HON’BLE SHRI G.S.SINGHVI, THE CHIEF JUSTICE AND HON’BLE SHRI JUSTICE C.V.NAGARJUNA REDDY WRIT PETITION Nos. 20470 AND 20471 OF 2006 WRIT PETITION Nos.20470 of 2006 Between: Amway India Enterprises, (a Private Company with unlimited liability), Through Mr.Yoginder Singh, Authorised Signatory. And another … Petitioners AND Union of India, rep., by Secretary, Ministry of Home, New Delhi and others. … Respondents ; ORDER : Counsel for the petitioners : Shri B.Adinarayana Rao Shri C.Sudesh Anand Counsel for respondents 1 & 2: Shri A.Rajashekar Reddy Assistant Solicitor General. Counsel for respondents 3 to 6: Advocate General Writ Petition No.20471 of 2006: Between K.Rajashekar Reddy And others. …Petitioners. And Union of India, rep by Secretary, Ministry of Home, New Delhi And others. … Respondents. Counsel for the petitioners : Shri S.R. Ashok for Shri S.Niranjan Reddy Counsel for respondents 1 & 2: Shri A.Rajashekar Reddy Assistant Solicitor General. Counsel for respondents 3 to 6: Advocate General for Sri J. Sudheer Counsel for respondent No.7 : Sri B.Adinarayana Rao for Sri C. Sudesh Anand Dated: 19 .07.2007 Per C.V.Nagarjuna Reddy, J Whether the business activities being carried on by the petitioners attract the provisions of Prize Chits and Money Circulation Schemes (Banning) Act 1978 (for short “the Act”) and whether the action of respondents 3 to 6 in interfering with the activities of the petitioners by invoking the provisions of the Act is arbitrary, are the questions which fall for consideration in these two writ petitions. The resume of facts in W.P.Nos.20470 and 20471 of 2006: Petitioner No.1 is a private company with unlimited liability registered under the Companies Act 1956 having its registered office at C-3, Quatab Institutional Area, New Delhi. It is the wholly owned subsidiary of Amway Corporation, United States of America and is engaged in manufacture/marketing of its various products through a network of distributors. Petitioner No.2 in W.P.No.20470 of 2006 and all the three petitioners in W.P.No.20471 of 2006 are distributors of the 1st petitioner. The 1st petitioner approached Government of India, Ministry of Industry, Department of Industrial Development with an application dated 2.6.1994 to convey approval of Government of India for setting up a wholly owned subsidiary of Amway Corporation of United States of America in India for the purpose of establishing and developing a direct selling business of products. The Government of India, Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approval, Foreign Collaboration-II Section conveyed to the Amway Corporation, its approval of the said proposal, namely, to set up the wholly owned subsidiary in India, to establish and develop a direct selling business of products which shall be sourced from local independent Indian manufacturers particularly small scale units by providing technology support to products of international standard, vide its letter dated 26.8.1994. The approval was subject to certain conditions which inter alia include the condition that the proposed Indian subsidiary does not envisage any manufacture by itself and that if it decides to take up the manufacturing also, it shall obtain prior approval from Government of India as per the prescribed policy and procedure and a further condition that the approval is made a part of the foreign collaboration agreement to be executed between the Amway Corporation of USA and the Indian Company and that the approval is valid for a period of two years from the date of issue within which period Amway Corporation was required to file agreement with the Reserve Bank of India/Authorised Foreign Exchange dealer. Condition No.13 of the approval stipulated that the company shall not manufacture the items reserved in the small scale sector without prior approval of the Government. The conditions contained in the original approval dated 26.8.1994 were amended from time to time on the applications made either by Amway Corporation, USA or by the 1st petitioner on issues such as foreign equity participation, rescheduling of fresh marketing period etc. A significant amendment to the initial approval was the amendment dated 4.8.2004 whereby the 1st petitioner was permitted to set up its own units for manufacturing a number of personal care and cosmetic products, home care range of products, nutrition and wellness range of products and surfactants. By the same proceedings the Government of India permitted the 1st petitioner to import products such as fragrance, deodorants, shampoos, conditioners, cleansers etc. One A.V.S.Satyanarayana, Director of Altus Systems Private Limited, Basheerbagh, Hyderabad (Respondent No.8 in W.P.No.20471 of 2006) lodged a complaint in the CID Police Station, Hyderabad which was registered as FIR No.10 of 2006 dated 24.9.1996. In his complaint, Mr. A.V.S.Satyanarayana stated that he was approached by Smt.M.Padmavathi and Sri M.Ramu introducing themselves as Amway Distributors; that they informed Mr.Satyanarayana that if he joins the scheme by paying Rs.4,000/- and sponsor 5 to 6 persons per month into the scheme he will get money not only through sale of products but also with the efforts of downline distributors; that the said two persons by visiting his house several times tried to induce him to join in the scheme; unable to bear the mental agony and harassment caused by the said two persons, he joined the scheme on 29.8.2005 by paying Rs.5,200/- to the 1st petitioner; that the said Padmavathi and Ramu informed him that if he introduces new members and sell the products to them, he will become a silver producer in lessthan four months time. He further mentioned that he was explained about the money circulation scheme and product selling scheme. For the sake of convenient reference, the complaint of Mr. A.V.S. Satyanarayana is reproduced below: “ One of the schemes which involves enrolment of further members is called as 9-6-3. Under this scheme, I have to enroll 9 members first and then those members will enroll 6 members each and further each such person will enroll three members. Thus under me there will be 225 members and from whose sales, I was told that I will be earning lakhs & lakhs of rupees without doing anything. They also further told that if I enroll 2 members per month then at the end of 9 months, there will be 512 persons under me and I will be getting 10,000 PV (4,00,000 BV) and it is also called as 1 leg which is 21%. Thus the scheme I felt was nothing but a chain, where each one were asked to enroll further. The same is showing as per the below picture: Total Chain will become as follows: 9+54+162+me = 226” 50 PV CASE 1 CASE 2 CASE 3 CASE 4 YOU ME 9 I Sponsor 9 People It is further stated in the complaint: “ The Amway India Enterprises is luring the public including me to introduce new distributors by showing the bait in the name of commission on sale of products to make quick money. The Amway India Enterprises is instigating the distributors like Padmavathi and Ramu to join the new distributors to sell the products in a large way, which is causing mental agony. It is nothing but money circulation which is illegal and also cheated me on the premise that they will return the money and commission according to company Multi-level Scheme (pyramid). I came to know that Amway India Enterprises, Hyderabad opened its branches all over Andhra Pradesh and exploiting youth like me and their families for their further gains.” The CID police registered a case for the offences under Section 385 and 480 of the Indian Penal Code and Sections 4, 5, and 6 of the Act on 24.9.2006. Within three days of registration of the crime, the petitioners filed these two writ petitions for issue of a writ of Mandamus to declare that the provisions of the Act have no application to the scheme run by petitioner No.1 and to restrain the respondents from interfering with the business carried by the petitioners. Contentions: Sri B.Adinarayana Rao, assisted by Sri C.Sudesh Anand, appearing for the petitioners in W.P.No.20470 of 2006 contended that the 1st petitioner company has been carrying on its business activity in India with the approval of Government of India and that the Government of India had neither withdrawn the approval nor interdicted the petitioners’ business activities which are being carried on in accordance with the approved scheme. He further submitted that the registration of criminal case by the CID police and their interference with the petitioners’ business on the ground that it is hit by the provisions of the Act is highly illegal, arbitrary and unconstitutional. He argued that none of the ingredients of Section 2(c) of the Act exists in the business carried on by the petitioners as there is neither quick or easy money nor payments received by the promoter on promise of payment of money on the contingency relative or applicable to the enrollment of new members into the scheme. Learned counsel further argued that the registration of the crime and interference with the petitioners’ business activities by the State and its authorities is patently illegal, highhanded, arbitrary and unauthorized. According to the learned counsel, the first petitioners’ holding company, namely, Amway Corporation, USA is carrying on the direct selling business of products by avoiding middlemen (wholesale and retail traders) in more than 80 countries all over the world and that the petitioner which is incorporated as a wholly owned company of the Amway Corporation of USA has introduced the said method in India like many other companies and that since the money is payable on the basis of the skill and business turnover of the distributors, the prohibition contained in Section 3 of the Act is not attracted. In support of his contention, the learned counsel relied upon the judgment of the Supreme Court in State of West Bengal Vs. Swapan Kumar Guha[1]. The learned counsel while making copious reference to various portions of the said judgment explained the scheme under which the petitioners are carrying on business and submitted that the ratio laid down therein is squarely attracted to the cases on hand. Sri S.R.Ashok, Senior Counsel appearing for the petitioners in W.P.No.20371 of 2006 supported the arguments of Sri B.Adinarayana Rao and submitted that the scheme under which the petitioners are carrying on the business is not comprehended by the provisions of Section 2(c) of the Act. He argued that no distributor will get any money merely on the enrollment of other members sponsored by him and that the money he gets depends upon marketing of products by himself and the other members whom he sponsored. The learned counsel further contended that there is no compulsion or coercion on the members to sponsor other members and that the scheme does not provide for payment of money on mere enrollment per se which alone attracts the definition of Section 2(c) of the Act. The scheme therefore, according to the learned counsel, cannot by any stretch of imagination be termed as “money circulation scheme” within the definition of Section 2(c) of the Act. Per contra, learned Advocate General submitted that the business activity of the petitioners squarely falls within the definition of “money circulation scheme” and is, therefore, hit by the provisions of Section 3 of the Act. Learned Advocate General invited the Court’s attention to brochure at Page-32 of the material papers filed in W.P.No.25749 of 2006 (a Public Interest Litigation filed by one of the alleged victims of the petitioners’ business) to explain how a person on his becoming a member is credited with points value (PV) and on his sponsoring other distributors how he is benefited on their business volume (BV). The learned Advocate General referred to diagram contained in the said brochure and pointed out that the whole scheme is evolved in such a manner that a person who joins as distributor is required to enroll six persons and each of the six persons would enroll four persons who in turn would enroll three persons each and, in this manner, the strength of the entire group becomes 103. He further pointed out that the money the person at the top of the group is supposed to get according to the scheme includes the money which, the other 102 persons, who are directly or indirectly sponsored by the first member, pay either towards subscriptions (initial/renewal) or by selling products. The learned Advocate General argued that there are reciprocal promises involved in the scheme. He submitted that while the promoter gets money from the members as a consideration for promise made to pay them money on the happening of event or contingency relative or applicable to the enrollment of new members, the members earn easy or quick money in redemption of the promise so made by the promoter. He controverted the arguments of the learned counsel for the petitioners that there is no compulsion or coercion to sponsor the members. The learned Advocate General then argued that petitioner No.1 evolved a mechanism where introduction of new members is made so attractive and luring that every distributor strives for sponsoring others in order to earn more and more money consequent on the enrollment of new members. He also submitted that the scheme as is being implemented was not the one which was placed before the Government of India or the one which is pleaded in the writ petition. In order to fortify his contention that easy/quick money is involved, the learned Advocate General referred to para-11 of the counter affidavit of the Deputy Superintendent of Police, Economic Offences Wing, CID, Hyderabad (Respondent No.6). It would be convenient to extract para-11 hereinbelow: “ 11.Easy/quick money and it being dependent on enrollment of members: a. A substantial sum of Rs.1,800/- out of Rs.4,400/- is credited direct to the account of “Amway”. It is stated on behalf of the company in the Writ Petition that it enrolled 4,50,000 distributors all over India. Taking this as correct, a sum of Rs.81,00,00,000/- (Rupees Eighty One Crore) is appropriated by the company at the time of enrollment of the members itself. This cannot but be stated “easy/quick money” got by it from the so called distributors/member de hors any service. b. The terms and conditions of “Distribution Renewal from”, supplied by “Amway” shown as Annexure-3 read as follows: Condition No.3: “The distributorship agreement if not renewed by Amway shall stand terminated on 31 December or on expiry of one year from the date of distributorship, as the case may be.” Condition No.12: “The Renewal of subscription fee including Block Renewal subscription fee is non- refundable.” Condition No.14: “Renewal of subscription fee is mandatory to continue with business and maintain your position in line of sponsorship” Thus, from 4,50,000/- distributors the company would get a sum of Rs.45,00,00,000/- (rupees forty five crores) (4,50,000 x 995) per annum on completion of every year which can only be stated to be “easy/quick money” sans any service to the distributors/members. c. To enable him to get the so called commission @ 3% every month, the ABO has to distribute/purchase/sell products worth Rs.2,000/- of “Amway” every month or else he will not be eligible to get any commission or continue as member in the scheme. Thus, each member is forced/induced/lured to purchase the products worth Rs.2,000/- every month to keep his chance of getting commission alive. Thus, “Amway” would automatically get a business of the quantum of Rs.1080/- crores (4,50,000 x 2,000 x 12(months) ) per annum which would yield an astronomical profit and it cannot but be stated as “easy/quick money” without any service to the distributors/members irrespective of whether they sell the products or not, though the company may conveniently refer it as “turnover by sale of products”. The learned Advocate General also explained how the scheme ensures payment of money on any event or contingency relative or applicable to the enrollment of members into the scheme. He submitted that a person who joins the scheme and becomes a distributor earns money in different ways. The learned Advocate General explained the mechanism of the scheme in the following manner: 1) Retail Profit Margin: On his becoming a member products are purchased or delivered to him. When he sells the product at a price not exceeding the MRP printed on the pack, he will get retail profit margin calculated as the difference between the distributor’s price and the MRP printed on the pack. 2) Performance Based Incentive: He will get incentives by way of fixed business volume (BV) and point value (PV) upon achieving a minimum PV for the month, i.e., if he reaches the level of the sale of products by earning minimum PV of 100, he becomes entitled to receive additional incentives on a graded scale depending upon the PV achieved for the month. The percentage of incentives depends upon the percentage of PV and the incentive is paid at the relevant percentage on the BV. All this is explained from the 1st petitioner’s scheme (Annexure-A at page-71 onwards in W.P.No.20470 of 2006). 3) On enrollment of other distributors sponsored by him, the sponsor distributor will get incentives under as many as 10 heads which are solely related to the PV and BV achievement of the sponsored distributors. The learned Advocate General referred to page- 33 of the W.P.No.25749 of 2006 which contains the 1st petitioner’s scheme wherein the various incentives which the existing member gets on completion of the sponsoring of the entire group comprising 103 members. The learned Advocate General distinguished the judgment of the Supreme Court in Swapan Kumar Guha (1 supra). He pointed out that after interpreting Section 2(c) of the Act, the Supreme Court held that the complaint lodged by the State in that case failed to satisfy the ingredients of the said provision and quashed the registration of criminal case and argued that the ratio of that judgment has no application to the facts of the present case in which the allegations contained in the First Information Report taken on their face value constitute an offence under the provisions of the Act. Sri A.Rajasekhar Reddy, learned Assistant Solicitor General appearing for Union of India submitted that the scheme approved by the Government of India is different from the scheme which the 1st petitioner company is executing and, therefore, the approval given by the Government of India cannot be used as a shield by the petitioners for carrying unlawful business. He referred to the letters dated 31.3.2003 and 23.9.2003 addressed by the Secretary, Government of India, Ministry of Consumer Affairs and submitted that though in the first letter a reference was made to the Judgment in Swapan kumar Guha (1 supra) and the Secretary opined that the companies dealing with direct/ network/middlemen marketing do not fall within the provisions of the Act, later on, he clarified that the unlawful activities are prohibited in the Act. Shri Rajasekhar Reddy submitted that as per letter dated 29.3.2003, the pyramid structured marketing schemes fall within the provisions of the Act and the people running those schemes cannot claim the benefit of the approvals granted by the Government of India. The learned counsel further argued that having regard to the serious allegations which prima facie show that the petitioners are involved in money circulation prohibited by the Act, they cannot seek to interdict the investigation by the police and that the truth or otherwise of the allegations made in the criminal case should be allowed to be revealed and this Court cannot issue writ to stultify the investigation. Mr.D.Sheshadri Naidu, who appeared for respondent No.8 in W.P.No.20471 of 2006 argued that the business being carried on by the petitioners attracts the definition of Section 2(c) of the Act. He submitted that the sale of product envisaged in the scheme is only a camouflage for the money circulation business. He referred to certain passages of G.P.Singh on Interpretation of Statutes and submitted that even though the scheme evolved by the 1st petitioner and being implemented does not overtly replicate a scheme prohibited under the provisions of the Act, a dynamic interpretation is required to be given to the provisions of the Act in order to prevent social evil being perpetrated by the petitioners. In his rejoinder, Shri B. Adinarayana Rao reiterated that the Government of India has not taken a specific stand that the business activity of petitioner No.1 is hit by the provisions of the Act. He submitted that the main ingredient of quick or easy money envisaged under Section 2(c) of the Act does not exist in the petitioners’ scheme. He further submitted that the 1st petitioner has an annual business turnover of 700 crores and even assuming that all the 4,50,000 subscribers paid the annual renewal fees of Rs.995/-, the 1st petitioner gets only about Rs.40 crores and by no stretch of imagination it can be said that the 1st petitioner is getting quick or easy money on this count. He referred to the instance pertaining to Accused No.4 (Raja Naren) in Crime No.10 of 2006 narrated in the counter affidavit wherein it is stated that the said person became a diamond member of the 1st petitioner company in the month of August 2006 and that he has not purchased goods worth a single rupee, but still he has credited with points worth Rs.7,61,140/- during that year and submitted that even if these figures are correct, the provisions of Section 2(c) of the Act are not attracted because making of such a profit by a person is not forbidden by any law. The learned counsel submitted that the commission credited to a sponsor on the purchases made by the downline distributors is only one of the components of the payments received by the sponsor members. The learned counsel then submitted that even if the Court comes to the conclusion that Section 2 (c) is attracted in the case of the petitioners, they cannot be forced to close the business till the conclusion of the criminal proceedings and indiscriminate seizure of products being effected by the police should be declared illegal and nullified. We have given serious thought to the respective arguments. However, before dealing with the same, we may notice the background in which the Act was enacted and the salient features thereof. Analysis: A study group constituted by the Reserve Bank of India made an in-depth examination of the provisions of Chapter-III-B of the Reserve Bank of India Act, 1934 and submitted its report with the recommendations that prize chits or money circulation scheme, by whatever name called, should be banned in the larger interest of public and suitable legislative measures should be undertaken. In order to implement these recommendations, the Parliament enacted Prize Chits and Money Circulation (Banning) Act 1978. Section 2 (c) of the Act defines money circulation scheme as: “ “money circulation scheme” means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrollment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions” Section 3 of the Act imposed a prohibition on promotion or conduct of any prize chit or money circulation scheme or enrollment as a member to any such chit or scheme or participation in it otherwise or receive or remit any money in pursuance of any chit or scheme. Section 4 of the Act postulates that whoever contravenes the provisions of Section 3 shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to Rs.5,000/- or with both. Proviso to Section 4 prescribed minimum sentence of imprisonment of one year and fine of Rs.1,000/- in the absence of special and adequate reasons to the contrary to be mentioned in the judgment. If a person in promotion or conduct of any prize chit involves himself in the acts enumerated in section 5 (a) to (f) of the Act, he shall be punishable