A probe by the Enforcement Directorate (ED) is on against e-commerce giants Amazon and Flipkart for possible violation under the Foreign Exchange Management Act (FEMA).
The latest disclosure forms are part of an affidavit given by ED to the Delhi High Court. The court is dealing with a Public Interest Litigation (PIL), which alleged that the two companies violated Foreign Direct Investment (FDI) norms by using 'name lender' companies as fronts to evade taxes.
The hearing in the PIL, filed by NGO Telecom Watchdog, is scheduled for November 19. On the previous date of hearing, the Chief Justice-headed bench, on July 30, had sought responses from Flipkart, Amazon and the ED.
The affidavit filed by ED Assistant Director MN Thyagaraj said, "The Department has already registered and initiated investigation under the provisions of FEMA, 1999, against respondent 2 (Amazon) and respondent 3 (Flipkart) to ascertain whether they have been contravening any provisions of FEMA or any Rule, Regulations, Notification, Direction or order issued in exercise of powers under FEMA....the investigation is under progress."
Responding to the allegations by the NGO, Rajneesh Kumar, Chief Corporate Affairs Officer, Flipkart said, "The Government of India has allowed 100 per cent FDI in the e-commerce marketplace model and we are fully compliant with these FDI laws." Amazon failed to respond to the questionnaire sent by DNA.
The petitioner alleged that the two companies had violated a 2016 Regulation on FDI issued by the Department of Industrial Policy and Promotion (DIPP) on March 29, 2016. As per the regulation, FDI, in business to consumer e-commerce model, was allowed for the first time, that too in the marketplace based model, but with some conditions. Marketplace model is where buying/selling to third-parties is provided.
The other model is inventory-based model where FDI is not permitted at all. This model of e-commerce allows the seller to maintain its own stock on the electronic platform.
The condition was that the sales volume from a single seller, including its group companies, cannot exceed 25 per cent of the gross sales.
According to petitioner's lawyer Pranav Sachdeva, both Amazon and Flipkart have created multiple entities known as 'name lending' companies through which they route 'hot-selling' stocks.
"Through the name lending companies, the e-commerce portals have turned into proxy sellers via their Name Lender/Controlled or Preferred Sellers," the petition stated.
Most brands on Flipkart have something in common – they got incorporated around the time when the 2016 regulation came. They are Superconnect (Shreyash Retail Private Limited), India Flash Mart (Health & Happiness Pvt Ltd), Omnitech Retail (Consulting Rooms Pvt Ltd), Trunet Commerce (Savadika Retail Pvt Ltd). The only exception is RetailNet (Tech-connect Retail) incorporated in May 2010.
In 2016-17, the total turnover was Rs 11,017 crore of the four companies (except Savadika) while only one company filed returns for 2015-16 with a turnover of just Rs 1.34 crore, the petition said.
In the case of Amazon, the petition alleged that Cloudtail India Pvt Ltd – owned by Prione Business Services Pvt Ltd - controlled 49 per cent by Amazon and 51 per cent is owned by Infosys co-founder Narayana Murthy and family through Catarman Advisors LLP – a registered seller on the online platform which is essentially an inventory-based ecommerce model where FDI is not permitted. According to the petition, to circumvent FDI cap, Amazon created Prione Business Services in which majority ownership is by an entity outside of Amazon's group.
PIL AGAINST TWO E-COMMERCE GIANTS
Allegations against Flipkart, Amazon
- A Public Interest Litigation (PIL) has alleged that the two companies violated Foreign Direct Investment (FDI) norms by using ‘name lender’ companies as fronts to evade taxes
- PIL has also alleged that the two companies have violated a 2016 Regulation on FDI issued by the Department of Industrial Policy and Promotion (DIPP) on March 29, 2016
Firms’ response
- Rajneesh Kumar, Chief Corporate Affairs Officer, Flipkart said, “The government has allowed 100 per cent FDI in the marketplace model and we are fully compliant with these FDI laws.”
- Amazon failed to respond to DNA questionnaire
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