2025 (5) TMI 1022 - AT - Service Tax

Levy of service tax - Business Auxiliary services - commission received by first-line distributors from M/s FSL constitutes consideration - extended period of limitation - HELD THAT - The activity of a Distributor of identifying other persons who can be roped in for sale of the M/s FSL products/marketing of the M/s FSL products and who on being sponsored by that Distributor are appointed by M/s FSL as second level of distributors the activity of marketing or sale of the goods belonging to M/s FSL and the commission received by the Distributor from M/s FSL which is linked to the performance of his sales group (group of the second level of distributors appointed on being sponsored by the Distributor) it is held that it should have to be treated as consideration for Business Auxiliary Service of sales promotion provided to M/s FSL. Therefore service tax would be chargeable on the commission received by a Distributor from M/s FSL 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 M/s FSL based on his own volume of purchase from M/s FSL and the commission earned by him on the basis of the volume of purchases of M/s FSL products made by his sales group i.e. group of second level of Distributors appointed by M/s FSL on being sponsored by the Distributor. In appellant s own case there has been a decision by this Tribunal in case titled as Surendra Singh Rathore Vs. Commissioner of Central Excise Jaipur-1 2013 (8) TMI 149 - CESTAT NEW DELHI on same set of circumstances the order has confirmed the demand of service tax on commission received by first line distributor of M/s FSL holding it to be the consideration for rendering Business Auxiliary services to M/s FSL. In the present case the appellant has not provided any document to show that out of the alleged amount received by the appellant during the relevant period what amount has been received with respect to the commission received from M/s FSL on the products purchased by his sales group. On the contrary when the M/s FSL was requested by adjudicating authorities below to quantify the demand it reported the distributor s profit margin as Nil . The commission for sale or personal consumption was also reported as Nil . The entire amount as has been confirmed against the appellants in these appeals was reflected as the amount of commission linked with the performance of appellant. Extended period of limitation - HELD THAT - There was no reason with the appellants to have believed that appellants are not liable to pay tax of the commission received from M/s FSL on the products purchased by his sales group. In the given circumstances non-payment of service tax is rightly held to be an act of suppression to evade payment of duty - the extended period has rightly been invoked. There are no infirmity in the order and the order is upheld - appeal dismissed.

The core legal questions considered by the Tribunal in these appeals revolve around the applicability and extent of service tax liability on commissions earned by distributors under a multi-level marketing (MLM) scheme operated by M/s Fashion Suiting Pvt. Ltd. (M/s FSL). Specifically, the issues are:

1. Whether the commission received by first-line distributors from M/s FSL constitutes consideration for Business Auxiliary Service (BAS) under Section 65(105)(zzb) of the Finance Act, 1994.

2. Whether service tax liability extends to the entire commission earned by the distributor, including commissions linked to purchases made by second-line and subsequent distributors ("downliners"), or only on the commission linked to purchases made directly by the distributor's immediate sales group.

3. The correctness of the adjudicating authorities' invocation of the extended period of limitation for recovery of service tax.

Issue-wise Detailed Analysis

1. Applicability of Business Auxiliary Service (BAS) to Commission Earned by Distributors

The relevant legal framework is Section 65(105)(zzb) of the Finance Act, 1994, which defines Business Auxiliary Service as any service in relation to promotion, marketing, or sale of goods produced or provided by the client, among other activities. The Tribunal examined the MLM scheme operated by M/s FSL, where a distributor purchases a minimum value "kit" and receives a unique Distributor Number. The distributor then sponsors others as downliners, who become distributors themselves, creating a multi-level chain.

The Court observed that the commission paid by M/s FSL to the distributor is linked to the distributor's efforts in promoting and marketing M/s FSL's products through this chain. The Tribunal held that the activity of identifying and sponsoring other distributors who market and sell M/s FSL products clearly falls within the ambit of "promotion or marketing" under the BAS definition.

Precedents relied upon include a Tribunal decision in Surendra Singh Rathore v. Commissioner of Central Excise, which upheld the taxability of commissions received by first-line distributors as BAS. The Tribunal emphasized that the commission is consideration for the marketing efforts of the distributor and thus taxable service under BAS.

The Court rejected the argument that such commissions are akin to dividends or volume discounts, clarifying that the commission linked to the sales group's performance constitutes a taxable service.

2. Extent of Taxable Commission: Direct Purchases vs. Downliner Purchases

A significant point of contention was whether service tax should be levied on the entire commission earned by the distributor, including commissions based on purchases made by subsequent levels of distributors (downliners), or only on the commission linked to purchases made by the distributor's immediate sales group.

The Tribunal analyzed the factual matrix and prior decisions, including Charanjeet Singh Khanuja v. CST, which held that service tax is chargeable only on commission earned on purchases made by the distributor's immediate sales group, not on commission linked to subsequent downliners beyond that group.

The Tribunal noted that the authorities below had demanded service tax on the gross commission without bifurcation, contrary to the principle established in the above decisions. The Commissioner (Appeals) had earlier remanded the matter for proper quantification, but the original adjudicating authority confirmed the demand without adequate bifurcation.

However, the appellants failed to provide documentary evidence to segregate commission amounts between direct sales group purchases and subsequent downliners. The records from M/s FSL indicated that the entire commission was linked to performance, with no profit margin or personal consumption commission reported separately.

Consequently, the Tribunal found that the demand confirmed on the entire commission was justified on the facts, given the lack of evidence from the appellants to the contrary. The Tribunal distinguished the earlier decision relied upon by the appellants (Appeal No. 54386-54390/2016) as not applicable to the present circumstances due to the absence of bifurcation evidence.

3. Invocation of Extended Period of Limitation

The Tribunal considered whether the extended period for recovery of service tax was rightly invoked. The extended period is generally invoked in cases of suppression or willful evasion of tax.

The Court observed that the issue of taxability on commissions linked to the sales group's purchases had been settled against the appellants in earlier decisions. Given this, the appellants had no reasonable basis to believe that they were not liable to pay service tax on such commissions.

The Tribunal held that the non-payment of service tax on the commission amounts was rightly treated as suppression of facts to evade duty, justifying invocation of the extended period for recovery.

Competing Arguments and Their Treatment

The appellants argued that service tax should only be levied on commission earned from direct purchases by their immediate downliners, not on commissions from subsequent levels, relying on prior Tribunal rulings. They also contended that the remand directions for bifurcation were ignored by the authorities.

The Revenue contended that the appellants failed to provide proper evidence to bifurcate commission streams and that service tax was rightly confirmed on the commission linked to performance. They also defended the invocation of the extended period.

The Tribunal acknowledged the legal principle that only commission linked to immediate sales group purchases is taxable but emphasized that the appellants' failure to produce evidence to segregate commissions justified confirming the demand on the gross amount. The Tribunal also upheld the extended period invocation based on suppression.

Significant Holdings

"The activity of a Distributor of identifying other persons, who can be roped in for sale of the M/s FSL products/marketing of the M/s FSL products and who on being sponsored by that Distributor are appointed by M/s FSL as second level of distributors, in our view, the activity of marketing or sale of the goods belonging to M/s FSL and the commission received by the Distributor from M/s FSL, which is linked to the performance of his sales group (group of the second level of distributors appointed on being sponsored by the Distributor) we hold that it should have to be treated as consideration for Business Auxiliary Service of sales promotion provided to M/s FSL."

"Service tax would be chargeable on the commission received by a Distributor from M/s FSL on the products purchased by his sales group."

"The non-payment of service tax is rightly held to be an act of suppression to evade payment of duty. We hold that the extended period has rightly been invoked."

"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 Tribunal thus reaffirmed the principle that commissions earned by distributors under an MLM scheme for promotion and marketing of client's goods constitute Business Auxiliary Services liable to service tax. It clarified that service tax is chargeable only on commission linked to the distributor's immediate sales group purchases, but in absence of proper evidence to bifurcate commissions, tax can be levied on the gross commission. The invocation of the extended period for recovery was upheld on grounds of suppression and evasion.

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