CESTAT Kolkata Holds MLM Activities Not Taxable As Business Auxiliary Service, Quashes Service Tax Demand

In a ruling on the taxability of multi-level marketing (MLM) operations under the pre-GST regime, the Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that activities involving purchase and sale of goods under an MLM model cannot be classified as taxable “Business Auxiliary Service” under the Finance Act, 1994, where the core activity remains trading in products rather than rendering an independent service.

On 11 May, a Bench comprising Judicial Member R. Muralidhar allowed the appeal and set aside the demand confirmed against the appellant arising from alleged classification of MLM commissions as taxable service income. It observed:

“…the Revenue has arbitrarily taken the taxable value for the period 2016-17 by simply doubling the total value available for the period 2015-16. This kind of arbitrary enhancement of the value is not provided for any statutory provisions….”

The dispute arose from a show cause notice dated 20 October 2021 issued to Mustafa Ali, alleging that he had provided “Business Auxiliary Service” to K-Link Healthcare India Pvt. Ltd. during the period 2015–16 to 2017–18. The Revenue alleged that he introduced persons into the company's MLM network and earned commission income linked to purchases made through such referrals.

Relying primarily on Income Tax Returns and Form 26AS data, the Department proceeded to quantify service tax liability on the commission amounts reflected therein. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) upheld the order, prompting the present appeal before the Tribunal.

Before the Tribunal, the appellant argued that the entire activity constituted trading in goods under an MLM structure. He submitted that participants were required to purchase products from the company and thereafter sell them within the network, and that commissions were intrinsically linked to product sales rather than any standalone promotional service.

Ali further challenged the quantification of demand, contending that the Department had adopted arbitrary figures, including doubling the turnover for 2016–17 without any statutory basis or supporting evidence.

The Revenue maintained that the appellant acted as a commission agent by introducing buyers to K-Link Healthcare India Pvt. Ltd., and that the income reflected in Form 26AS clearly established liability under “Business Auxiliary Service”.

The Tribunal rejected the Revenue's approach, finding serious infirmities in the computation of taxable value and holding that the demand lacked statutory backing. It also held that MLM-based activities involving sale and purchase of goods do not, by themselves, satisfy the ingredients of “Business Auxiliary Service”.

Accordingly, the CESTAT set aside the impugned order and granted consequential relief to the appellant.

For Appellant: Tarun Chatterjee, Jayanta Roy and Sneha Das, Advocates

For Respondent: P.Das, Authorized Representative for Revenue