2013 (8) TMI 149 - AT - Service Tax

Multilevel Marketing Scheme Faces Service Tax Liability, Commission Deemed Business Auxiliary Service Under Finance Act, 1994

The SC examined a multilevel marketing scheme's service tax liability. The court held that commission received constitutes a Business Auxiliary Service ... Business Auxiliary service - Revenue proceeded against the assessee for having provided ‘Business Auxiliary Service’; for failure to obtain registration and filing returns disclosing amounts received from the taxable service - Commission received from M/s Fashion Suitings Pvt. Ltd., Bhilwara Rajasthan (for short FSL), for providing the Business Auxiliary Service of promotion and marketing of FSL products – Held that:- 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 Penalty under Section 76 of the service tax act – Held that:- Imposition of penalties on the appellants is not sustainable as the appellants were under the bona-fide belief that the service provided by them was not Business Auxiliary Service . We are unable to accept this contention as we discern no ambiguity in the statutory definition of Business Auxiliary service that could have sustained on given rise to any bona-fide belief as to the activities of the appellants being not Business Auxiliary Service – Decided against the Assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:(a) Whether the commission received by the appellants under the RCM Business Marketing Plan constitutes consideration for providing 'Business Auxiliary Service' as defined under Section 65(19)(i) of the Finance Act, 1994;(b) Whether the appellants were liable to obtain registration and pay service tax on the said commission received from M/s Fashion Suitings Pvt. Ltd. (FSL);(c) Whether the penalties imposed under Sections 76, 77, and 78 of the Finance Act, 1994 on the appellants for failure to obtain registration, non-filing of returns, and non-payment of service tax are sustainable, particularly in light of the appellants' contention of bona fide belief that their activity did not constitute 'Business Auxiliary Service';(d) The legal characterization of the RCM Business Marketing Plan-whether it is a legitimate multilevel marketing scheme or a dividend-paying arrangement;(e) Whether the appellate and adjudicating authorities correctly applied the law in confirming the demand of service tax, interest, and penalties.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (d): Nature of Commission and Classification of RCM Business Marketing PlanThe Finance Act, 1994, under Section 65(19)(i), defines 'Business Auxiliary Service' as any service relating to promotion, marketing, or sale of goods produced or provided by the client. The question is whether the commission received by the appellants under the RCM Business Marketing Plan is consideration for such services.The appellants argued that the RCM plan is a multilevel marketing scheme where the first distributor 'A' purchases products and introduces subsequent distributors 'B', 'C', 'D', and 'E'. The commission paid on purchases by downstream distributors is contended to be a dividend rather than commission for marketing services.The Court examined the terms of the agreement and the structure of the RCM plan, which involves issuing a scratch card with a password and a product kit, enabling individuals to become distributors upon registration. Distributors are required to make minimum purchases and receive commissions based on their own and their introducees' purchases. The plan incentivizes promotion and propagation of FSL products through a network of distributors.The Court held that the RCM Business Marketing Plan is essentially a multilevel marketing scheme and not a dividend-paying arrangement. The commission received by the appellants is the direct result of their marketing and promotional efforts for FSL products. This constitutes a 'Business Auxiliary Service' under the statutory definition. The Court emphasized that the commission is consideration paid by FSL to the appellants for services rendered in promotion and marketing, making the appellants service providers liable to service tax.The adjudicating authority's and appellate authority's findings that the appellants provided taxable 'Business Auxiliary Service' were upheld as 'impeccable' and warranted no interference.Issue (b): Liability to Obtain Registration and Pay Service TaxThe Revenue initiated proceedings under the Finance Act, 1994, alleging that the appellants failed to obtain registration and file returns disclosing amounts received from the taxable service. The Show Cause Notice proposed a demand of Rs. 45,579/- for the period 01.02.2008 to 31.03.2010, along with interest and penalties.Both the adjudicating authority and the Commissioner (Appeals) confirmed the demand, concluding that the appellants had deliberately evaded service tax liability by not registering and not filing returns.The Court found no merit in the appellants' contentions and confirmed the liability to pay service tax, interest under Section 75, and penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The Court noted that the commission received was undisputed and directly linked to the taxable service provided.Issue (c): Sustainability of Penalties and Bona Fide Belief DefenseThe appellants contended that the penalties imposed were not sustainable because they were under a bona fide belief that their activities did not amount to 'Business Auxiliary Service.'The Court rejected this defense, stating that there was no ambiguity in the statutory definition of 'Business Auxiliary Service' that could have supported such a bona fide belief. The activities of the appellants clearly fell within the scope of the defined service, and hence the penalties under Sections 76, 77, and 78 were rightly imposed.The Court emphasized that ignorance or misunderstanding of a clear statutory provision does not absolve one from penalty liability.Issue (e): Correctness of Appellate and Adjudicating Authorities' OrdersThe Court analyzed the factual matrix, the terms of the RCM Business Marketing Plan, and the statutory framework. It found that the adjudicating authority and Commissioner (Appeals) correctly applied the law and facts in confirming the tax demand, interest, and penalties.The Court noted that the appellants' arguments were thoroughly considered and rejected on sound legal and factual grounds. Therefore, the impugned orders were upheld without interference.3. SIGNIFICANT HOLDINGS'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 RCM 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.''We discern no ambiguity in the statutory definition of Business Auxiliary service that could have sustained or given rise to any bona-fide belief as to the activities of the appellants being not Business Auxiliary Service.''The appellate and adjudication orders are impeccable on this analysis and warrant no interference.'The Court conclusively determined that the appellants were liable to pay service tax on the commission received under the RCM Business Marketing Plan as providers of Business Auxiliary Service. The penalties imposed for failure to register, file returns, and pay service tax were also upheld, rejecting the bona fide belief defense.