The appellants/assessees were "distributors" enaged in direct selling of Amway consumer products. A Distributor could also sponsor/enroll other persons for direct marketing as distributors of the products and they get earn a commission based on the sales secured by these second level Distributors.
Thus Amway, a distributor earns monthly income in three ways
(a) Margin between on the purchase from Amway and sale to their customers i.e. trading ;
(b) Commission earnen on their purchases for personal consumption during the month ; and
(c) monthly commission earned on sale secured by second level Distributors enrolled by the by the Distributor.
Position adopted by the Tax authorities
Service tax authorities demanded service tax authorities on the gross amount i.e. all three types of earnings by the Distributor. The assessees disputed this this.
No service tax on trading of goods: The assessees are distributors, who buy from Amway and sell in retail. This is trading in goods. This activity cannot be treated as sales promotion, marketing or sale of the goods of Amway. Once Amway's products are bought by the Distributor, they cease to belong to Amway, and the distributor cannot be said to provide any service to Amway qua the goods. So any incentive or commission received by an Amway Distributor on the purchase of goods cannot be treated as consideration received for promotion or marketing or sale of the goods. No service tax is chargeable on such profit earned by the distributors from purchase/sale of the goods.
Service tax applicable on promotion by sponsoring other distributors and commissioner earned on their sales:However, the third activity of identifying and roping in other persons for sale of Amway products and sponsoring such persons would qualify as marketing or sale of Amway goods. Any commission received by the Distributor from Amway linked with the performance of his sales group or second level distributor would be consideration for Business Auxiliary Service in connection with sales promotion for Amway. Therefore, service tax would be chargeable on the commission received by a Distributor from Amway on the products purchased by his sales group.
The demand confirmed by the tax authorities is for the gross amount, the case has to be remanded to the original authority for re-determination.
Exemption under not 5/2006 ST applicable : Another point of contention is the applicability of notification no.5/2006-ST. This exemption would be admissible to Distributors as they are engaged in promoting sales/marketing of the products of Amway and are not marketing or promoting any taxable service which is branded and the brand name belongs to another person.
Not a wilful act of evasion - No Penalty : As regards penalty, mere non compliance with registration, tax payment and filing returns cannot be inferred as a wilful act to evade service tax. Also the Commissioner (Appeals) after analyzing the activities of the assesses took a view the activity is not covered by Business Auxiliary Service under the Finance Act, 1994. When two differing views exist in the Department itself, it cannot be said there was no scope for doubt.
Extended period will not apply : As held by the Apex Court in Continental Foundation Joint Venture Vs. CCE, Chandigarh reported in 2007 (216) ELT 177 (SC) 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.