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Ecomm Taxation: Flipkart Not ‘Sale’ing Anymore!

Published on Thu, Nov 26,2015 | 22:22, Updated at Thu, Nov 26 at 22:34Source : 

By: Pratik Shah, Partner, and Jigar Doshi, Associate Director, SKP Business Consulting

Online shopping has been instrumental in changing how we perceive a marketplace today. It has almost eliminated the typical hassles associated with brick-and-mortar stores such as the time required, limited options and availability of products, and there’s the added convenience of delivery at your doorstep. With the numerous online shopping portals in the country, even people from the smallest towns in India are just a click away from products from across the world.
Most e-commerce portals (Flipkart, eBay, Amazon, etc.) in India usually follow the ‘marketplace model’ where these portals do not act as a principal seller but only provide online marketplace services and act as a ‘facilitator to sales’ made by the principal seller to the prospective customer. The principal seller in this case is understood to be the service receiver and the online portals, being the service providers, are mere ‘facilitators to sales’ who provide marketplace services to the principal seller.

Given the evolving nature of the marketplace model, many State Revenue Departments have challenged the supply flow of goods prevalent in this model, disagreeing with the role of online portals as mere ‘facilitators to sales’. The Revenue Department usually perceives that the supply of goods in a normal online sales transaction is conducted in two phases – firstly, at the point of confirmation of an order by a customer, online portals purchase the ordered goods from the seller on a principal-to-principal basis, and in the second phase, the sale is executed between the online portal and the end customer. Thus, according to the Revenue’s contention, tax must be levied and collected in each of the two phases – from ‘seller to portal’ and ‘portal to customer’, with the relevant indirect taxes such as State Value Added Tax (State VAT), Central Sales Tax (CST), excise and service tax.

In the recent case of Flipkart Internet Private Limited versus State of Kerala, through its Finance Secretary, WP(C). No. 5348 of 2015, the contentious issue of the supply flow of goods in e-commerce marketplace model sales was heard and opined upon by the Kerala High court.

The petitioner (Flipkart Internet Private Limited) filed a writ petition challenging the demand raised by the VAT authorities of Kerala with respect to the sales executed by its registered seller (WS Retail) to customers located within the state of Kerala. The petitioner is an online service provider facilitating sale and purchase transactions through its online portal. Once a customer identifies a product on the portal, the petitioner’s registered seller would be notified, who would then execute the sale with the customer. Applicable taxes on the sale are directly paid by the registered seller. The petitioner was of the view that it was not engaged in the business of sale or purchase of goods but merely facilitated the transaction through its online portal. The online portal notifies its registered sellers of the products intended to be purchased by a customer, after which the seller would raise an invoice on the customer and make suitable arrangements for the delivery of goods. Furthermore, on the basis of the nature of the sale transaction, whether intra-state or inter-state, the registered seller would collect and pay taxes either under the local VAT Act or under the CST Act, as applicable.

Contrary to the above, the Revenue was of the view that the petitioner enters into an agreement of sale with the customers located in Kerala to sell products. These sales were considered intra-state sales as it was alleged that the product was delivered to the customer in Kerala from an online portal whose situs could be traced to Kerala. Since an online portal could be seen as an intangible shop, the situs of the sale would be in Kerala where the agreement to sell was made and accordingly, liable to Kerala VAT. The Revenue held that the petitioner entered into an agreement of sale with its customers who were located in Kerala. Furthermore, the sale was perceived to be a local sale, invoking the concept of intangible shop sales in the state of the customer (Kerala, in this case). Even though the petitioner was not the seller of the product, it could be liable to VAT as an online portal could be seen as an intangible shop. Accordingly, they were also liable to pay a penalty equivalent to twice the amount of tax payable.

The Kerala High Court recognised that in the impugned orders, the concerned authority did not enter a specific finding supported by reasons as to whether there was any sale effected by the petitioner. The impugned orders only acknowledged that there were transactions of sale that resulted in goods being delivered to customers in Kerala but failed to further investigate the matter or find that it was the petitioner who had effected those sales.

Furthermore, there is no consideration of the specific contention of the petitioner that the sales in question were effected by sellers who were registered on its online portal, and that they were inter-state sales on which the respective sellers had paid applicable taxes under the CST Act. Also, WS Retail, the seller responsible for effecting a majority of the sales to customers in Kerala through the petitioner’s online portal, is registered as a dealer under the Kerala VAT (KVAT) Act. In the returns submitted by this seller, they had conceded a nil taxable turnover under the KVAT Act on the contention that their entire sales turnover pertained to inter-state sales effected by them. Under these circumstances, the findings in the impugned orders reflect a patent non-application of mind by the concerned authority and also smack of arbitrariness. Therefore, the writ petition was allowed.

Leveraging the understanding provided in this case regarding the supply flow of goods in marketplace model transactions, it can be concluded that e-commerce portals only provide trade aggregation services to the principal seller who in turn sells the goods/services to the end customer. Also, e-commerce portals are not to be construed as an ‘intangible shop’ executing end-customer sales. Following this decision, some of the State Revenue Departments including those of Uttar Pradesh, Kerala and Delhi[1] have made the disclosure of monthly sales data mandatory for vendors registered with online portals. The Delhi VAT Rules were amended by a Notification No. F.3(20)/Fin(Rev-I)/2015-2016/dsvi/906 dated November 12, 2015, to separately recognise sales made ‘through’ e-commerce portals to the end consumer within their returns-filing procedures. This thereby acknowledged the fact that e-commerce sales are only facilitated by online portals and the sales in the process are executed with the end customer and not with e-commerce portals.  

This comprehensive understanding of the supply chain in the e-commerce marketplace model can also be extended to other online aggregator services ranging from radio-cab services to food and travel services. This decision can be invoked for discerning the minute differences between aggregation services by portals to service providers and the normal supply of goods/services from a principal seller (service providers) to end customers. Also, this may have an impact on the levy of 1% VAT Tax Deducted at Source (TDS)[2] as proposed (in review phase) by the Karnataka government for payments made by online portals to the principal sellers.   

With the advent of Goods and Services Tax (GST) in the near future, the clarification provided above will certainly play a crucial part in influencing the GST law at its initiation and in deciphering how e-commerce marketplace services will be perceived in the new regime. The GST regime, basing its taxability on mere supply of goods/services and not sales or provision of services, may recognise e-commerce marketplace services separately. If the understanding provided in the abovementioned case sees the light of day in the GST regime, online portals will benefit greatly as they may opt for registration only in the states where they have presence through a permanent establishment such as a warehouse, depot or a branch office.

[1] New tax tangle for e-commerce firms: Karnataka proposes a 1% levy on payments by buyers to sellers,
2 Ibid.


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