DIPP replies to Delhi High Court on E-commerce Model vis-à-vis India’s FDI Policy

January 11, 2016

As reported by The Economic Times, an Indian daily, the Department of Industrial Policy and Promotion (DIPP), which is responsible for the formulation and implementation of foreign investment in India, has told the Delhi High Court that the marketplace model used by e-commerce websites is “not recognized” in the country’s foreign direct investment (FDI) policy.

The DIPP reportedly told the Delhi High Court that FDI is a capital account transaction and thus any violation of FDI regulations are covered by penal provisions of FEMA (Foreign Exchange Management Act).

The current regulatory status of Consolidated FDI Policy 2015 with respect to foreign investments in the e-commerce space is as under:

  • 100% FDI is allowed under the automatic route in companies engaged in B2B e-commerce.
  • NNo FDI is allowed in companies which engage in single brand retail trading by means of e-commerce.
  • No FDI is allowed in companies which engage in multi brand retail trading by means of e-commerce.These restrictions are related to sale of goods and not services.

E-commerce Activites

The above statements made by the DIPP is a reply in furtherance to the writ petitions filed by the Retailers Association of India and the All India Footwear Manufacturers & Retailers Association in May and June, 2015 i.e. W.P.(C) 5034/2015 and W.P.(C) NO. 7479/2015 respectively, against the Union of India in the Delhi High Court alleging the circumstances of eluding FDI norms by e-commerce companies. Vide its order dated May 20, 2015, the Delhi High Court had disposed off the writ petition W.P.(C) 5034/2015 with a direction to the Respondents to consider the writ petition as a representation and deliberate upon the same with due expedition.

The said order dated May 20, 2015 can be accessed here. Meanwhile, the writ petition W.P.(C) NO. 7479/2015, besides being addressed to the DIPP, was also addressed to the Ministry of Finance, Department of Economic Affairs, the Governor of the Reserve Bank of India (RBI) and the Enforcement Directorate. On further enquiry on whether sales by e-commerce entities through the medium of internet are being taxed by the Government as retail sales, the senior counsel for the petitioners informed that the Union of India (UOI) and other State Governments have been treating such sales as sales by retailers and have raised tax on them which are however under challenge under different fora / courts, and further, as far as the Supreme Court of United States is concerned, it has held such transactions taxable as a retail sale. The Delhi High Court observed in its order dated September 23, 2015 that prima facie, it appeared that the UOI / State Governments cannot, on the one hand, for the purpose of tax, treat such sales as retail and on the other hand, for the purposes of investment, not treat the same as retail sale. The case is listed for further hearing on February 26, 2016.

The Delhi High Court has already ordered the Enforcement Directorate to investigate whether ecommerce companies have flouted FDI rules.

Meanwhile, the DIPP has pointed out in its reply to the Court that “The petitioners have failed to show that the FDI policy is arbitrary, mala fide or ultra vires of the constitution,” and has asked why the ecommerce companies haven’t been made parties to the ongoing case as any decision in the present writ is bound to have an adverse impact on them.

With the growth of the internet and app based smartphone technology, there has been a tremendous increase in e-commerce and this matter is likely to bring clarity to the issue.

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