VAT
Problems In E-Commerce Transactions – Amazon’s Karnataka Case Study (A
Potential Noscitur Principle Issue)
E-commerce transactions in India are gaining
popularity at the very fast pace majorly due to its attributes of ease of
shopping, good discounts, social media integration, cash on delivery mode of
payment etc. The Industry is all set to grow and beat the records considering
the recent show of strength of several E-commerce companies of India Inc in
there capability to raise funds as well.
The fact that the domain of e-commerce is so new
and upbeat there may be several laws that were essentially made to govern the
conventional sales and purchase system which are required to made upbeat or
atleast clarified by revenue authorities / judiciary to ensure that this richly
growing industry is certain in terms of taxation.
One such case of tax hurdle has recently cropped
in case of Amazon in Karnataka. Before we proceed with the legal discussion,
the facts are important.
E-Commerce
Transactions – Types
E-commerce transactions in India can be of several
natures. Two well known are as under,
A)
It may be a
case where an E-com Company may buy the products in bulk in discount and then
sell the same at cheaper price by the help of its online e-commerce platforms. Though
this is not a general model considering the cost and working capital pressure
that may be involved.
B)
The other
method which is more popular and
frequently adopted method is to act as platform facilitator between the sellers and the buyers. In
this model, E-com company does not purchases the inventory but instead asks the
third party sellers to sell by using its platform to the customers who log on
the E-com company’s platform. Importantly, the e-com company charges commission
/ delivery charges and undertakes to perform packing and marketing / delivery
of the goods to the customer. Obviously, the invoices are made at the end of
independent sellers directly to the customers.
KEY
NOTE :- Crucially, in order to ensure quick availability of products with
E-commerce company these sellers are required to amend their registration to
include the space/premise with E-com Company as “Additional place of business
(if already registered with main office”) based on rent / lease/ Service
agreement entered into between the sellers and E-commerce Company. In Delhi it
is undertaken by amendment filed with DVAT department in DVAT – 07.
From
this premise of E-com Company then all the goods are gathered, processed /
packed and sent for delivery to the customers either independently or vide
dedicated courier agencies.
Issue
As reported by several leading business times, it
is learnt that the issue mainly 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;
Key Note :- Similar provisions may exist in most of the states in regard to the definition of dealer and this fact can raise serious concerns in regard to taxability in all states on ecommerce industry if the matter is not expeditiously addressed by the revenue authorities. In Delhi (unlike Haryana) incidentally, section 2(1)(j), do not refer to supplying, or distributing in the main part of the definition though portion relating to commission agent is similar even in delhi.
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.
“The
tax authorities do have a point when they question how so many vendors have
registered the Amazon warehouse as an additional place of business; even if
there is no rule capping the number of vendors that can declare a particular
place as an additional place of business, the spirit of the law would suggest
that such a registration be backed by some staff, infrastructure and so on.” –
Financial Express
Legal
Discussion
Four
Key Points,
a) It is learnt that in the current matter, advance
ruling dated August 24, 2012 in case of Amazon Seller Services was obtained
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.
b) Karnataka VAT
authorities may need to consider that without even first going in the aspect of
who is dealer and who is not, it is essential that the incidence and taxable
event must exist to tax such a transaction. Taxable event is sale / purchase.
c) Thirdly, the
whole issue gains force on the assumption / hypothesis that E-commerce Company
acts as ‘Agent’. 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.
d) Noscitur
Principle:- Despite this it is crucial to understand that
the Karnataka VAT Authorities may push to consider the E-commerce Companies
therein as dealers without the definition of agent since the dealer itself
covers the activity of supplying / distributing the goods for any valuable
consideration.
But the Karnataka VAT authorities
may have overlooked is the Noscitur Principle which has used in catena of
judgements to identify the harmonious law applicable to the transaction.
In above the case, the word
‘supply’ and ‘distributing’ should be interpreted in light of ‘Noscitur a
Socii”. Several case laws might be resorted by the E-commerce companies,
a)
CIT Bangalore
v. BC Srinivasa Shetty 1981 (2) SCC 460
b)
M/s Bhayana Builders (P) Ltd. & Others Versus
CST, Delhi & Others 2013 (32) S.T.R. 49
(Tri. - LB) etc
Nonetheless, it seems
that the issue might be stretched on the aspect of interpretation specially in
those states where the definition of dealer itself covers supply and
distribution in the main portion of definition irrespective of agency.
--
About the Author:
CA Ankit Gulgulia
(Jain)
Author
is Practicing Chartered Accountant in New Delhi/NCR and specialising in
Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at ankitgulgulia@gmail.com
or at +91-9811653975
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