Whether commission on sale is covered under the category of Business Auxiliary Services?

Case:- LALIT DONGRE VersusCOMMISSIONER OF CENTRAL EXCISE, NASHIK

Citation:- 2015 (40) S.T.R. 486 (Tri. - Mumbai)

Brief facts: - All these appeals are filed by individual appellants and raised the same question of law and facts accordingly, they are being disposed of by a common order.
The relevant facts that arise for consideration in all the appeals are the appellants are distributors for M/s. RMP Infotec Pvt. Ltd. which is a binary network company having business model, that they enroll Direct Independent Distributors to promote the company’s packages and canvas for enrolment of new members to create a chain of distributors who are as per agreement under compulsion to buy products from shopping section of M/s. RMP every month; M/s. RMP issues payment advice to each distributors indicating therein commission payable to the distributors. It is the case of the Revenue that appellants are not independent traders but commission agents of M/s. RMP and hence they are liable to pay service tax on the amount of commission received. As they are nothing but commission agents and covered under the category of Business Auxiliary Service under Section 65(19) of Finance Act, 1994, show cause notices were issued to all appellants for recovery of service tax liability, interest thereof and for imposition of penalties. All the show cause notices were contested on merits as well as on limitation. Adjudicating authority after following due process of law, confirmed the demands raised with interest and also imposed penalties. Aggrieved by such an order, appellants preferred appeals before the first appellate authority. The first appellate authority after granting personal hearing to the appellants rejected the appeals.

Appellant’s contention:- Learned Counsel appearing on behalf of appellants would draw their attention to the facts of the case as also the agreement entered by appellants with M/s. RMP. It is his submission that appellants cannot be considered as commission agents as it does not place on record any evidence to show that M/s. RMP is providing service on goods which is being promoted or marketed by appellants. It is his submission that appellants are distributors as can be ascertained from the fact that appellants are permitted to appoint only two distributors. It is his submission that the appellants has privity of contract of appointing distributors is limited only to two persons and any amount of purchase made by these two distributors on which appellants received commission has to be considered, in extreme case is an amount paid as commission to the appellants and submits that appointment of subsequent distributors by the distributor appointed by the appellants has no bearing on the functioning of the appellants. He would submit that definition of Business Auxiliary Service is not covering the arrangement like the one which is in this case. He would submit that the Budget Changes of 2010-11 it brought into service tax net the multilevel marketing system hence these activities are to be covered after 2011, which is an indicative factor that the services rendered by the appellants during the period 2007-08 onwards to 2011-12 are not taxable. He would then submit that the decision of this Tribunal in the case of Shri Surendra Singh Rathore and Smt. Chanda Bohrav. Commissioner of Central Excise, Jaipur - 2013-TIOL-1582-CESTAT-Del = 2014 (34)S.T.R.147 (Tri. - Del.)and Shri Mahavir Saharan- 2013-TIOL-2055-CESTAT-Del may not be applicable as in those cases the products, were being manufactured and supplied by M/s. Amway. He would distinguish the cases, it is his submission that in the cases in hand M/s. RMP are direct selling marketing company of various entities like Tata-AIG, Reliance Infocom and Whirlpool, etc. The business transactions between appellants and M/s. RMP are in respect of purchase of goods for further sale which cannot be covered under the category of business auxiliary services. He would extensively submit that the judgments of the Tribunal in the cases as cited above are distinguishable on the facts. It is his submission that the penalties imposed on the appellants also are incorrect and needs to be set aside as the appellant had bona fide impression that they are not liable to pay service tax liability.

Respondent’s contention:- Learned DR on the other hand after taking them through the same agreement entered by appellants submits that the said agreement clearly enforces the condition that appellants are required to purchase goods every month to worth of Rs. 10,000/-. He would submit that the distributors appointed by the appellants and further distribution by those distributors have to purchase goods from M/s. RMP worth of Rs. 10,000/- for which commission is paid. He submits that the issue is squarely covered by the decision in the case of Shri Surendra Singh Rathore and Smt. Chanda Bohra (supra) and reads the said decision.

Reasoning of judgment:- The issue to be decided in this case is whether the appellants are covered under the category of Business Auxiliary Services by virtue of being distributors and appointing further distributors for the sale of goods of M/s. RMP and getting paid a commission for the sale effected to chain of distributors below them. Undisputedly appellants herein appoint two distributors and encourage the said two distributors to appoint further distributors and the chain continues. Appellants claim this is not multilevel marketing scheme or binary is totally incorrect; on reading the agreement between appellants and M/s. RMP in this case it indicates that the appellants are required to appoint only two distributors they are supposed to increase these two to further appoint of 2 distributors and by such sub-distributors (if they could be called so). The appellants and the chain of distributors appointed by them are under compulsion to purchase other goods worth Rs. 10,000/- from M/s. RMP. Appellants herein are getting paid an amount as commission from goods which were purchased by the distributors and sub-distributors appointed by the appellant distributors.
There cannot be any dispute that the appellants are in receipt of commission/facilitation for the sales which were derived on the basis of purchase made by the distributors appointed by the appellant and further down line. Though it is a fact that there is a cap for payment to the appellant as a distributor, it cannot be denied that the arrangement is nothing but multilevel marketing scheme. At this juncture they have to hold that the issue involved in this case is now squarely covered by the judgment of this Tribunal in the case of Shri Surendra Singh Rathore and Smt. Chandra Bohra (supra). They reproduce the relevant paragraphs which are as under :-
“4. The agreement between the appellants and FSL was for the purpose of selling the company’s product as per the RCM Business Marketing Plan (RCM stands for Right Concept Marketing Plan). According to terms and conditions of the agreement between the parties, FSL issues a scratch card having a password along with a standard product “Kit of the Products” by charging a price for same. Any person can submit an application through the internet using password and after acceptance becomes a distributor of the company for the purpose of selling the company’s product under the RCM plan. Minimum purchases in terms of RCM products prescribed by the company from time to time is compulsory for a distributor during the month in which he desires to have the commission credited in his account. Company is obligated to remit consideration to the distributor for selling the company’s product as per terms of conditions specified in the “RCM Business Marketing Plan” of the company. Particulars of the RCM Business Marketing Plan have been set out in the adjudication order. As per this plan a distributor gets commission on the supply made by FSL and also a share in the commission for introducing new customers, after such distributor propagates/promotes FSL products under “share your views with your friends and relatives concept.” Thereafter, when a new customer starts using FSL products they in turn will propagate/promote FSL products to other persons and the distributor gets commission in respect of purchases made by such introducees, down the line. He shares the commission with others on such purchases. Consequently FSL sales are boosted.
5. The question is whether the commission received by the appellants as a consequence of the “RCM Business Marketing Scheme” in relation to discounts offered, constitutes consideration paid by the service receiver FSL to the service provider/appellants.
6. Shri Sarwal ld. Counsel for the appellants submitted that the “RCM Business Marketing Plan” is a Multilevel Marketing Scheme and in this scheme the first distributor ‘A’ approaches FSL and purchases their products of certain minimum value. ‘A’ recommends FSL products to another distributor ‘B’ and ‘B’ recommends to subsequent introducees to the scheme namely ‘C’, ‘D’ and ‘E’ and the further introducees ‘C’, ‘D’ and ‘E’ are not known to ‘A’. Ld. Advocate has the submitted that ‘A’ gets commission on purchases made by ‘C’, ‘D’ and ‘E’. It is alternatively contented on behalf of the appellants that the so-called commission paid by FSL to the appellant in respect of purchases made by subsequent distributors ‘C’, ‘D’ and ‘E’ does not amount to commissions for promotion or marketing activities permitted by the petitioner but is dividend paid to ‘A’ for his efforts for introducing the scheme to new introducees who also become distributors of FSL.
7. On analysis of the terms and conditions of similar agreements between the FSL and the petitioners, the adjudicating authority confirmed the tax liability against the appellants. We are satisfied that RCM (Right Concept Marketing) Business Marketing Plan is neither a new arrangement nor there is any concept of dividends as suggested by the ld. Counsel. This is a clear Multilevel Marketing Service Scheme. The consideration/commission received by the appellants from FSL (this fact is not disputed) is the result of the marketing/promotion of FSL products by the appellants and constitutes a service (Business Auxiliary Service), provided in respect of FSL products to FSL. The commission/consideration is provided according to the terms and conditions, for marketing/promotion efforts by the appellants. The receipt of commission by the appellants clearly makes them providers of “Business Auxiliary Service” as defined under Section 65(19) of the Act. The appellate and adjudication orders are impeccable on this analysis and warrant no interference.”
It can be seen from the above reproduced paragraphs of the Tribunal’s judgment that the issue involved in this case is squarely covered against the appellant.
They find that the said judgment of the Tribunal in the case of Shri Surendra Singh Rathore and Smt. Chanda Bohra upheld the penalties imposed on the appellant therein on an identical case. They do not find any reason to deviate from such a view taken by the Tribunal. Accordingly, in view of the foregoing and authoritative judicial pronouncements, they hold that the impugned order is correct, legal and does not suffer from any infirmity.
All the appeals are rejected.

Decision:- Appeals rejected.

Comment:- The analogy of the case is that Assessee is distributors of binary network company appointing further distributors to create chain of distributors. As per agreement, distributors and sub-distributors under compulsion to buy products from shopping section of company. Assessee’s claim of that arrangement is not multilevel marketing scheme or binary totally incorrect. Assessee required appointing only two distributors and subsequently appointed distributors required to further appoint two distributors. Assessee is in receipt of commission/facilitation for sales derived on the basis of purchase made by distributors appointed and further down line. Though cap for payment to assessee as distributor, arrangement nothing but multilevel marketing scheme. Hence, commission on sale of goods covered as business auxiliary service.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/3003

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