DECEMBER 05, 2014

By Sherin Daniel

PROVISION of goods and services over an electronic network such as internet is the latest buzz called electronic commerce/e-commerce. E-commerce is certainly the most contemporary and promising business venture enabled by the growing population of internet users and online shoppers. Presently, online travel booking dominates the e-commerce market in India; however, various reports suggest that e-tailing will drive the growth in future. E-tailing has redefined the way in which commercial transactions operate. The benefits reaped by the sellers/manufacturers/distributors on the one hand and consumers on the other hand are manifold. From a sellers' perspective, benefits include inter alia an ever growing consumer pool, irrespective of the geographical barriers. Similarly, from a buyers' standpoint, benefit is to purchase goods at the most competitive price in the market. The success of popular e-commerce portals in a short span of five years in India reflects the growth potential it has in store for the future.

Having said that, it cannot be ignored that the taxation laws in India has been inevitably complex in its own way with respect to the traditional commercial transactions. Advent of e-commerce has unsurprisingly also created news related to tax issues involved in the transactions. In a recent probe by the commercial tax department in Karnataka, it has been alleged that e-tailers qualify as a 'commission agent' under the Karnataka Value Added Tax Act, 2003 (KVAT Act) and therefore, are liable to pay VAT/CST in Karnataka. To a certain extent there are perplexities involved in determining the right tax levy, liability to pay tax and remission of tax in the appropriate State. Below is an analysis of applicable taxes in the back drop of business models adopted by the e-commerce ventures in India.

Business Models Explained

Typically, the e-tailers in India operate either just as a 'marketplace' for the sellers or as a 'fulfillment by e-tailers’ based business models.

In a 'marketplace' model, the transaction is fairly simple, wherein, the sellers list their products / goods on the e-tailers' portal. The consumer places an order for the product, which is subsequently delivered by the seller directly to the consumer. The seller also issues as an invoice directly to the customer. However, the e-tailer receives consideration from the consumer, which is transferred to the seller after withholding e-tailer's portion of consideration. The e-tailer only acts as a facilitator through its portal wherein the buyers and sellers meet.

In a fulfillment model, the sellers and e-tailers share their responsibilities towards a consumer who places an order for goods. The seller stocks the inventory of goods at e-tailer's warehouse which is subsequently, picked, packed and shipped to the consumer by the e-tailer, as and when consumers place order. Typically, the seller also amends his VAT/ CST registration certificate to include the etailer's warehouse as an 'additional place of business' for sales tax purpose. Further, it is to be noted that the invoice to the consumer is issued by the e-tailer on behalf of the seller, clearly specifying the details of the seller. The seller also certifies in the invoice that the sale is effected by him and the VAT /CST will be paid by the seller and the turnover of sales will be accounted for the purpose of return filed by the seller.

Sales Tax - Contention of VAT authorities

In the fulfillment model transaction, the tax authorities contend that the liability to discharge VAT / CST is on the e-tailers. Liability to discharge tax on e-tailers is based on the following grounds:

1) E-tailers are engaged in distribution and supply of goods and, therefore, qualify as a 'commission agent' as included in the definition of 'dealers' in the state VAT laws. Hence, etailers are liable to pay VAT/CST to the government.

2) The VAT law does not enable the retailers/sellers to take space at the e-tailers warehouse as an additional place of business.

Whether E-tailer is a 'commission agent'? - An Analysis

Section 2(12) of the KVAT Act defines 'dealer' to include - 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;

Given the fact that e-tailers undertake inter alia supply and distribution of goods to the consumers, it cannot be altogether ignored that e-tailers do not come within the purview of 'commission agents'. However, it has to be noted that the services provided by e-tailers to the sellers are on a principal to principal basis, and not as agent of sellers. Further, e-tailers are not engaged by sellers as agent for sales promotion. Also, the sole activity undertaken by commission agents is supply and distribution of goods on behalf of the principal. However, e-tailers provide various services to sellers by facilitating the trade with the help of an on-line portal, which demands to be seen as a larger activity also involving packing, shipping and delivery of goods to consumers. Services provided by e-tailers cannot be attributed a restrictive meaning by classifying their services as a commission agent services.

It is pertinent to note that under section 3 of the KVAT Act, the taxable event or incidence and levy of tax is on 'every 'sale' of goods within the state', and 'sale' has been defined under section 2(29) to mean 'every transfer of property in goods by one person to another in the course of trade or commerce for cash deferred payment or other valuable consideration'

Based on an analysis of the aforesaid provisions under the Act, it can be ascertained that:-

a) Incidence of tax is 'Sale',

b) Such 'sale' is upon transfer of property in goods,

c) By one person to another

Upon validating the aforestated points in the backdrop of the fulfillment model, it can be ascertained that, the portal of the e-tailers as well as the invoice issued by e-tailers on behalf of sellers clearly identify the 'seller' along with his name and address. Hence, sale of goods happen by transfer of property in goods by the seller, having a 'place of business' in e-tailers premise in Karnataka to the consumer. Therefore, considering the fact that such sale is happening through the seller alone and the e-tailer is only facilitating the entire transaction, the e-tailer cannot be rendered liable to pay tax.

Further, section 8 of the KVAT Act which throws light on the liability of an agent to pay tax and 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 this regard, it has to be primarily noted that e-tailers are not selling goods, and the sale is only done by the sellers. Secondly, e-tailers are not acting on behalf of sellers to the consumers, whereas, etailers are providing services to the sellers which range from enabling goods to be listed in the e-portal to storing, shipping and delivering goods to consumers of sellers product. Merely, because a portion of e-tailers activity is supply and distribution of goods would not make them as 'commission agents' and thereby render them liable to pay VAT.

It was rightly pointed out in the case of Kandula Radha Krishna Rao and Ors. vs The Province of Madras AIR 1952 Mad 718 that “As no written conveyance, still less a registered deed, is necessary for the sale of goods, unlike in the case of sale of immovable property, the contract of sale is performed when the goods are actually delivered. It is because that there can be a sale by. a person who has no title to the goods that Section 27 enunciates the rule that the buyer acquires no better title to the goods than the seller had. In the case of a commission agent, the accepted mercantile practice is that he has control over or possession of the goods and he has the authority from the owner of the goods to pass the property in and title to the goods. If this is so, undoubtedly when a commission agent sells goods belonging to his principal with his authority and consent and without disclosing to the buyer the name of the owner, there is certainly a transfer of property in the goods from the commission agent to the buyer. A business which consists in such transactions can properly be described as a business of selling goods. A similar position would arise even in the case of a commission agent buying for an undisclosed principal. A commission agent doing this kind of business would, in my opinion, fall within the definition of dealer in the Sales Tax Act. Neither the definition of dealer nor of sale contemplates as a necessary condition, that the goods sold should belong to the person selling or buying. There can be a sale or purchase on behalf of another.”

Hence, it requires to be concluded based on the fact that e-tailers are not having the authority to transfer the title of goods to the buyer and the transfer of title of goods is done by the seller to the buyer by virtue of the invoice, e-tailers cannot be called as commission agents/dealers for the purpose of the discharge of tax.

However, no matter what manner the commercial tax department proposes to treat the new age commercial transaction/e-tailers, the courts of law have to throw light as to whether e-tailers are indeed nothing more but mere commission agents' and, therefore, liable for VAT or otherwise.

Separately, so far as registration of e-tailer's warehouse by sellers/retailers as an additional place of business is concerned, there is no provision under the KVAT Act which prohibit the same. However, whether a single warehouse can be an additional place of business for multiple sellers/retailers in order to accommodate a fulfillment model transaction is a question which remains to be answered.

Service Tax Implication

In a marketplace model, consideration earned by e-tailers for listing of sellers' goods in its portal qualifies as a 'service' under the section 65B (44) of the Finance Act, 1994, which includes 'any activity for a consideration'. Therefore, e-tailer is liable to discharge service tax at the rate of 12.36% for provision of service to the seller.

Similarly, in the fulfillment model, the e-tailer has multiple revenue streams in the following forms:-

a) Pick and Pack Fee - This is usually a fixed fee that is charged for every unit that is sent out to the customer.

b) Weight handling shipping fee - This fee is calculated based on the weight value assigned to the unit plus the packaging weight.

c) Delivery service fee - This fee is charged on the final price the buyer pays for the goods (including/excluding) any applicable taxes.

d) Storage fees - Storage fee is charged for all the goods stored in the e-tailer's warehouse. Storage Fee is generally assessed based on seller daily average volume in a calendar month.

Irrespective of the bi-furcation of the fee, the activities undertaken by e-tailers for the seller qualify as a 'service' for the purpose of the levy of service tax to be discharged by e-tailers.

Conclusion

While levy of service tax is clear on the services provided by e-tailers, the probe for levy of VAT on e-tailers on account of existing VAT laws is a discouragement to the trade and investments in the state. Irrespective to what the court of law has to say for e-tailer's liability to discharge VAT, the proposal by the government of Karnataka to clear the clouds by amending the KVAT Act to specifically include e-tailers in the definition of 'dealer' could come as a road block for upcoming e-tailers.