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.

Issues Involved:
1. Classification of activities under "Business Auxiliary Service" as per Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994.
2. Applicability of service tax on commissions received by Amway distributors.
3. Eligibility for small service provider exemption under Notification No. 6/2005-ST.
4. Application of extended limitation period under Section 73(1) of the Finance Act, 1994.
5. Definition and scope of "commercial concern" prior to the amendment effective from 1.5.2006.

Detailed Analysis:

1. Classification of Activities under "Business Auxiliary Service":
The Department argued that the activities of the distributors fall under "Business Auxiliary Service" as per Section 65(105)(zzb) read with Section 65(19)(i) of the Finance Act, 1994, which includes "promotion or marketing or sale of goods produced or provided by or belonging to the client." The Tribunal, however, clarified that the sale of goods by distributors, which they purchased from Amway, does not constitute a service to Amway. The products, once purchased by the distributors, belong to them and not to Amway. Thus, the profit earned from retail sales and the commission received based on the volume of purchases do not qualify as "Business Auxiliary Service."

2. Applicability of Service Tax on Commissions Received:
The Tribunal distinguished between different types of commissions received by distributors. It held that commissions linked to the distributors' own purchases from Amway are not taxable as they are akin to volume discounts. However, commissions based on the performance of second-level distributors enrolled by the primary distributors are considered as "Business Auxiliary Service" and are taxable. The Tribunal noted that the adjudicating authority had not made this distinction and remanded the matter for re-quantification of the service tax demand based on this clarification.

3. Eligibility for Small Service Provider Exemption:
The Tribunal rejected the Department's plea that the distributors are not eligible for the small service provider exemption under Notification No. 6/2005-ST because they are promoting branded products. It clarified that promoting branded products does not equate to providing a branded service. Therefore, the eligibility for the exemption needs to be re-examined by the adjudicating authority.

4. Application of Extended Limitation Period:
The Tribunal held that merely not applying for service tax registration or not filing returns does not constitute suppression of facts with intent to evade tax. Given that there were differing views within the Department on the taxability of the activities, the Tribunal ruled that the extended limitation period under Section 73(1) could not be invoked. Consequently, the demand should be limited to the normal one-year period.

5. Definition and Scope of "Commercial Concern":
The Tribunal addressed the argument that individuals could not be treated as "commercial concerns" prior to the amendment effective from 1.5.2006. It clarified that a business concern can include a proprietary firm owned by an individual, and there is no distinction between a proprietary firm and its owner. Thus, individuals engaging in commercial activities were considered as "commercial concerns" even before the amendment.

Conclusion:
The Tribunal set aside the orders passed by the Commissioner (Appeals) and remanded the matters to the Original Adjudicating Authority for de novo adjudication in line with its observations. The appeals filed by both the distributors and the Department were disposed of accordingly.

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