Walmart-Flipkart deal: Predatory pricing can't be foretold; US retailer need not fear competition watchdog for now

The Competition Act, 2002 has made pre-approval of acquisition by the Competition Commission of India (CCI) mandatory if the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have,— (A) either, in India, the assets of the value of more than Rs 1,000 and crores or turnover more than Rs 3,000 crores; or (B) in India or outside India, in aggregate, the assets of the value of more than $500 million, including at least Rs 500 crores in India, or turnover more than $1,500 million, including at least Rs 1,500 crores in India.

Walmart falls within the ambit of the pre-approval regime with its global turnover far in excess of the minimum prescribed. In any case with a reported turnover of Rs 19854 crore for the financial year 2017-18, Flipkart clearly exposes Walmart to the pre-approval requirement. The approval of the CCI must be sought within 30 days of the approval by Flipkart and Walmart Boards to the acquisition. The CCI has to pass its order one way or the other within 210 days of filing of application failing which the approval of CCI is deemed to have been granted.

The CCI is mandated to examine the likely effect of Walmart’s dominance in the relevant market not only from the consumer standpoint but also from competition’s. The Confederation of All India Traders (traders’ body) has already raised its pitch, fearing predatory pricing by Walmart that would put its members out of business.

The moot question however is what ‘relevant market’ is. Will the CCI take a narrow view and take the e-commerce market as the relevant market? Or will it take both online and offline markets as the relevant market? In all fairness it should take an integrated view of both the markets given the fact that at the end of the day, a consumer can obtain the same goods from either of the two.

The charge of predatory pricing leveled by the traders’ body would have stuck on Flipkart known for its deep discounts, often below cost, which explains its phenomenal losses. But Walmart is known for its prudential policy of passing on the benefits of bulk and direct purchases to its consumers. It remains to be seen if the CCI is impressed with the rhetoric of predatory pricing.

More than two decades ago, the Supreme Court wisely ruled in HLL-TOMCO merger case that predatory pricing cannot be foretold. It said, we will cross the bridge when we come to it. In that sense pre-approval is a mere formality except for those who have shown marked proclivity towards abuse of dominance earlier. Walmart hasn’t and, therefore, it has nothing to fear. Time was when Walmart felt the heat of charge of gobbling up competition mainly Mom and Pop stores but with the advent of competition from the likes of COSCO, Target and Amazon and drastic changes in the minimum wages law across the US, Walmart today is in a better position to ward off the charge of possible abuse of its dominant position.

Walmart store. Representational image. AFP.

Walmart store. Representational image. AFP.

Tax implications

Coming to its responsibility under the income tax law to deduct tax at source from the Flipkart promoters and investors, the law after the chastening effect of Vodafone experience is, if the transfer of shares is in respect of Indian operations, the seller has to deduct tax at source. In Vodafone case, Hutchison, Hong Kong had set up a company in the tax haven Camay Island which in turn had invested in Hutchison’s operating company in India which was taken over by Vodafone. Vodafone UK bought 67 percent stake in the Camay Island company and thus came to control the Indian operations through a convoluted process. India saw through the thinly disguised stratagem and slapped a notice on Vodafone to pay up the tax it ought to have deducted at source before paying Hutchison.

One does not know if Walmart is attempting something similar. Its statements that it will abide by the Indian law, on the contrary, show that it would deduct tax to the extent required by law.

Section 195 of the Income-Tax law allows Wal-Mart to put the ball in the taxman’s court. It can state in its application how much it is paying to Sachin Bansal and Binny Bansal and Softbank and others. It is for the assessing officer to sift the grain from the chaff and spell out how much is the capital gain in each one’s case. All that Walmart needs to do is to deduct tax accordingly.
(The author is a senior columnist and tweets @smurlidharan)

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Updated Date: May 11, 2018 10:43 AM

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