collects consideration from the buyer and remits the same to the seller after deducting a pre-decided amount, from the said consideration towards its service charges.
In order to minimize the delivery time, certain E-commerce companies, such as Amazon India, store goods of sellers in their warehouse even before an order is placed. In certain other cases, companies have set up designated centres in Metropolitans, wherein goods from various local locations are gathered, sorted out, re-packed and sent to the appropriate destination. For the purpose of transporting the goods, e-commerce companies engage local courier agencies.
The Issue:
The current dispute has arisen in case of e-commerce companies that undertake storage of goods procured from various sellers in their warehouse before dispatching them to the respective buyers. It appears that Karnataka VAT authorities are of the view that in such cases, the e-commerce companies are involved in supplying and distribution of goods and, therefore, would qualify as 'dealers'.. The authorities are also of the view that these companies act as commission agents or consignment agents of sellers. Therefore, these companies are covered under the definition of 'dealers' and, therefore, are liable to discharge VAT.
The term dealer is defined under Section 2(12) of the Karnataka Value Added Tax Act, 2005 as under (relevant portions only):
'Dealer' means 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 includes-
(c) 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;
Further, the authorities in Karnataka are insisting that e-commerce companies register their premises / warehouse and undertake other compliances like maintenance of statutory records and filing of returns.
It is a settled principle that a levy of tax would arise on occurrence of a taxable event. In the case of levy of VAT, the taxable event is sale or purchase of goods. In the case of e-commerce transactions, as explained above, the companies are not involved in sale of goods at all. The primary object of the companies is to offer online portals where the buyer and the seller meet and the buyer places an order for goods advertised on the portal. The invoice is raised by the seller on the buyer. No invoice whatsoever is issued by the e-commerce company on the buyer in respect of sale of goods. Clearly, e-commerce companies are service providers.
In the above context, reference is made to an advance ruling dated August 24, 2012 in case of Amazon Seller Services, wherein the Authority held that Amazon is providing an online retail distribution channel and the associated logistical services. Thus, it was held that Amazon is clearly a service provider.
Also, the e-commerce companies provide services on principle to principle basis to the sellers and not as agents of the sellers. As per Section 182 of the Indian Contract Act an agent means "a person employed to do any act for another or to represent another in dealings with third persons". Clearly, in the present case e-commerce companies are not engaged in sale of goods on behalf of the principals. They only provide a portal which enables the buyer to meet the sellers and thereafter provide logistic services to the sellers to ensure that the goods are delivered to the buyer. Thus, even on this count, the e-commerce companies do not qualify as 'dealers'.
The Karnataka VAT authorities have overlooked the above aspect and have proceeded on the basis that the definition of "dealer" includes even persons engaged in mere supplying or distribution of goods, without understanding the context in which the expression supply and distribution has been used. Similarly, the contention that the e-commerce companies act as agents of their sellers is clearly erroneous and without any basis.
As of now, the Karnataka VAT authorities are questioning the activities of Amazon. However, following this, other e-commerce companies, engaged in similar activities, may face questions from their respective VAT authorities in other States seeking registration of their warehouses, payment of VAT and other compliances.
If the above issues raised by the VAT authorities result in initiation of legal proceedings, it is likely to have serious repercussions on e-commerce business in India.
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