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12 August, 2016
Amidst much anticipation, the Department of Industrial Policy and Promotion released Press Note 3 (PN3) in March of 2016 (now incorporated in the Consolidated FDI Policy dated June 7, 2016) to clarify its stand on the subject of foreign direct investment (FDI) in e-commerce. This post is an attempt to highlight certain issues arising out of PN3 in relation to the use of the term ‘services’, which may not only impact the e-commerce players but may also extend to other businesses which utilize electronic platforms.
Through the release of PN3, the Department clarified its stance on two key aspects: (a) FDI is permitted in the ‘marketplace model of e-commerce’ under the automatic route (i.e., without prior approval); and (b) FDI is prohibited in the ‘inventory based model of e-commerce.
By way of explanation,
The term “marketplace model of e-commerce” has been defined to mean – providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
The term “inventory based model of e-commerce” has been defined to mean – an e-commerce activity where the
inventory of goods and services is owned by the e-commerce entity and sold to consumers directly.
The term “e-commerce” has been defined to mean, buying and selling of goods and services including digital products over digital and electronic network.
As such, given the definition of ‘e-commerce’, sale of goods and services over a digital and electronic network by an entity with FDI, will bring it within the purview of PN3, giving it a very wide import. Accordingly, an entity with FDI engaged in sale of goods and services and utilising, for instance, a website or a mobile app, would need to be comply with the provisions of PN3.
Interestingly, whilst sale of services (along with sale of goods) has been included in the definition of ‘e-commerce’ and ‘inventory based model of e-commerce’, in a separate provision of PN3, sale of services through e-commerce has been placed under the automatic route (i.e., without prior approval). This appears to imply that if the sale of services is either along with sale of goods or connected to it, then sale of owned inventory through e-commerce is likely to be prohibited.
However, if sale of services is being undertaken on a standalone basis, then the same is likely to be permitted. But no parameters have been prescribed to determine what is a permitted ‘sale of services’ activity and what type of activity will be prohibited. This results in ambiguity in cases where a sale of service requires an incidental sale of goods.
The following examples highlight this conundrum:
- Will an entity providing photography services (and having FDI), which sells services online and owns an inventory of incidental goods/ material required by it to provide the services to its customers (such as album covers for the photographs, photo paper, etc.) be considered to be engaged in an inventory based model of e-commerce, or can it be said that in order for an entity to provide photography services, it is necessary for it to own equipment and material which will enable it to deliver the services along with the photographs/ albums to its customers and therefore the activities described above are merely a sale of services?
- Similarly in the case of an entity with FDI, which sells salon services through an e-commerce platform (such as a mobile app), will such entity be considered to be engaged in an inventory based model of e-commerce if it were to own an inventory of the products it uses during the course of providing services (such as creams, masks, shampoos, etc.), or will such an entity be construed to be engaged only in sale of services, since the sale of goods is merely incidental to its primary function of providing such services?
To take this example a step further, what if the salon entity were to also sell beauty products to its customers on the same platform, would that be considered a permitted activity?
The above are a few examples of many others where there is likely to be an element of sale of goods in a business which primarily engages in a sale of services. Given this ambiguity, there may have to be a case by case analysis to evaluate whether the activity proposed to be undertaken will attract the provisions of PN3.
Conclusively, though well-intentioned, the provisions of PN3 have resulted in some ambiguity on the issue of FDI in e-commerce. It would be interesting to note how the industry practice in this regard evolves in light of the view of relevant authorities in specific matters and issues, going forward.
For further information, please contact:
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas
cyril.shroff@cyrilshroff.com
