2015 (6) TMI 585 - AT - Service Tax

Demand of service tax - Tax on commission received - Commission as distributor of Amway - Held that - 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. - Matter remanded back. Whether duty exemption under notification no.5/2006-ST would be admissible to the Distributors in this group of cases - 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 have to be remanded to the Original Adjudicating Authority. 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 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. - 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 - Decided in favour of assessee.

Summary

The core legal questions considered in this judgment are:

1. Whether the activities of the distributors of Amway India Enterprises Pvt. Ltd. constitute a taxable Business Auxiliary Service under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994.

2. Whether the distributors, being individuals or proprietary firms, qualify as "commercial concerns" liable to service tax prior to the amendment effective from 1.5.2006.

3. Whether the entire commission received by the distributors from Amway is taxable, or only the commission linked to the sales group (second level distributors) constitutes Business Auxiliary Service consideration.

4. Whether the distributors are eligible for exemption under the small service providers notification no.6/2005-ST.

5. Whether the extended limitation period under proviso to Section 73(1) of the Finance Act, 1994 is invokable due to alleged suppression of facts or wilful evasion of service tax.

6. Whether penalties under Sections 76, 77, and 78 of the Finance Act, 1994 are justified.

Issue-wise Detailed Analysis

1. Taxability of Distributors' Activities as Business Auxiliary Service

Legal Framework and Precedents: Section 65(105)(zzb) defines taxable service as service provided to a client by a commercial concern in relation to Business Auxiliary Service. Section 65(19) defines Business Auxiliary Service as any service in relation to promotion, marketing, or sale of goods produced or provided by or belonging to the client, among other activities.

Court's Reasoning: The Court analyzed whether the distributors' activities fall within the scope of Business Auxiliary Service. It noted that distributors purchase Amway products at a price (DAP) and resell them at or below MRP, earning a profit margin. The Court held that once the goods are purchased by the distributor, they cease to belong to Amway. Therefore, the sale of these goods by the distributors is not a service to Amway but a sale of goods owned by the distributors themselves.

Accordingly, the Court found that the commission or incentives received by distributors based on their own purchase volumes, which are akin to volume discounts, do not constitute consideration for Business Auxiliary Service and are not taxable.

However, the Court distinguished the commission received by distributors on the volume of sales made by second-level distributors (their sales group). This activity involves identifying and enrolling others to promote Amway products, which is a service in relation to promotion or marketing of goods belonging to Amway. Hence, such commission qualifies as consideration for Business Auxiliary Service and is taxable.

Application of Law to Facts: The Court applied the definition of Business Auxiliary Service strictly, emphasizing the ownership of goods at the time of sale and the nature of the commission. It ruled that only the commission linked to the sales group's purchases is taxable.

Treatment of Competing Arguments: The Department argued for taxability on the entire commission amount, while the distributors contended that only the commission linked to sales group activity is taxable. The Court sided with the distributors on the commission linked to their own purchases but upheld taxability on the sales group commission.

Conclusion: Service tax is chargeable only on the commission received on the sales group's purchases; the rest of the commission and profit margin from direct sales are not taxable under Business Auxiliary Service.

2. Status of Distributors as "Commercial Concern" Prior to 1.5.2006

Legal Framework and Precedents: Prior to 1.5.2006, the Finance Act imposed service tax on Business Auxiliary Services provided by a "commercial concern." The term was amended post 1.5.2006 to "any person." The Board's Circular No.62/11/03/ST (2003) stated individuals could not be treated as commercial concerns. Tribunal precedents such as Mangal Vs. CCE, Jaipur (2008) supported this view.

Court's Reasoning: The Court rejected the distributors' plea that individuals could not be commercial concerns before 1.5.2006. It reasoned that a proprietary firm owned by an individual is a commercial concern and there is no distinction between the firm and the individual for this purpose. When an individual engages in commercial activity, they are a commercial concern.

Application of Law to Facts: Since some appellants were proprietary firms, and others individuals engaged in commercial activity, the Court held that the service tax liability existed even prior to 1.5.2006.

Treatment of Competing Arguments: The distributors relied on the Circular and Tribunal decisions to argue no tax liability before 1.5.2006. The Department argued that the commercial activity itself qualifies the distributors as commercial concerns. The Court agreed with the Department.

Conclusion: Distributors, including individuals and proprietary firms, are commercial concerns liable for service tax on Business Auxiliary Services even before 1.5.2006.

3. Taxability of Entire Commission vs. Commission Linked to Sales Group

Legal Framework and Precedents: Business Auxiliary Service includes promotion or marketing of goods belonging to the client. The Court referred to Tribunal decisions on multi-level marketing schemes where commission linked to sales group activities was held taxable.

Court's Reasoning: The Court found that the entire commission received by distributors was treated as taxable by the Department without distinction. It held that only the commission linked to the sales group's purchases is consideration for Business Auxiliary Service and taxable. Commission based on the distributor's own purchases is a volume discount and not taxable.

Application of Law to Facts: The Court remanded the matter to the Original Adjudicating Authority to quantify the commission attributable to sales group activity for correct tax demand.

Treatment of Competing Arguments: The distributors argued for exclusion of commission on own purchases; the Department sought tax on full commission. The Court adopted a middle path.

Conclusion: Tax demand must be limited to commission earned on sales group purchases; the rest is non-taxable.

4. Eligibility for Small Service Provider Exemption

Legal Framework: Notification no.6/2005-ST exempts small service providers from service tax subject to conditions. The proviso excludes persons providing branded services under another's brand name.

Court's Reasoning: The Department contended that distributors promoting branded products are not eligible for exemption. The Court disagreed, holding that marketing or sale promotion of branded products does not amount to providing branded taxable service. The distributors are promoting goods, not branded services.

Application of Law to Facts: The Court observed that the eligibility for exemption was not examined by the lower authorities and remanded the issue for de novo adjudication.

Treatment of Competing Arguments: The Department's restrictive interpretation was rejected in favor of a broader exemption scope for distributors.

Conclusion: Distributors may be eligible for small service provider exemption; issue remanded for fresh consideration.

5. Invokability of Extended Limitation Period under Section 73(1) Proviso

Legal Framework and Precedents: The extended limitation period of five years applies only if there is wilful misstatement, suppression of facts, or intent to evade tax. The Apex Court in Continental Foundation Joint Venture Vs. CCE held that where there is scope for doubt, extended limitation cannot be invoked.

Court's Reasoning: The Court found that the distributors did not obtain service tax registration nor file returns, but this alone does not prove wilful evasion. Since the Department itself had conflicting views on taxability, there was genuine doubt.

Application of Law to Facts: The Court held that the extended limitation period is not invokable and the Department can only demand service tax within the normal one-year limitation period.

Treatment of Competing Arguments: The Department argued suppression and evasion; distributors argued absence of intent. The Court accepted the latter.

Conclusion: Only normal limitation period applies; extended limitation and related penalties are not justified.

6. Justification for Penalties under Sections 76, 77, and 78

Legal Framework: Penalties under these sections are imposed for non-compliance, suppression, or evasion.

Court's Reasoning: Since the Court found no wilful evasion or suppression, penalties imposed are not justified.

Application of Law to Facts: The Court observed that absence of clear intent to evade tax negates penalty imposition.

Conclusion: Penalties under Sections 76, 77, and 78 are not sustainable.

Significant Holdings

"The 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."

"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, 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 ... would have to be treated as consideration for Business Auxiliary Service of sales promotion provided to Amway."

"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."

"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."

"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."

Final Determinations

The Court set aside the impugned orders of the Commissioner (Appeals) and remanded the matters to the Original Adjudicating Authority for fresh adjudication strictly in accordance with the observations. The service tax demand is sustainable only on commission received by distributors on the purchases made by their sales group (second level distributors), not on commission linked to their own purchases or profit margin on resale. The distributors are liable to service tax as commercial concerns even prior to 1.5.2006. The small service provider exemption eligibility is to be examined afresh. The extended limitation period and penalties are not invokable due to absence of wilful evasion. The appeals by both distributors and Revenue stand disposed accordingly.