GOQii's dispute with Flipkart centres around two of its wearables devices.

An Indian startup's legal challenge against a Walmart unit claiming losses caused by sharp discounting of its products is winning support from other online sellers, in what is shaping as a key test of how the giant retailer operates in the country.

The legal tussle between GOQii, a seller of smartwatch-type health devices, and Walmart's Flipkart, comes just months after government imposed stricter rules for foreign investment in e-commerce that were aimed at deterring such sharp discounts.

GOQii sued Flipkart last month in a Mumbai court, alleging its devices were discounted by around 70 per cent to the retail price, much more than the two sides had agreed to, legal documents related to the case showed.

The case will next be heard on Friday. Flipkart has denied any wrongdoing, saying it was not responsible for any discounts which are only determined by third-party companies which sell on the e-commerce website.

The legal spat has brought to the fore concerns long raised by small traders. They say companies such as Flipkart and Amazon.com deeply discount some products by burning billions of dollars to lure customers onto their sites in the expectation that they will also buy other goods.

"It will set a precedent if the final decision goes against Flipkart for predatory pricing," said Salman Waris, a partner at TechLegis Advocates & Solicitors.

"Small traders' associations and other startups may take other marketplaces adopting deep discounting strategy to court."

The GOQii case could snowball. The All India Online Vendors Association told Reuters in a statement it plans to file a plea to join GOQii's case against Flipkart on behalf of 3,500 online sellers it represents.

Flipkart said in a statement it takes legal compliance seriously and was compliant with Indian law. "We are engaged with the supplier to come to a swift resolution," it said.

With a 19 per cent market share, GOQii was the second-biggest player in India's wearables market last year, data from industry tracker IDC in December showed. The market is dominated by China's Xiaomi, with Samsung a small player.

GOQii Versus Flipkart

GOQii's dispute with Flipkart centres around two of its wearables devices that allow users to track exercise measurements, such as the number of steps walked, or heart rates.

GOQii's Chief Executive Vishal Gondal told Reuters the firm signed an agreement in September with a Flipkart unit, allowing it to sell the two GOQii devices at a price not below Rs 1,999 and Rs 1,499, after discounts.

But GOQii last month found Flipkart's website showed the devices on sale for Rs 999 and Rs 699 rupees. The company wrote to Flipkart, saying it was giving "unauthorized" discounts and resorting to "predatory pricing", violating the agreement, its legal notice showed.

Flipkart was just a business-to-business wholesale venture which sells good to re-sellers, its law firm, Shardul Amarchand Mangaldas, said in its response that was seen by Reuters.

That's central to how Flipkart operates - as government prohibits foreign e-commerce firms from stocking and selling their own inventory on its websites, their wholesale units purchase goods in bulk and sell them to re-sellers. Those re-sellers use Flipkart's own website to sell some of those goods to customers.

Flipkart does not control or influence prices which were determined by such re-sellers, the law firm said, adding that it reserves "the right to institute actions for defamation, both civil and criminal".

GOQii's Mr Gondal, however, said he was in possession of WhatsApp messages and e-mails from Flipkart's employees that show the company was aware and involved in discounting products on its website. He declined to share those with Reuters, citing the ongoing court case.

Mr Gondal said about 500,000 device orders were cancelled after GOQii's other customers accused the startup of cheating them when they saw cheaper prices on Flipkart. The company was also assessing monetary damages it plans to seek from court.

"It's a matter of survival. It's not easy to take on a multi-billion-dollar company," Mr Gondal said.

In interim relief, the court has ordered the sellers, who are also party to the case, to remove the wearable devices from the Flipkart platform.

Walmart's Struggles

Government's new foreign investment rules introduced in February were troubling for Flipkart and Amazon as they barred companies from selling products via firms in which they have an equity interest and stopped them from pushing their sellers to sell exclusively on their websites.

The policy was aimed at deterring deep discounts and helping small traders, but it shocked Walmart as it had just months ago closed its biggest deal by investing $16 billion in Flipkart.

Swadeshi Jagran Manch (SJM), the economic wing of the Rashtriya Swayamsevak Sangh, the ideological parent of PM Modi's ruling party, said on Tuesday the government must investigate online discounts.

"We are standing behind any small trader, businesses who suffer online," said Ashwani Mahajan, SJM's co-convenor, adding it would discuss GOQii's legal case against Flipkart with government officials.