Service Tax on Commission earned by Amway Distributors

By | April 17, 2016

Facts of the Case

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 Distributor’s sales group.

Issue

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” and hence taxable under Section 65(105)(zzb)  “Business Auxiliary Service”. Accordingly, the show cause notices were issued to the persons  for demand of Service tax from them under proviso to Section 73(1) of the Finance Act, 1994 along with interest thereon under Section 75 ibid and also for imposition of penalty on them under Sections 76,77 and 78 ibid from the assessees. .

Held

Service Tax on Sale of Goods in Retails by Amway Distributor :-

In our view, 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, in our view, 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, in our view, 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 cannot 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, 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 or purchase of certain quantum of goods from Amway.

Service tax on  monthly commission received from Amway based on the volume of the sale made by the second level Distributors appointed by Distributors i.e. the Distributor’s sales group :-

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, in our view, 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 Distributor’s sales group, these matters would have to be remanded to the Original Adjudicating Authority.

CESTAT, NEW DELHI BENCH

Charanjeet Singh Khanuja

v.

Commissioner of Service-tax, Indore/Lucknow/Jaipur/Ludhiana

JUSTICE G. RAGHURAM, PRESIDENT
AND RAKESH KUMAR, TECHNICAL MEMBER

FINAL ORDER NOS. ST/A/51818-51855/2015-CU(DB)
APPEAL NOS. ST/138,139/2009, 406, 522-525/2010, ST/257, 259, 433, 473, 502, 580, 1123, 1383, 1781
AND 1802/2011, ST/56, 86, 126, 645,/2012, ST/1723, 1724, 2337 AND 2810/2012, ST/851-854, 863-870 & ST/878/2012

JUNE  9, 2015

Kapil Kher, Senior Advocate, J.K. Mittal, Vineet Singh, Abhisek Jaju, Sidhant Jain, Nitesh Garg and Kamal Gupta, Advocates for the Appellant. Govind Dixit, DR for the Respondent.

ORDER

Rakesh Kumar, Technical Member – The appellants in the Appeal Nos. ST/138 and 139/2009, ST/406/2010, ST/522 to 525/2010, ST/257,259, 433, 473, 502, 580, 1123, 1383, 1781 & 1802/2011, ST/56, 86, 126, 645/2012 and ST/1723-1724, 2337 and 2810/2012 and the respondents (Revenue) in Appeal Nos. ST/851 to 854, 863, 864, 865, 866, 867, 868, 869, 870 and 878/2012 are the individuals or proprietary firms owned by individuals who are the distributors of Amway India Enterprises Pvt. Ltd., New Delhi (hereinafter referred to as “Amway”). 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 Distributor’s sales group.

2. According to the Department, the activity of the appellants in Appeal Nos. ST/138 and 139/2009, ST/406/2010, ST/522 to 525/2010, ST/257, 259, 433, 473, 502, 580, 1123, 1383, 1781 & 1802/2011, ST/56, 86, 126, 645/2012 and ST/1723-1724, 2337 and 2810/2012 and of the respondents in Appeal Nos. ST/851 to 854, 863, 864, 865, 866, 867, 868, 869, 870 and 878/2012 filed by the Revenue 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”. Accordingly, the show cause notices were issued to the persons mentioned above for demand of Service tax from them under proviso to Section 73(1) of the Finance Act, 1994 along with interest thereon under Section 75 ibid and also for imposition of penalty on them under Sections 76,77 and 78 ibid from the assessees. The details of duty demands made from these persons are as under :—

SI. No. Appeal Nos. Assessee’s Name Period of dispute Show cause dated Amounts of ST demand (Rs.)
1. ST/138/2009 Mr. Charanjeet Singh 1-7-2003 to 31-3-2005 20-12-2005 1,25,922/-
2. ST/139/2009 Sh. Biju John 1-7-2003 to 31-3-2005 20-12-2005 2,47,060/-
3. ST/406/2010 Varinder Dhiman July, 2003 to 31-3-2006 21-6-2007 97,747/-
4. ST/522/2010 Ashok Arora 1-7-2003 to 31-3-2006 21-6-2007 2,70,546/-
5. ST/523/2010 Pradeep Kumar 1-7-2003 to 31-3-2006 10-4-2007 1,61,160/-
6. ST/524/2010 Sarabjit Singh 1-7-2003 to 1-3-2006 10-4-2007 1,61,160/-
7. ST/525/2010 Manjeet Pal Singh 1-7-2003 to 31-3-2006 21-6-2007 1,89,819/-
8. ST/257/2011 Waraich Mktg. 1-7-2003 to 31-3-2006 11-7-2007 11,40,888/-
9. ST/259/2011 Sandhu Mktg. 1-7-2003 to 31-3-2009 11-7-2007 5,55,915/-
10. ST/433/2011 Rashmi Panchnanda 1-7-2003 to 31-3-2008 17-4-2009 9,55,023/-
11. ST/473/2011 Manjeet Kaur & Ors. 1-7-2003 to 31-3-2005 11-9-2008 15,773/-
12. ST/502/2011 Shuddhatm Bharil 1-7-2003 to 31-3-2008 24-10-2008 18,69,606/-
13. ST/580/2011 Atul Sondhi 1-4-2006 to 31-3-2008 9-1-2009 3,06,391/-
14. ST/1123/2011 Paramjeet Kaur Amol 1-7-2003 to 31-3-2006 25-9-2009 1,08,052/-
15. ST/1383/2011 Rajveer Singh 1-4-2004 to 31-3-2008 13-4-2009 6,97,800/-
16. ST/1781/2011 Shekhar Chaudhary 2006-07 and 2007-08 19-3-2009 3,75,546/-
17. ST/1802/2011 Nitesh Dixit 1-7-2004 to 31-7-2008 16-10-2008 6,63,113/-
18. ST/56/2012 Paramjeet Amole July, 2003 to March, 2005 25-9-2009 77,599/-
19. ST/86/2012 Ritti Rastogi July, 2003 to Sep.2008 24-10-2008 29,00,676/-
20. ST/126/2012 Ritu Rastogi Oct. 2003 to March, 2008 26,64,121/-
21. ST/645/2012 Kavita Sukhija 1-4-2003 to 31-3-2010 20-4-2009 2,65,403/-
22. ST/1723/2012 Ms. Sangeet 1-4-2003 to 31-3-2009 11-9-2009 39,862/-
23. ST/1724/2012 Deepak Batish 1-4-2003 to 31-3-2008 20-4-2009 1,50,006/-
24. ST/2337/2012 Sanjiv Gandhi 2003-04 to 2006-07 20-4-2009 2,02,346/-
25. ST/2810/2012 Rajan Sachdev 2003-2004 to 2007-08 20-4-2009 2,40,322/-
26. ST/851/2012 CCE v. Ajeet Singh 2006-07 to 2009-10 13-9-2010 3,70,283/-
27. ST/852/2012 CCE v. Pramila Singh 2006-07 to 2009-10 13-9-2010 2,73,978/-
28. ST/853/2012 CCE v. Sneh Lata 2006-07 to 2009-10 13-9-2010 2,21,502/-
29. ST/854/2012 CCE v. Sunita Singh 2006-07 to 2009-10 13-9-2010 3,95,522/-
30. ST/863/2012 CCE v. Shri Krishna Murari 2006-07 to 2009-10 13-9-2010 2,57,306/-
31. ST/864/2012 CCE v. Shailendra Srivastava 2006-07 to 2009-10 13-9-2010 3,52,088/-
32. ST/865/2012 CCE v. Nandita Pan- dit 2006-07 to 2009-10 13-9-2010 3,21,496/-
33. ST/866/2012 CCE v. Suchi Naithani 2006-07 to 2009-10 13-9-2010 2,18,196/-
34. ST/867/2012 CCE v. Saurabh Saxena 2006-07 to 2009-10 13-9-2010 2,35,043/-
35. ST/868/2012 CCE v. Vandana Nigam 2006-07 to 2009-10 13-9-2010 3,14,256/-
36. ST/869/2012 CCE v. Prem Lata Singh 2006-07 to 2009-10 13-9-2010 3,63,725/-
37. ST/870/2012 CCE v. Sharmila Gupta 2006-07 to 2009-10 13-9-2010 86,438/-
38. ST/878/2012 CCE v. Tarun Prasad 2006-07 to 2009-10 13-9-2010 3,08,810/-

3. The above show cause notices were adjudicated by the Original Adjudicating Authority by separate orders by which the Service tax demands as made in the show cause notices were confirmed along with interest thereon under Section 11AB and besides this, penalties were imposed under Sections 76, 77 and 78 of the Finance Act, 1994.

4. On appeals being filed to the Commissioner (Appeals) against these orders, while the appeals filed by Mr. Charanjeet Singh Khanuja, Mr. Biju John, Shri Varinder Dhiman, Shri Ashok Kumar Arora, Shri Pradeep Kumar, Shri Sarabjit Singh, Shri Manjit Pal Singh, M/s. Waraich Marketing, M/s. Sandhu Marketing, Ms. Rashmi Pachnanda, Smt. Manjit Kaur, Shri Shuddhatm Prakash Bharill, Shri Atul Sondhi, Smt. Paramjit Kaur Amole, Shri Rajveer Singh, Shri Shekhar Choudhary, Shri Nitesh Dixit, Mt. Paramjit Kaur Amole, Ms. Ritu Rastogi, Ms. Kavita Sukhija and Smt. Sangeet, Shri Deepak Batish, Shri Sanjiv Gandhi and Shri Ranjan Sachdev were dismissed, against which the present appeals have been filed, the appeals filed by Shri Ajit Singh, Pramila Singh, Sneh Lata, Sunita Singh, Shri Krishna Murari, Shri Shailendra Srivastava, Nandita Pandit, Suchi Naithani, Saurabh Saxena Vandana Nigam, Prem Lata Singh, Sharrrvila Gupta, Tarun Prasad were allowed by the Commissioner, against which the Revenue is in appeals.

5. Heard both the sides.

6. Shri Kapil Kher, Sr.Advocate, Shri J.K. Mittal, Advocate, Shri Vineet Singh, Advocate, Shri Abhisek Jaju, Advocate, Shri Sidhant Jain, Advocate, Shri Nitish Garg, Advocate and Shri Kamal Gupta, Advocate, ld. Counsels representing the Appellants in Appeal Nos. ST/138 and 139/2009, ST/406/2010, ST/522 to 525, ST/257, 259, 433, 473, 502, 580, 1123, 1383, 1781 & 1802/2011, ST/56, 86, 126, 645/2012 and ST/1723-1724, 2337 and 2810/2012 and the respondents in Appeal Nos. ST/851 to 854, 863, 864, 865, 866, 867, 868, 869, 870 and 878/2012 made the following submissions :—

(1) The persons in these cases from whom Service tax is sought to be recovered are distributors of Amway, who during the period of dispute purchased the Amway products and sold the same. They are not engaged in promoting the sales of Amway products. The Department has confirmed Service tax demands on the entire amount of sales commission received from Amway, a substantial portion of which is the sale incentives received on certain volume of purchase of the Amway products made by the Distributor from Amway during a particular month.

(2) There is no specific allegation as well as the mention of the amount of commission attributable to the sales caused by the sales group of a Distributor consisting of second level of Distributors appointed through a Distributor.

(3) During the period till 30-4-2006, in terms of Section 65(105) (zzb) service provided to a client by a “commercial concern” in relation to Business Auxiliary Service was taxable. It is only by the amendment made by Finance Act, 2006 w.e.f. 1-5-2006, that the word “commercial concern” was substituted by “any person”. In the present case, the Distributors are the individual persons. The Board vide Circular No. 62/11/03/ST dated 25-8-2003 has clarified that individual cannot be treated as a commercial concern. The Tribunal in the case of Mangal Singh v. CCE [2008] 16 STT 359 (New Delhi – CESTAT) has also held that during a period prior to 1-5-2006, individuals could not be treated as a commercial concern. In view of this, irrespective of whether the Distributors in these cases had provided Business Auxiliary Service to Amway or not, no service tax can be charged from them on the amount of commission received by them during the period prior to 1-5-2006.

(4) Even if the activity of the Distributors in this group of cases is treated as taxable under Section 65(105)(zzb) read with Section 65(19)(i) of the Finance Act, 1994, each of them would be eligible for small service providers exemption under exemption notification no.6/2005-ST dated 1-3- 200jp This plea had been specifically made before the lower authorities but the same was not accepted.

(5) In any case, longer limitation period under proviso to Section 73(1) of Finance Act, 1994 is not invokable, as there was no wilful mis-statement, suppression of facts or contravention of the provisions of Finance Act, 1994 or of the Rules made thereunder with intent to evade payment of Service tax on the part of the assessees. For the same reasons, there is no justification for imposition of penalty on the assessees under Sections 76, 77 and 78 of the Finance Act, 1994.

7. Shri Gobind Dixit, ld. Departmental Representative, defended the findings of impugned orders of the Commissioner (Appeals) in respect of Appeal Nos. ST/138 and 139/2009, ST/406/2010, ST/522 to 525, 257, 259, 433, 473, 502, 580, 1123, 1383, 1781 & 1802/2011, ST/56, 86, 126, 645/2012 and ST/1723-1724, 2337 and 2810/2012 filed by the Distributors and assailed the impugned orders of the Commissioner (Appeals) reiterating the grounds of appeals in respect of Appeal Nos. ST/851 to 854, 863,, 864, 865, 866, 867, 868, 869, 870 and 878/2012 filed by the Revenue. He emphasized that the activities of the Distributors of Amway in these cases is covered by the definition of Business Auxiliary Service under Section 65(105)zzb read with Section 65(19)(i) of the Finance Act, 1994 and in this regard, he cited the judgement of the Tribunal in the case of (a) Surendra Singh Rathore v. CCE [Final Order No. 57072-570073/2013, dated 27-6-2013] and also in the case of Mahaveer Saharan v. CCE & ST [Final Order No. 57681/2013, dated 19-9-2013] wherein the Tribunal has held that the Right Concept Marketing (RCM) of M/s. Fashion Suitings Pvt. Ltd., Bhilwara is a multi level marketing scheme and the consideration/commission received by the appellants from M/s. Fashion Suitings Pvt. Ltd. (FASL) is the result of the marketing/promotion of FASL products and hence, constitutes Business Auxiliary service provided in respect of FASL products to FASL and the same would be taxable under Section 65(105)(zzb) read with Section 65(19)(i) of the Finance Act, 1994.

Shri Dixit pleaded that ratio of these judgments of the Tribunal is squarely applicable to the facts of these cases. With regard to the limitation, he pleaded that the Distributors in these group of cases had neither declared their activities to the Department nor had obtained the Service tax registration and hence, they have suppressed the relevant facts from the department and, accordingly, the longer limitation period under proviso to Section 73(1) has been correctly invoked and penalty under Sections 76, 77 and 78 of the Finance Act has been correctly imposed. With regard to the assessee’s plea that they are not a commercial concern, Shri Dixit pleaded that since they were acting as distributors of Amway products and were engaged in promoting the sales of the products of Amway for which they were receiving the commission, each of them has to be treated as commercial concern. With regard to the Assessee’s plea for small service providers’ exemption Notification No. 5/2006-S.T., Shri Dixit pleaded that since they were providing the service of marketing or sales promotion of branded products, they would not be eligible for this exemption. Shri Dixit accordingly pleaded that in respect of Appeal Nos. ST/138 and 139/2009, ST/406/2010, ST/522 to 525, 257, 259, 433, 473, 502, 580, 1123, 1383, 1781 & 1802/2011, ST/56, 86, 126, 645/2012 and ST/1723-1724, 2337 and 2810/2012, there is no infirmity in the orders passed by the Commissioner (Appeals) and in respect of Appeal Nos. ST/851 to 854, 863, 864, 865, 866, 867, 868, 869, 870 and 878/2012 filed by the Revenue, the impugned orders passed by the Commissioner (Appeals) are not correct.

8. We have considered the submissions from both the sides and perused the records.

9. The appellants in the appeals ST/138 and 139/2009, ST/406/2010, ST/522To 525, 257, 259, 433, 473, 502, 580, 1123,1383,1781 & 1802/2011, ST/56, 86,126, 645/2012 and ST/1723-1724, 2337 and 2810/2012 and the respondents in the Appeal Nos. ST/851 to 854, 863, 864, 865, 866, 867, 868, 869, 870 and 878/2012 filed by the Revenue are distributors of Amway India Enterprises Pvt. Ltd. Amway operate their business of selling of their products under a Business Plan called Multi Level Marketing. As per the “Business Starter Guide of Amway India Enterprises Pvt. Ltd.” placed on record, they appoint Distributors, who purchase their products and sell the same at the price not exceeding the MRP fixed by the Amway. The Distributors, in turn, can sponsor a second level of distributor who are also appointed as distributors by Amway and besides selling the Amway products purchased Amway, they also promote the marketing of the Amway products. As per the Amway Business Plan, a distributor has three streams of income – (a) distributor of Amway products purchases the products from Amway at the Distributions’ Acquisition Price (DAP) and sells them in retail at the price not exceeding the MRP as fixed by the Amway. The difference between the retail sale price and the DAP is the Distributor’s profit margin, (b) Besides above, the Distributor also gets a commission from Amway from 6% to 21% depending upon the purchases of Amway products during the month for sale or for personal consumption. Thus, depending upon the purchases made by the distributor during a month from Amway, he gets a commission/bonus varying from 6% to 21%. This is the second stream of income of the distributor; (c) A Distributor also gets monthly commission on the basis of the success and productivity as defined by the products’ sales of the distributors appointed through him which constitute his sales group.

10. In these cases, the Service tax has been demanded on the gross amount of commission received by each of the Distributors (assessees) of Am- way during the period of dispute, as mentioned in the Chart in para 2 above. The department’s contention is that these commission received by the assessees from Amway are in respect of the Business Auxiliary Service provided by them to Amway. 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(105Kzzb) read with Section 65(19) of the Finance Act, 1994.

11. In terms of Section 65(105)(zzb), the service provided to a client by Commercial concern in relation to the Business Auxiliary Service is taxable. The term “Business Auxiliary Service” is defined under Section 65(19) of the Finance Act, 1994 as under:—

‘Section 65(19) : “Business auxiliary service” means any service in relation to,—

(i) Promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) Promotion or marketing of service provided by the client; or

Explanation. – For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “service in relation to promotion or marketing of service provided by the client” includes any service provided in relation to promotion or marketing of games of chance, organized, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo;

(iii) Any customer care service provided on behalf of the client; or

(iv) Procurement of goods or services, which are inputs for the client; or

** ** **’

12. According to the Department, the activity of the assessees is “pro- motion or marketing or sale of the goods produced or provided by or belonging to the client.” In our view, 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, in our view, 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, in our view, 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 cannot 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, 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 or purchase of certain quantum of goods from Amway.

13. However, 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, in our view, 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 Distributor’s sales group, these matters would have to be remanded to the Original Adjudicating Authority.

14. Another objection raised by the appellants in Appeal Nos. ST/138 and 13972009, ST/406/2010, ST/522 to 525/2010, ST/257, 259, 433, 473, 502, 580, 1123, 1383, 1781 & 1802/2011, ST/56, 86, 126, 645/2012 and ST/1723-1724, 2337 and 2810/2012 and the respondents in Appeal Nos. ST/851 to 854, 863, 864, 865, 866, 867, 868, 869, 870 and 878/2012 is that the assessees are individuals and during the period till 30-4-2006, 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. We do 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’, we are of the view that even during the period prior to 1-5-2006, the Business Auxiliary Service, even if provided by an individual to a client, was taxable. Moreover, in this group of appeals, the Appellants in Appeal Nos. ST/257/2011 and ST/259/2011 are proprietary firms who, without any doubt, are commercial concerns.

15. Another point of dispute is as to whether duty exemption under notification No. 5/2006-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-S.T. In this group of cases, the eligibility of the Distributors (assessees) for the exemption Notification No. 6/2005-S.T. has not been examined and for this purpose also, these matters have to be remanded to the Original Adjudicating Authority.

16. Another plea raised in these appeals is regarding limitation. It is the contention of the assessees that there was absolutely no suppression or mis-statement 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 assessees 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. On considering the rival submissions on this point, we are of the view merely because the assessees 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. We also take notice of the fact that in respect of appeals filed by the Revenue, the Commissioner (Appeals) after analyzing the activities of the assessees 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 v. CCE 2007 taxmann.com 532 when there is scope for doubt in the mind of an assessee on a particular issue, the longer limitation period, under proviso to Section 11A(1)cannot be invoked and in our view, 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.

17. In view of the above discussion, 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 our observations and directions in this order. The appeals filed by the Distributors (assessee) as well as those filed by the Department stand disposed of as above.

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