IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 7.1.2005 C O R A M : THE HONOURABLE MR.JUSTICE A.K.RAJAN W.P.NO.22674 OF 2004 AND W.P.M.P.NO.27411 OF 2004 1. M/s.Apple FMCG Marketing (Pvt) Limited, rep.by its Chief Executive Officer Mr.R.Eric, No.172, Arcot Road, Vadapalani, Chennai -600 026. 2. Mr.R.Eric .. Petitioners versus 1. The Union of India, rep. by its Secretary to Government, Ministry of Finance, New Delhi. 2. The State of Tamil Nadu, rep. by its Chief Secretary, Secretariat, George Town, Chennai-600 009. 3. The Director General of Police, Kamarajar Salai, Mylapore, Chennai-600 004. .. Respondents Petition filed under Article 226 of the Constitution of India praying for a writ of declaration that selling its products through its Distributors by using the Network Marketing System is legal and not in contravention of the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 or any other law and consequently forbearing the respondents or their subordinates or agents or their men from in any manner interfering with the lawful business activities of the petitioner company by either freezing of bank accounts or interfering in the conduct of the seminars and promotional meetings held for the distributors and prospective distributors. https://hcservices.ecourts.gov.in/hcservices/ For petitioners :: Mr.P.V.S.Giridhar For respondents :: Mr.R.Kanniappan, Government Advocate **** O R D E R The first petitioner is a company registered under the Companies Act. It is marketing various products including shampoo, tea, coffee powder, after-shave lotion etc. under the brand-name 'Joy Eternal' through "network marketing". This method of marketing differs from the conventional sale through a distributor and the retail network; any person could take up the marketing and sale, and make an earning; it is done by several reputed companies like Hindustan Lever and Indian Express. Several unemployed youth have taken up the marketing of these products and have earned satisfactory incomes depending on their talents and efforts. (i) No complaints have been received from any consumer about the quality of the goods sold. Under the scheme of network marketing the company sells products to the customers and the consumers in turn can sell the products to their peers and earn commission out of the sale. In fact it avoids many middlemen, and cost of advertisement, etc. The marketing process is carried out directly by recruiting the customers themselves as distributors of the products and services; the company regularly organises business development meetings and seminars, distributors meetings, etc.,. The participants of the meetings are encouraged to take up the distributorship of the products and are suitably registered if they so desire. There is no service fee for registration as distributor. Any person who is interested is given a product for the price fixed. The distributors are encouraged to en-roll more distributors. The commissions are given only as per the volume of sales made by the individual distributor and his team. This system ensures that intermediate distributors are not like a chain leading to the customer and the company. (ii) There are only two stages, viz. stockist and distributor. The distributor can introduce another person as a distributor and he will also get commission. The distributor has to put in his effort in selling the products and then only he will get the commission. The company also takes care of the risks involved in the trading activities; there is no deposit of money by the consumers and the products are given to the person who pays the money for the same. The distributors are paying the price for the products they purchase. Thus, the possibility of the principal company or its Directors making use of any funds of others is avoided. Except service charges, https://hcservices.ecourts.gov.in/hcservices/ no charges or deposits are levied to enroll as a distributor. There is no risk of non-recovery of the funds due to the consumer since the products are given out only on receipt of payment. Thus, the process of network marketing is a foolproof and beneficial mechanism for the conduct of trade and commerce. The pricing of the products is always a contentious issue. The product is not exorbitantly priced. But, some others, who are inimical towards the company, are trying to overturn the trading activity of the company by resorting to various crooked means and methods. They maligned the name of the company by publishing reports in a magazine and consequently the company is faced with roving enquiries by the police and the company promotion seminars and meetings are also being disturbed by the police. Stockists and distributors of the company have also faced similar harassment. It is an infringement of the fundamental right conferred under Article 19(1)(a) of the Constitution. No complaint has been registered against the company in any of the police stations. The Union of India has also examined the issue of the network marketing and has come to the conclusion that there is no illegality in the said system. The Union of India has also stated that the system of network marketing will not come under the purview of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The labour of a person in selling goods is rewarded by payment of commission. Several companies have launched similar network marketing system. Therefore, it is quite annoying when the police go around the meeting venues and seek statements from them and ask several questions. Such invasive process causes considerable delays and difficulties and results in violation of the rights conferred under Art.19(1)(g) of the Constitution. The company understands that similar companies have been targeted in similar way and their accounts have been frozen by the respondents and the company apprehends that the respondents will take steps to freeze the accounts of the company and disrupt the business activities. There is no promise of easy or quick money held out to the distributors. The distribution of commission for selling is different from the prize chits. The system only results in advancing the socialist vision of the framers of the Constitution, and the wealth is evenly distributed without being concentrated in a group of persons. The people at large are given more opportunity to earn money depending on their skill and labour. The officials of the third respondent are harassing the petitioner and its distributors, and it resulted in decline of the trade activities. Hence the writ petition. 2. The first respondent has not chosen to file any counter in spite of the time granted repeatedly for enabling them to file a counter. https://hcservices.ecourts.gov.in/hcservices/ 3. The second respondent has filed a counter stating that the second respondent has been impleaded unnecessarily in the writ petition. It is also stated that the third respondent would take action, in accordance with the provisions of the Act, if the petitioner commits any illegal act. 4. The third respondent in his counter has stated that the petitioner has explained how the marketing of certain goods through their network is carried on; the petitioner has also stated that there is no FIR pending against their company and hence no investigation is taken up by the police. When that be so, the other facts that the seminars and meetings are all being disturbed by the police is absolutely false. Police would not interfere with any business conducted by any person in accordance with law. If specific complaints are received by the police against the petitioner firm, it is the duty of the police to take up investigation; such investigation can not be prevented. The facts and figures given by the petitioner are illusory and imaginary. The apprehension that their accounts would be freezed would come to the mind only if the business carried on by them is not legal. Under those circumstances, the writ petition filed only on apprehension and fear of intervention and hence it is to be dismissed. 5. After seeing the counter affidavit, the petitioner wanted to withdraw the petition. But in view of the importance of the issues raised in this writ petition, this Court refused to grant permission to withdraw the writ petition. 6. The learned counsel Mr.Giridhar appearing for the petitioner submitted that this system of 'network marketing' practised by the petitioner company does not fall within the provision of Prize Chits and Money Circulation Scheme (Banning) 1978 Act. He submitted that he has filed documents which shows how the net work marketing is carried on. He has filed the pamphlets issued in that regard. 7. (i) According to the system, when a person purchases any product from the company, he has to make an application (form filed in the typed set) which contains the column for three user names (name of person who registers with the company). It also contains a column to fill up the sponsors' name and his placement. He has to sign a declaration that he has entered into this agreement as an independent distributor. In addition to the agreement, they are bound by the conditions contained the brochures (not filed in the typed set) and it is valid for one year from the date of joining. (ii) The type set also contains Product price list for "Rs.550 plan"(also there are "Rs.1000 plan" and others). It https://hcservices.ecourts.gov.in/hcservices/ contains six products namely Nutrimalt, Coffee, Tea, Soap, Shampoo and Pickles. The maximum retail price (MRP) and the distributor's price (DP) also are given. The sum of maximum retail price of all these six products comes to Rs.497/-. The total amount for which it is sold to the distributors is Rs.372/-. (iii) Admittedly, for these products, the so called distributor pays a sum of Rs.550/-, whereas the distributor's price is only Rs.372/-. Therefore, Rs.178 is charged extra from the distributors. This amount, the distributor pays to the company because he is made to believe that when he sells these goods to others and enroll others in the scheme, he gets commission from the petitioner company. Such Commission depends upon the total volume of business that he generates by enrolling new distributors, it progresses like a chain; the amount of commission depends on the subsequent "distributors" who is made to join by the petitioner or a purchaser through him. The promise of the possible commission is the reason for one's enrolment. The form requires to be filled up with three "distributors" names through whom the new entrant get into the scheme and their placement. (iv) One has to purchase one or more starter kit by paying the money as stated above; the starter kit are valued at Rs.550/-, Rs.1000/- and so on; he must sell the product to two other persons and get their application form filled up and sent to the company; those two persons in turn have to purchase starter kits from the company and in turn they must sell and enrol two other persons each. Each new entrant shall purchase the starter kit from the company and in turn sell enroll two other persons. Like this, every new purchaser from whom the new entrant purchases shall enter the three names of his predecessors in the chain. Like this, the chain progresses. The three names filled up by each and every new distributor depending upon the rank or placement and volume of the business, everyone in the chain gets the commission. If a person gets started with five starter kits, he will sell it to ten persons and that ten will become twenty at the next stage and twenty will become forty and so on. When it goes up to ten stages in this manner, the person who sold first will get a commission. 8. As seen already, a starter kit which is sold at Rs.550/- for the goods which may be sold at Rs.372. Therefore, in one kit, an excess amount of Rs.178/- is collected. This amount is shared by the company and the so called distributors. When a person first purchases the starter kit, he pays Rs.178/- more as above. Thereafter, he sells the same at the lesser price (distributor's price) and he may sell it others and earn the profit. That is, each time a person purchases a starter kit, the petitioner gets a sum of Rs.178/- in excess. https://hcservices.ecourts.gov.in/hcservices/ 9. The learned counsel for the petitioner further submitted that earlier 45% of the sale amount was distributed as commission but presently it is increased to 65% of the sale price. That means the goods which are worth only Rs.35/- are sold at Rs.100/- and this Rs.35/- covers not only the price of the goods, but also expenditure involves for the administration of the company. Of course, the Court can not interfere with the fixation of the price. Anybody is free to fix any price and it is for the customers to accept or not. But, it is not an ordinary sale of goods. The persons are lured to become a 'distributor' only on the hope or expectation that he may get more money by way of commission if he sells the products similarly to others. Of course, many persons are earning lot of commission in this manner. This chain is likely to progress for some time. At one point of time the progress of the chain will stop. On that day persons who buy the product may not find any further distributor to purchase from them. By the time, the company would have earned enormous profit. But a very large number of persons would be left cheated. 10. (i) To be a distributor of such product, it requires registration under the TNGST Act, in case the value of turn over exceeds a particular limit. It is possible that a few of the distributors may exceeds that limit. But, those persons are not registered under the TNGST Act and also would not be pay to the Government the sales tax. (ii) That apart, this system is not an ordinary business transaction, it exploits the personal influence an individual has in the society. The 'distributors' are found to influence their subordinates or friends. Many of such distributors gets included because of such undue influence by their superiors. Many unwilling purchasers would be forced to purchase only to obey their superiors or satisfy their friends or at times under threat or coercion or inducement and so on. Therefore, the deemed agreement became void under the Indian Contract Act. Therefore, it is the duty of the law enforcing authorities to prevent such undue influence being exercised. 11. As rightly submitted by the learned counsel for the respondents only under promise or expectation of getting huge commission (easy or quick money), the public are lured to invest more money in such of the schemes. It is only an imaginary profit. Every one cannot sell all the products (as stated already) to some others. If a person is unable to get purchasers or distributors at one point of time, very large number (may be in lakhs) of people would be left at that stage, unable to find a purchaser or distributor. At that stage, all such persons would be cheated. https://hcservices.ecourts.gov.in/hcservices/ 12. From the averments, made in the counter affidavit, it is seen that the law enforcing authorities are keeping the surveillance against such meetings and record statement from the persons who attend the meetings. By that, the law enforcing authorities are doing their duty cast on them. It is indeed appreciable that at least now the law enforcing authorities are vigilant that people should not get cheated and ultimately come to them for redress. 13. But there is also a prayer for declaration that the activities are not illegal and does not amount to violation of any of the laws. Therefore, this Court has to decide the aspect as to whether this multi level marketing is legal or not. 14. The main contentions of the petitioner are as follows:- (i) So far no complaints have been received against them from any distributor. Therefore, this Multi-level Marketing has not caused any loss to any of the distributors. (2) There is no 'service fee' for registration as distributor. (3) Every distributor gets commission on the basis of the volume of business that is generated by him. (4) No chain of customers in the process. (5) The distributors and the purchasers pay the value of the product that is purchased, therefore, they are not paying any excess amount. (7) They collect only nominal service charge for the service rendered. (8) The surveillance by the respondents violates the petitioners' fundamental right provided under Articles 19(1)(a) and 19(1)(g) of the Constitution of India. (9) Further the Union of India has also clarified that the "Multi-level Marketing" does not infringe the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (Hereinafter referred to as 'The Act'). 15. Mere fact that no complaints were received does not make an act legal, if it be otherwise illegal. It is true that no service fee is collected by the petitioner for registration. It is also true that the commission that is received by the distributor depends upon the volume of business generated by him. From the scheme of Multi-level Marketing, as reflected in the brochure issued by the petitioner, the commission is received only if the distributor sells the https://hcservices.ecourts.gov.in/hcservices/ product, which he purchases, to two others and those two persons sell it to two other persons each and those four persons sell similarly to two persons each. In this manner, if more number of persons in the next stages come into this scheme, the person through whom those persons got enrolled gets commission. 16. The contention of the petitioner is that there is no chain of customers. This contention appears not acceptable. The scheme, as stated above, creates chain of customers and only when the chain progresses without any break in any of the links, the 'principal distributor' gets more commission. If, for any reason, the chain is broken, at any stage, then the principal distributor's commission would get reduced proportionally to that extent. Therefore, it is not correct to say that there is no chain of customers in the process. 17. The next contention is that the purchasers pay the value of the product as stated above and they do not pay the excess amount. It is seen that a 'starter kit' is purchased by the principal distributor for a sum of Rs.550/- as per the plan found in the brochure. The very same brochure contains the M.R.P. of the kit as Rs.497/-, which is rounded off to Rs.500/- and a service charge of Rs.50/- is collected when a kit is sold. The contention that no service charge is collected also does not appear to be correct in view of the fact that every person who purchases a kit has to pay a service charge of Rs.50/- for each kit. Service charges are collected by governmental institutions like Electricity Board and Telephones as they are authorised by the Statutory Rules. No individual can collect any charge as service charges. The collection of service charge is therefore, not legal. 18. As submitted by the learned counsel for the petitioners, the petitioners-Company originally was giving 45% of sale price as commission and now that is increased to 65%. From the very fact that 65% is earmarked for paying as commission to the distributors, it is clear that the value of the product is only 35% of the sale price. That is, when the goods are sold at Rs.550/-, the actual value of the goods that are sold is only Rs.188/-(calculated at 35%). For the value of goods worth Rs.188/-, the purchaser pays Rs.550/-. But, selling the goods at higher price that is fixed by the seller, does not offend any law. To get commission one has to purchase starter kits. If the distributor wants to get more commission through a member of 'sub-distributor' under him, he shall purchase more number of such starter kits. There is no authority to collect Rs.50/- as service charges for one kit. If it is purely a sale of goods, no service charges are permissible under any law. https://hcservices.ecourts.gov.in/hcservices/ 19. The progress of the chain of customers, at some point of time, would get saturated and the distributor, who purchases the goods, will not find any purchaser/sub- distributor to sell or enroll afresh. At that time, due to the progress of the chain, in the manner stated above, such persons who would not find new members may be in lakhs or even millions. Therefore, lakhs or even millions of people are bound to lose their entire money of Rs.550/- (value of one starter kit). At the same time, major portion of 65% of the amount would be a gain to the petitioners-company since there would be no one share that money. 20. Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act, defines 'Money Circulation Scheme', as follows: "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 or a promise to pay money, on any event or contingency relative or applicable to the enrolment 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." The above definition makes it clear that any scheme by whatever name it is called whereby on a promise that one would receive or would make quick or easy money by enrolment as members into the scheme is 'money circulation scheme'. In this case, there is enrolment of members into the scheme; there is also a promise made that on such enrolment of large number of persons into the scheme, one would make quick money or easy money. There cannot be any doubt that by enrolling new members and by the process of selling the goods to new distributors this chain progresses; the person who became such members earlier get commission without doing any work; getting such a commission is nothing but getting quick or easy money. Therefore, such schemes/the so called 'Multilevel Marketing', definitely falls within the definition of 'money circulation scheme'. 21. The learned counsel for the petitioner submitted that Union of India has made a clarification in an answer to a question in Parliament that Multi-level Marketing does not violate or offend the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act. It is suffice to say that it is not for Union of India or any Member of Parliament to interpret the provisions of any Member of Parliament. The Act has been passed by the Parliament, but the power to interpret https://hcservices.ecourts.gov.in/hcservices/ the Act is only vested in Judiciary, and that power is not given to the Executive. The statement given by the Union of India or its Officers that Multi-level Marketing does not attract the provisions of the Act cannot legalise an illegal act. 22. It is true that several companies including Multinational Companies carry on the business of the "Multilevel Marketing" and it is also true that the Executive and the law enforcing authorities keep a blind eye on such activities. This also does not make an illegal act legal. It is always a fact that the law enforcing authority would try to close the stable only after the horse had escaped." That is, the law enforcing authority would realise that this scheme would ultimately leave a large number of persons cheated. Thereafter, after losing their money, they would approach the executive complaining that they were cheated. Till such time, the law enforcing authorities do not act. They do not take preventive action to enforce the provisions of the existing law. 23. The learned counsel for the petitioner placed reliance upon the judgment of the Supreme Court in RESERVE BANK OF INDIA v.. PEERLESS G.F. & I.Co.Ltd. [AIR 1987 SC 1023] to support his argument that there is no element of chance in the scheme adopted by the petitioner and hence the Act is not attracted. In the Peerless's case the Supreme Court had an occasion to interpret