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16 Feb 2016

Service Tax on Multi-Level Marketing

Multi-Level Marketing (MLM) is a marketing strategy in which the distributor is compensated for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant's "downline", and can provide multiple levels of compensation. In this model, distributors sell products directly to consumers by means of relationship referrals or by encouraging others to join the company as a distributor. In this model, usually three kinds of incentives/rewards are earned by the distributor-

  1. profit margin earned on sale of goods purchased from the MLM company (hereafter referred to as “company”);
  2. incentive received for buying certain quantum of goods; and
  3. Consideration for identification of persons who can further be appointed as distributors.

Recently, in case of Smt. A. Vijaya vs. Commissioner of Central Excise, Salem (2016) 64 taxmann.com 77 (Chennai- CESTAT), while discussing the taxability of MLM model honorable tribunal held that:

a) Profit margin

Sale of goods by distributors to the seller is not in the nature of service but is in the nature of sale of goods, on which VAT is applicable because after sale, those products cease to belong to the company, but belong to the Distributor. Hence Service Tax is not applicable.

b) Buying Commission

Incentive received for quantum of goods purchased by the distributor from the company is in the nature of voluble discount. Hence, outside the ambit of Service Tax.

c) Downline Marketing

The activity of a Distributor of identifying distributors is considered as Business Auxiliary service on which Service tax will apply.