Service Tax - Amway, for direct sales, no Service Tax - Second Level Distributors liable to Service Tax: CESTAT

NEW DELHI: AMWAY is a company engaged in marketing and sale of consumer products and it markets its products through direct selling and for this purpose Amway appoint persons as distributors who buy the products to be marketed from Amway at Distributors Acquisition Price (DAP) and are required to sell the

same at the price not exceeding the MRP fixed by the Amway for these products. Since the Distributors get the products from Amway at DAP which is the price lesser than the MRP, the difference between the sale price not exceeding the MRP and the purchase price (DAP) is the Distributors profit margin. Besides this, as per the marketing policy of Amway, a distributor is entitled to commission based on the monthly volume of purchases made by him from Amway for direct sale to the consumers or for personal consumption. This commission is linked to the volume of purchases made by a Distributor from Amway in a month. The distributors appointed by Amway can also sponsor/enroll other persons for marketing of the Amway products. These second level Distributors enrolled through a particular Distributor can directly purchase the products from Amway for selling the same. Based on the volume of the Amway products purchased by such second level distributors, the Distributors through whom they are enrolled, are paid commission and other incentives by Amway. This commission is also paid on monthly basis. Thus, under the direct selling/multi-level marketing concept of Amway, a distributor earns monthly income in three ways

(a)   by directly selling the Amway products purchased from Amway and the difference between his purchase price (DAP) and the sale price is his profit margin;

(b)   commission received from Amway depending upon the volume of purchases of Amway products made by the Distributor during the month for sale or for personal consumption; and

(c)    monthly commission received from Amway based on the volume of the sale made by the second level Distributors appointed by Distributors i.e. the Distributors sales group.


According to the Department, the activity is covered by the definition of Business Auxiliary Service as given in Section 65(105)(zzb) read with Section 65 (19) of the Finance Act, 1994, as according to the Department, the activities of these Distributors of Amway are covered by Clause (i) of Section 65(19) promotion or marketing or sale of goods produced or provided by or belonging to the client. On the other hand, the contention of the assessees is that their activity is not covered by the definition of Business Auxiliary Service as given under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994.

Show cause notices were issued to 38 persons and service tax demands as made in the show cause notices were confirmed along with interest thereon under Section 11 AB and besides this, penalties were imposed under Section 76,77 and 78 of the Finance Act, 1994. The appeals relating to them are decided in this order. Some appeals are by assessees and some are by the Revenue.

Direct Sale, no service: The Tribunal observed, “The activity which is covered under Section 19(i) is in relation to the promotion or marketing or sale of the goods produced by the client or provided by the client or belonging to the client. This expression, would not cover the sale of the goods by a person, which belong to him, as the activity of the promotion or marketing or sale of the goods by a person belonging to him would not constitute service. The assessees in these cases are distributors, who purchase the goods from Amway at the Distributors Acquisition Price (DAP)) and sell the same in retail at price not exceeding MRP fixed by the Amway. This activity of the Distributors, cannot be treated as promotion, marketing or sale of the goods produced or provided by or belonging to the client (Amway), as the sale of the goods purchased by the Distributors from Amway is not the sale of the goods belonging to their client Amway. Once the Amway products have been purchased by a Distributor from Amway, those products cease to belong to Amway, but belong to the Distributor and sale of these goods by the Distributor would not constitute service to Amway. For the same reason, any incentive or commission received by a Distributor from Amway for buying certain quantum of goods from Amway during a month can not be treated as the consideration received for promotion or marketing or sale of the goods produced by or provided by or belonging to the client, more so, as this commission is not linked to the goods sold by the Distributor, but is linked to the goods purchased by the Distributor from Amway during a month and is in the nature of volume discount.”

Therefore, the Tribunal held that no service tax is chargeable on the profit earned by the distributors from sale of the goods in retail which had been purchased by them from Amway and on the commission earned by them every month on purchase of certain quantum of goods from Amway.

Second Level Distributors liable to Service Tax: The Tribunal found, the activity of a Distributor of identifying other persons, who can be roped in for sale of the Amway products/marketing of the Amway products and who on being sponsored by that Distributor are appointed by Amway as second level of distributors is the activity of marketing or sale of the goods belonging to Amway and the commission received by the Distributor from Amway, which is linked to the performance of his sales group (group of the second level of distributors appointed on being sponsored by the Distributor) would have to be treated as consideration for Business Auxiliary Service of sales promotion provided to Amway.

Therefore, service tax would be chargeable on the commission received by a Distributor from Amway on the products purchased by his sales group.

However, in the impugned orders service tax has been demanded on the gross amount of commission and no distinction has been made between the commission earned by a Distributor from Amway based on his own volume of purchase from Amway and the commission earned by him on the basis of the volume of purchases of Amway products made by his sales group i.e. group of second level of Distributors appointed by Amway on being sponsored by the Distributor. For quantifying the service tax demand on the commission received from Amway on the volume of purchase made by the distributors sponsored /enrolled by a particular distributor i.e. the Distributors sales group, these matters are remanded to the Original Adjudicating Authority.

Is individual a commercial concern? An objection raised by the appellants is that the assesses are individuals and during the period till 30.04.2006, service tax was chargeable only on the services provided to a client by a commercial concern in relation to Business Auxiliary Service and the individual persons cannot be treated as Business concern. Tribunal did not accept this plea as a business concern can be a proprietary firm also which is owned by an individual and there is no difference between proprietary firm owned by a person and that person. When an individual engages himself in a commercial activity, he has to be treated as business or commercial concern. Therefore, notwithstanding the fact that w.e.f. 1.5.2006 the term, commercial concern in Section 65(105)(zzb) was replaced by any person, even during the period prior to 1.5.2006, the Business Auxiliary Service, even if provided by an individual to a client, was taxable.

Small Scale Exemption? marketing or sales promotion of a branded product does not come under the exclusion category : Another point of dispute is as to whether duty exemption under notification no.6/2005-ST would be admissible to the Distributors in this group of cases. In this regard, the Department's plea is that this exemption is not applicable when the taxable service is provided by a person under a brand name/trade name, whether registered or not, of another person and in this group of cases, the Distributors have promoted the sale/marketing of branded products. This plea of the Department is not correct, as in these cases the distributors are engaged in promoting sales/marketing of the products of Amway and they are not marketing or promoting any taxable service which is branded and the brand name belongs to another person. Marketing or sale promotion of branded products by a person/ commission agent does not amount to providing branded service by him and hence, marketing or sales promotion of a branded product does not come under the exclusion category as mentioned in the proviso to notification no.6/05-ST. In this group of cases, the eligibility of the Distributors (assessees) for the exemption notification no.6/2005-ST has not been examined and for this purpose also, these matters are remanded to the Original Adjudicating Authority.

Limitation: It is the contention of the assesses that there was absolutely no suppression or misstatement of facts or deliberate contravention of the provisions of the Finance Act, 1994 or of the Rules made thereunder with intent to evade payment of service tax. The Department's contention, on the other hand, is that the assesses neither obtained service tax registration nor did they declare their activities to the jurisdictional service tax authorities nor did they file ST-3 Return and, therefore, they are guilty of suppression of relevant facts and deliberate violation of the provisions of Finance Act, 1994 and of the Rules made thereunder with intent to evade payment of tax.

Tribunal observed that merely because the assesses did not apply for Service Tax Registration or did not file ST-3 Returns or did not declare their activities to the jurisdictional central excise authorities, it cannot be inferred that this was a wilful act with intent to evade payment of service tax. Tribunal also took notice of the fact that in respect of appeals filed by the Revenue, the Commissioner (Appeals) after analyzing the activities of the assesses had taken the view that the same is not covered by the definition of Business Auxiliary Service under Section 65(105) (zzb) read with Section 65(19) of the Finance Act, 1994. When on the issue involved in this group of cases, there were two views in the Department itself, it cannot be said that on the question as to whether the activity of the assessees was taxable under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994, there was no scope for doubt. As held by the Apex Court in the case of Continental Foundation Joint Venture Vs. CCE, Chandigarh reported in 2007-TIOL-152-SC-CX when there is scope for doubt in the mind of an assessee on a particular issue, the longer limitation period, under proviso to Section 11 A(1)cannot be invoked and the ratio of this judgement of the Apex Court is applicable to the facts of these cases. Therefore, the longer limitation period of 5 years under proviso to Section 73(1) of the Finance Act, 1994 would not be invokable and duty can be demanded only for normal limitation period of one year from the relevant date.

The impugned orders passed by the Commissioner (Appeals) are set aside and the matters are remanded to the Original Adjudicating Authority for de novo adjudication strictly in terms of the observations and directions in this order.