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
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