By TIOL News Service

NEW DELHI, OCT 25, 2013: THE appellants entered into an agreement with M/s Fashion Suitings Pvt. Ltd., Bhilwara Rajasthan for the purpose of selling the company's product as per the RCM Business Marketing Plan (RCM - Right Concept Marketing). According to terms and conditions of the agreement between the parties, FSL issues a scratch card having a password along with a standard product "Kit of the Products" by charging a price for same. Any person can submit an application through the internet using password and after acceptance becomes a distributor of the company for the purpose of selling the company's product under the RCM plan.

As per this plan a distributor gets commission on the supply made by FSL and also a share in the commission for introducing new customers, after such distributor propagates/promotes FSL products under "share your views with your friends and relatives concept." Thereafter, when a new customer starts using FSL products they in turn will propagate/promote FSL products to other persons and the distributor gets commission in respect of purchases made by such introducees, down the line. He shares the commission with others on such purchases. Consequently FSL sales are boosted.

Minimum purchases, in terms of RCM products prescribed by the company from time to time, is compulsory for a distributor during the month in which he desires to have the commission credited in his account. Company is obligated to remit consideration to the distributor for selling the company's product as per terms of conditions specified in the "RCM Business Marketing Plan" of the company.

The question is whether the commission received by the appellants as a consequence of the "RCM Business Marketing Scheme" in relation to discounts offered, constitutes consideration paid by the service receiver FSL to the service provider/appellants.

Against the appellants demands were confirmed holding them liable to pay Service Tax under the category of Business Auxiliary Services for promotion and marketing of goods produced by the client. Penalties were also imposed along with interest.

Since the lower appellate authority upheld the orders the appellants are before the CESTAT and submit that the RCM business plan is a Multi-level Marketing scheme and the ‘so-called commission' is actually a dividend paid to the appellants for their efforts in introducing the scheme to new introducees who become distributors of FSL.

The Bench observed -

"7. …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. The appellate and adjudication orders are impeccable on this analysis and warrant no interference."

In the matter of imposition of penalties, the appellants submitted that they were under the bonafide belief that the service provided by them was not "Business Auxiliary Service".

To this submission, the Bench remarked - "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. We therefore confirm the penalties imposed on the appellants."

In fine, the appeals were rejected.

(See 2013-TIOL-1582-CESTAT-DEL)