Press Note 3 of 2016: ‘Old wine in a new bottle’?

Press Note 3 of 2016 issued by the
Department of Industrial Policy and Promotion (DIPP) has had a mixed reception
– e-commerce companies have largely remained silent, while some ‘brick and
mortar’ retailers have welcomed the prohibition on influencing the price of
goods amongst others
. We believe that
pending litigation and consultations with stakeholders have led the Government
to issue the press note at this stage. A clear indication of this can be seen
from the conditions attached to the liberalization, e.g. prohibition on
influencing of sale price, restriction on exercise of ownership over inventory,
cap on the percentage of sales from one vendor or its group companies, all
cumulatively intended to ‘maintain level playing field’. While the issues raised
in the pending litigation are largely addressed by the new conditions, the
ambiguity and applicability thereof, is prone to further controversy and
possibly, further litigation.
Today’s Business Standard has published some comments in this regard (excerpted below), authored by Satyajit Gupta, Principal – Corporate/ M&A, Advaita Legal along with his colleague Sudipta Bhattacharjee, Principal – Tax Controversy Management. 
Opening up a marketplace of controversy
Government norms
allowing FDI in e-commerce marketplace have left the industry divided. Legal
and tax experts share their insights on how the guidelines will influence the
existing court cases, and tax-related litigation.
Will impact valuation
of goods: Satyajit Gupta
Press Note 3, that lays
out the rules on FDI in e-commerce for marketplace model, essentially re-states
the obvious – that FDI is not permitted in multi-brand B2C e-commerce. The
‘silver lining’ is the unambiguous recognition (for accessing FDI) granted to
e-commerce companies engaged in the ‘marketplace’ model, i.e. those players who
do not own the inventory of goods, and merely provide the IT platform for
buyers and sellers to transact, though it comes with strings attached.

Impact on the pending litigation

The litigation before the Delhi High Court hinges on the argument advanced by
‘brick and mortar’ retailers that the ‘marketplace’ model of B2C e-commerce is
nothing but multi-brand B2C retail by using complex and convoluted business
structures; the contention being that the FDI regime in relation to multi-brand
retail should apply to such e-commerce entities. The petitioners have alluded
to the fact that sales of products by such e-commerce companies have been
treated as retail sales by governments for taxing such transactions, to bolster
their contention that this is retail trade in substance.

Does the press note dilute the stand of marketplace players in relation to
indirect tax litigation?

They do not. In fact, they go a long way in strengthening the stand taken by
e-commerce companies in litigation with state VAT authorities that they are
pure service providers. As regards litigation under State entry tax laws, it
may not have any direct impact on such litigation as the main challenge there
is relating to the constitutional validity of entry tax provisions. The
perceivable impact, which may arise on e-commerce companies, is in relation to
the valuation of goods which would be subject to entry tax – given the
restriction against ‘directly or indirectly influence the sale price of goods
or services’. Since entry tax was leviable on the value at which the goods were
imported after factoring in any discount, the prohibition on influencing the price
is now likely to result in entry tax being levied on the value at which goods
are sold by the seller without factoring in any discount. This aspect would
need to be examined further in pricing strategies.

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