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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-
Recently, in case of Smt. A. Vijaya vs. Commissioner of Central Excise, Salem (2016) (Chennai- CESTAT), while discussing the taxability of MLM model honorable tribunal held that:
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.
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.
The activity of a Distributor of identifying distributors is considered as Business Auxiliary service on which Service tax will apply.
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