Regulatory Hotline: Tax demand on E-commerce companies quashed – Authorities directed to re-examine transactions

• Kerala High Court quashed demand notices under Kerala VAT law to Flipkart and Myntra on the ground that tax authorities did not satisfactorily deal with objections of Petitioners.
• High Court holds that notices were issued arbitrarily without concluding on whether transaction was an inter-state sale or intra-state or that one of petitioners was not engaged in sale of goods and that sellers on its portal were responsible for the same.
• High Court also cautioned tax department from making aggressive claims in show cause notice

The Kerala High Court (“Court”) in Flipkart Internet Private Limited vs State of Kerala quashed demands raised by Tax Authorities in Kerala against e-commerce companies. This judgment is significant in view of the fact that various state governments have sought to aggressively enforce state VAT laws on e-commerce companies.

Show-cause notices were issued by the Tax Authorities against Flipkart and Myntra. These notices stated that the companies were liable to pay tax under the Kerala Value Added Tax, 2003 since sales were effected within the state of Kerala. Further, demand notices were also issued by the Tax Authorities. Flipkart and Myntra, responded to these notices. However, the Tax Authorities rejected the objections and confirmed the demand. Parties filed a writ petition before the Court challenging the show cause notice and the demand notice.

The Court referring to precedents held that situs or location of a sale would not determine whether a sale was in the course of inter-state or intra-state sale. The Court held that the Tax Authorities had failed to establish that there was an intra-state sale. Therefore, the Court quashed the demand notice.

This judgment is a measure of relief for e-commerce companies in relation to sales tax litigation. It is pertinent to note that the indirect tax legislations have to face the challenges posed by the business models employed by e-commerce companies. Recent news reports suggest that Government is likely to come up with a policy that would address all these issues.

The link to our comprehensive analysis of the judgment is available here.