2025 (4) TMI 1395 - AT - Service Tax

Levy of service tax - Business Auxiliary service - appellant as an individual distributor of Amway products is liable to pay service tax on the commission received from Amway or not - cum duty benefit - invocation of extended period of limitation - HELD THAT - The activity of the appellant is the activity of marketing or sale of the goods belonging to Amway and the commission received by the Distributor from Amway is linked to the performance of his sales group is liable 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. In this context it is noted that the appellant is a similarly placed distributor of Amway India Enterprise Pvt Ltd as the various distributors involved in the judgment of Charanjeet Singh Khanuja vs Commissioner of Central Excise and Service Tax Indore 2015 (6) TMI 585 - CESTAT NEW DELHI where it was held that 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. For quantifying the Service tax demand on the commission received from Amway on the volume of purchase made by the distributors sponsored /enrolled by a particular distributor i.e. the Distributor s sales group these matters would have to be remanded to the Original Adjudicating Authority. The Tribunal in its decision in the case of M/s Manish Kumar Khaptawala Pragna Arunkumar Patakh Ravi Prakash Smita Verma Master Bhavna N Patel Binal Manoj versus C.C.E. S.T. - Surat-I C.S.T. Service Tax Ahmedabad 2018 (8) TMI 1114 - CESTAT AHMEDABAD held that the appellant was liable to pay service tax. Duty cum benefit - HELD THAT - The Hon ble Supreme Court in its judgment in Commissioner of Central Excise Vs. Maruti Udyog Ltd. 2002 (2) TMI 101 - SUPREME COURT granted the cum-duty benefits to the assessee holding that There is nothing to show that once the demand was raised by the Department the respondent sought to recover the same from the purchaser of scrap. The facts indicate that after the sale transaction was completed the purchaser was under no obligation to pay any extra amount to the seller namely the respondent. In such a transaction it is the seller who takes on the obligation of paying all taxes on the goods sold and in such a case the said taxes on the goods sold are to be deducted under Section 4(4)(d)(ii) and this is precisely what has been directed by the Tribunal. There is also nothing to show that the sale price was not cum-duty. Invocation of the extended peri od - HELD THAT - It is important to note that the respondent is an individual who cannot be faulted if she thought that she was only a dealer; a difference between the purchase price and the sale price or MRP is available to her and therefore it cannot be said that there was an intention to evade service tax. The said issue arose only because Amway called such amount as commission whereas the appellant simply sold the goods to the person who asked a product at a particular MRP - the Hon ble Supreme Court in the case of Continental Foundation Joint Venture v. CCE Chandigarh 2007 (8) TMI 11 - SUPREME COURT held that when there is scope for doubt in the mind of an assessee on a particular issue the longer limitation period under proviso to Section 11A(1) cannot be invoked - the extended limitation period of 5 years under proviso to Section 73(1) of the Finance Act 1994 cannot be sustained. Conclusion - i) The demand of service tax on the commission received by the appellant linked to the performance of her sales group treating it as consideration for Business Auxiliary Service upheld. ii) The appellant is granted the benefit of cum-tax valuation and the denial of such benefit by the Commissioner (Appeals) is held to be beyond the scope of appeal and thus not sustainable. iii) Penalties equivalent to the service tax amount under Section 78 set aside due to absence of deliberate default while penalties under Section 77 also reconsidered. The impugned order is modified to the extent indicated above and the appeal is allowed partially.

Summary

The core legal questions considered in this judgment are:

1. Whether the appellant, as an individual distributor of Amway products, is liable to pay service tax on the commission received from Amway under the category of "Business Auxiliary Service" for the period FY 2011-12 to FY 2015-16.

2. Whether the benefit of cum-tax (cum-duty) valuation can be extended to the appellant while computing the taxable value for service tax purposes.

3. Whether the extended period of limitation under proviso to Section 73(1) of the Finance Act, 1994 is applicable in the appellant's case.

4. Whether penalties under Sections 77 and 78 of the Finance Act, 1994 are justified in the facts of the case.

Issue 1: Liability to Pay Service Tax on Commission as Business Auxiliary Service

The relevant legal framework includes Section 65(105)(zzb) and Section 65(19) of the Finance Act, 1994, which define "Business Auxiliary Service" as any service in relation to promotion, marketing, or sale of goods produced or provided by or belonging to the client.

The Court relied heavily on the precedent set by the Tribunal in the case involving similarly placed Amway distributors, where it was held that the sale of goods purchased by a distributor from Amway does not constitute a service to Amway because once the goods are purchased, they belong to the distributor and not Amway. Therefore, the commission linked to the distributor's own purchase volume (such as "Personal Performance Commission") is not taxable under Business Auxiliary Service.

However, the commission received by the distributor linked to the performance of his sales group (i.e., downstream distributors sponsored by him) is considered a service provided to Amway in promoting or marketing its products. Such commission is liable to service tax as consideration for Business Auxiliary Service.

The Court noted that the impugned orders demanded service tax on the gross commission without distinguishing between commission on personal purchases and commission on sales group performance. The Court remanded the matter to the Original Adjudicating Authority for proper quantification of service tax demand limited to commission linked to the sales group.

The Court rejected the appellant's argument that as an individual, she could not be considered a "business concern" liable to pay service tax, holding that an individual engaged in commercial activity is treated as a business concern for this purpose.

Issue 2: Cum-Tax Benefit in Valuation

The appellant claimed that the value on which service tax was demanded should be considered inclusive of service tax (cum-tax), thereby reducing the taxable value. The Court examined the legal principles established by the Supreme Court in cases dealing with excise duty valuation, notably the judgment in Commissioner of Central Excise vs. Maruti Udyog Ltd., which held that when the price charged is inclusive of excise duty, the duty element must be excluded to arrive at the assessable value.

The Court also relied on Tribunal decisions such as Panther Detective Services and Bhagawati Security Services, which held that receipts should be treated as inclusive of service tax for valuation purposes when no separate service tax is charged.

Applying these principles, the Court held that the appellant is entitled to the cum-tax benefit and that the Commissioner (Appeals) erred in denying this benefit, thereby traversing beyond the scope of the appeal. The Court modified the impugned order to grant the cum-tax benefit while calculating the service tax demand.

Issue 3: Applicability of Extended Period of Limitation

The department invoked the extended limitation period under proviso to Section 73(1) of the Finance Act, 1994, alleging suppression of facts and deliberate default by the appellant.

The appellant contended that the issue involved interpretation of law and there was no intention to evade tax. The Court referred to the Supreme Court decision in Continental Foundation Joint Venture, which held that where there is a bona fide doubt on the issue, the extended limitation period cannot be invoked.

Considering that the appellant was an individual who reasonably believed she was merely selling goods at MRP and the issue arose due to Amway's classification of certain amounts as commission, the Court found that there was no deliberate attempt to evade tax. Hence, the extended period of limitation was not applicable.

Issue 4: Penalties under Sections 77 and 78

Penalties were imposed under Section 78 (equal to the service tax amount) and under Section 77(1)(a) and 77(2) for failure to obtain service tax registration and file returns.

Since the extended limitation period was held inapplicable and the appellant was found to have acted without intent to evade tax, the Court set aside the penalty equivalent to the duty amount under Section 78. Penalties under Section 77 were also reconsidered in light of the appellant's bona fide position.

Conclusions and Final Determinations

The Court upheld the demand of service tax on the commission received by the appellant linked to the performance of her sales group, treating it as consideration for Business Auxiliary Service. However, the demand was restricted to the normal limitation period, and the extended period demand was set aside.

The appellant was granted the benefit of cum-tax valuation, and the denial of such benefit by the Commissioner (Appeals) was held to be beyond the scope of appeal and thus not sustainable.

Penalties equivalent to the service tax amount under Section 78 were set aside due to absence of deliberate default, while penalties under Section 77 were also reconsidered.

Significant Holdings:

"The 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 ... would have to be treated as consideration for Business Auxiliary Service of sales promotion provided to Amway."

"Once the Amway products have been purchased by a Distributor from Amway, those products cease to belong to Amway, but belong to the Distributor and sale of these goods by the Distributor would not constitute service to Amway."

"When there is scope for doubt in the mind of an assessee on a particular issue, the longer limitation period, under proviso to Section 11A(1) cannot be invoked."

"The appellant should be granted cum-duty benefit while calculating the demand."

"The penalty equivalent to duty is also set-aside."