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In multi-level marketing; profit earned by first level distributor from sale of manufacturer’s product on his own account and volume based incentive / commission received by him on his purchases would not be liable for service tax under Business Auxiliary Services. However, commission earned on purchases made by next level distributor sponsored by him would attract service tax.
Facts
Appellants being individuals and household agents (i.e. first level distributors) bought products from ‘Amway’ for sales to retail customers at MRP. They also identified second level distributors and sold Amway products to them for further retail sale. First level distributors had three types of income namely (i) profit from products purchased from Amway at Distributor’s Acquisition Price and sold at amount not exceeding product’s MRP (ii) volume based commission based on purchases made by them from Amway and (iii) commission earned from Amway on the basis of purchases made by second level distributor sponsored by them in the chain of direct marketing. Department levied service tax on gross commission earned by distributors under category of “Business Auxiliary Services” on the ground that they not only made retail sale by direct marketing, but they also engaged in sales promotion on behalf of Amway by appointing 2nd line and 3rd line distributors.
Held
While deciding the case, the Hon’ble Tribunal applied the ratio laid down in similar case by Principal Bench of New Delhi CESTAT in Final order Nos. 51818 51855/2015 dated 09/06/2015 in case of Mr. Charanjeet Singh & others (Batch of 38 appeals). It observed that Amway products are not sold on the shelf but only through distributors and that Amway products cease to belong to Amway once they are purchased by a distributor and ownership of goods gets transferred to the distributor. It held that “Business Auxiliary Services” would cover promotion, marketing or sale of those goods which belong to client and not those goods which belong to distributor themselves. Hence, sale of these goods by distributors/ sub-distributors would not constitute service to Amway. Further it concurred with the decision of the Principal Bench on the aforesaid case in which Tribunal held that any incentive or commission received by the distributor from Amway for buying certain quantum of goods during a month cannot be treated as consideration received for promotion or marketing or sale of goods, more so, as this commission is not linked to goods sold by the first level distributor but his purchases, it is in the nature of volume discounts. However, commission received by Appellants on the basis of volume based purchases of Amway products made by their sales group i.e. group of second level of distributor appointed by Amway as identified qua the Appellants is held to be liable for service tax, on the ground that by sponsoring such second level distributors, the Appellants in fact promote sales of Amway products and commission paid for the same is also linked to sales made by Amway company directly to such second-level distributors.
