Food Combos: Whether Single-Brand or Multi-Brand Retailing?

[Akhil Kumar is a fourth year BA LLB (Hons.) student and Ayushi Singh a third year BA LLB (Hons.) student at NUALS, Kochi]

Single and Multi-Brand Retail Trading

According to paragraph 5.2.1. of the Foreign Direct Investment Policy (“Policy”), foreign direct investment (“FDI”) in the manufacturing sector is permitted in India under the automatic route. Further, a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without government approval. The present FDI Policy, as amended by Press Notes, provides for certain conditions that must be complied with by companies having foreign investment that seek to engage in single brand retail trading (“SBRT”) in India. According to the Policy, 100% FDI is allowed in case of single brand retail trading through automatic route. Only those products that are branded during manufacturing and also sold under the same brand in other countries will be covered under single brand retail. These conditions, inter alia, require that the products must be sold under a ‘single brand’, with such brand being the same as that sold globally, and that only those products that are branded at the time of manufacturing shall be covered. This is the extent of the Policy’s conditions on the ‘single brand’ under which products are sold in SBRT.

Neither the definitions section within the Policy, nor the Foreign Exchange Management Act, 1999, under which the FDI Policy is notified, define the term ‘single brand’, or even ‘brand’. Multi brand retail trading (“MBRT”) means sale of different products of different brands through one platform. 51% FDI is permitted under the government route for MBRT, subject to satisfaction of certain conditions. Therefore, it can be seen that brands engaging in MBRT have struggled to get enough foreign investments as opposed to those engaged in SBRT. It is also pertinent to note that various state governments including Rajasthan and Delhi have expressed their intention to withdraw FDI in MBRT.

The Dispute

Consider an e-commerce entity (“Seller”) that sells its own products as well as beverages of other brands on its cloud kitchen and receives FDI under SBRT. As a sales strategy, the entity sells beverages of other brands along with its food products as combos. There have been disputes as to whether this practice of selling beverages of other brands as combos would amount to MBRT.

Analysis 

It can be understood that the Seller ‘manufactures’ food products and combines it with a beverage manufactured by a different manufacturer and sells this combined product together (hereinafter “Combo”) on its e-platform, to the end customer. While a plain reading of the Policy suggests that the Combo sold by the Seller falls within the ambit of MBRT, however, certain judicial pronouncements regard such ‘combination’ as one service that is ‘indivisible into parts’.

It is pertinent to note that the transactions entered into between the customers and the Seller is indivisible. The invoice raised by the Seller is also indivisible and incapable of being split up into charges for each of the food materials separately. In State of Punjab v. Associated Hotels of India Ltd (AIR 1975 SC 1131), a constitutional bench of the Supreme Court, while examining whether the bill tendered by a hotels (which in addition to lodging also contains accounts for amenities like electricity, food, water supply etc.) can be spilt up for each service offered by the hotel, held that:

the bill prepared by the hotelier is one and indivisible, not being capable by approximation of being split up into one for residence and the other for meals. No doubt, such a bill would be prepared after consideration of the costs of meals, but that would be so for all the other amenities given to the customer. For example, when the customer uses a fan in the room allotted to him, there is surely no sale of electricity, nor a hire of the fan. Such amenities, including that of meals, are part and parcel of service which is in reality the transaction between the parties.

The Authority for Advance Rulings for the State of Uttarakhand[1] (“AAR”) evaluated a case wherein the applicant ran a sweetshop on the ground floor and a restaurant on the first floor. While determining the tax credits available to the applicant, the AAR discussed the concept of ‘composite supply’ ‘mixed supply’ and ‘bundled supply’.

– A ‘composite supply’ means a supply is comprising two or more goods/services, which are naturally bundled and supplied in with each other in the ordinary course of business, one of which is a principal supply. Essentially this means that items are sold as a combination.

– A ‘mixed supply’ means a combination of two or more goods or services made together for a single price. This means that each of these items can be supplied separately and is not dependent on any other.

– A ‘bundled supply’ is a combination of goods and/or services.

The AAR in this case held that services provided by the applicant is engaged in ‘composite supply’ with restaurant being the primary service and the sweet shop being the extension. Accordingly, the AAR held that all the items being sold by the applicant from the restaurant will be taxable at the rate of 5%. In the present case, the Combo sold by the e commerce entity should also be construed as a composite supply or a mixed supply and hence the transaction entered into by the Seller and the customers shall be considered as one comprising a single product and therefore, a single brand.

Conclusion and Suggestions

According to a discussion paper issued by the Department for Promotion of Industry and International Trade, “Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers.” The different rules for the two models have created an uneven playing field between domestic multi-brand retailers and online marketplaces. The former’s inability to access foreign funds as easily has already led to considerable consolidation.

The prevailing ambiguity over whether or not the abovementioned activity forms a “single brand” is a cause for concern. This is predominantly so in light of the vast differences that exist in the conditions imposed on SBRT and MBRT. While SBRT’s treatment is relatively liberal, those engaging in MBRT are far more strictly regulated, due to the perceived negative effects that traders such as Walmart or Tesco may have on small-scale grocery stores. A legal void with respect to the interpretation of the term “single-brand” allows the Government to capriciously initiate action against and bar foreign retailers whom they deem to be trading in multiple brands when, in fact, they may merely be engaged in retailing of sub-brands. This scope for arbitrariness creates an unpredictable business environment for foreign investors, which disturbs the ease of doing business in India.

While the FDI Policy does not reflect upon the treatment of goods sold as combination, based on the judicial pronouncements, it can be said that because products of different brands are not sold individually and are offered for sale together and because the invoice for such products are not divided for each such product sold, the Combo service being offered by the Seller should not be treated as multi-brand retail trading. However, Grofers and Big Basket also manufacture their own products and sell the same as combinations with other products (belonging to different brands), on their e-platform. Both Grofers and Big Basket have sought approval from the government for undertaking ‘food product retail trading’. Therefore, as a matter of abundant caution, the beverage manufacturer whose beverage is sold as combination should be requested to print on the labels that the said beverage is in association and only for the use/ distribution by the Seller and the beverage cannot be sold individually by any entity.

Akhil Kumar & Ayushi Singh

[1] Order dated October 22, 2018 in application number 08/2018-19

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