THE HON'BLE SRI JUSTICE GODA RAGHURAM AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION No. 22914, 22916, 23737 AND 25749 OF 2006 COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) W.P. No.22914 of 2006: This Writ Petition is filed by M/s. Gemini Techno Marketing Private Limited seeking a declaration from this Court that the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 (hereinafter referred to as the “Act”) has no application to the business carried on by the petitioner and its distributors. The petitioner seeks a consequential direction to the respondents not to apply or enforce the provisions of the Act to the petitioners’ business, and to restrain them from interfering with their lawful business. W.P. No.22916 of 2006: The relief sought for in this Writ Petition is to declare that the provisions of the “Act” have no application to the business carried on by the petitioner, and the action of the respondents, in interfering with the business carried on by the petitioner and its distributors, is arbitrary and illegal. The petitioner seeks a consequential direction to the respondents not to apply or enforce the provisions of the Act to their business, and to restrain the respondents from interfering with their lawful business. W.P. No.23737 of 2006: M/s. Dewsoft Overseas Private Limited, and their franchisees, have filed this Writ Petition seeking a declaration from this Court that the action of the respondent, in applying the provisions of the Act to the petitioners’ business and interfering with their business activities, is illegal and arbitrary. They seek a consequential direction to restrain the respondents from interfering with their lawful business and that of their associates/franchisees. W.P. No.25749 of 2006: This petition is filed by a retired scientist of the National Geo- physics Research Institute in public interest to declare the action of respondents 1 to 12, in permitting M/s Amway India Enterprises to run its business in India, as arbitrary and illegal and in violation of the provisions of the Act. It would suffice for the disposal of this batch of writ petitions if the facts, in W.P. No.22914 of 2006, are noted. The petitioner is a private limited company registered under the Companies Act, 1956. It claims to be engaged in the marketing of its products through a network of distributors; to be providing accident insurance of Rs.1.00 lakh to its distributors in collaboration with Bajaj Allianz Life Insurance Company limited; and to have provided employment to thousands of unemployed individuals, more particularly in rural areas. The petitioner would submit that it is an income tax assessee; it is registered under the Sales Tax Acts; it provides accident insurance of Rs.1.00 lakh to each distributor in collaboration with Bajaj Allianz; no easy and quick money circulation is involved in its marketing; there is no element of deception in its marketing business; it is a member of the Indian Direct Selling Association; the members of the association are strictly product sales companies which do not indulge in quick or easy money making/money circulation schemes; the distributors have a separate and independent legal identity from that of the petitioner; the relationship between the petitioner and its distributors is strictly at arm’s length; the distributors are solely responsible for the overall management of their business including sales, income, profit or loss, accounting, taxation etc; the petitioner’s business is not a money circulation scheme under the Act; the petitioner’s sales and marketing plans do not envisage promoting or conducting a scheme for the making of quick or easy money; it is identical for every distributor; each distributor’s success is dependent on the time, effort and commitment put in by him, and the sales and marketing of the products of the petitioner which results in his earning commission on the personal purchase of products for sale to the end consumers amongst the public; the commission earned is on the group turnover of product purchases, for sale to the consumers amongst the public, made by the distributor and his/her group distributors; there is no compulsion for a person to continue as a distributor; within the 90 days trial period he can return the business kit and obtain full refund of the money paid by him; free product training sessions are held for training of distributors; the distributors go to the consumers amongst the general public, receive orders and place purchase orders with the petitioner at the distributor price, and sell products to the end consumer at a price not exceeding the MRP printed on the product; the petitioner’s sale and marketing plan does not envisage making quick or easy money; distributors do not earn money by enrolling new distributors; the focus is only on the sale of products; none of the conditions precedent for attracting Sections 2(c), 3 and 4 of the Act are attracted; and the incentives given by the petitioner towards distribution is for the efforts put in by them. The petitioner would assert that, without recognizing the factual and legal position, the respondents were interfering with their lawful business by taking action against them under the Act; respondents 5 and 6 had conducted simultaneous raids on their branches; had caused wide publicity regarding the arrest of some of their distributors; had registered cases against the petitioner and its distributors; had sealed various office premises of the petitioner; and had thereby created panic in the minds of the petitioner’s distributors and consumers with malicious intent. The 2nd respondent would submit that implementation of the Act falls within the purview of the State Government; in case there are fraudulent schemes being carried on in the name of Direct/Network/Multilevel Marketing companies, with the object of making quick and easy money, such schemes should be investigated by the State Government; the Reserve Bank of India issued a clarification in its letter dated 5.2.2003; and it is for the State Government to decide whether or not any given scheme attracts the provisions of the Act. The 7th respondent would submit that the petitioner’s scheme is a binary scheme which means one person has to sponsor or enroll two persons each, and again these two persons are required to enroll or sponsor two persons each to join into the scheme; the new member must be sponsored or enrolled by the already enrolled members in the scheme; the new member ie., those sponsored are called the downline workers and the sponsor is called the upline member; the entrance fee is Rs.2699/-; when a new member joins the scheme, all upline members in the same network or chain get commission irrespective of their efforts; as soon as new members are sponsored either directly, or by the efforts of his downliners, all the upliners in the group get points and, on the basis of points, commission is paid and distributed; as money circulation is based on the contingency relative or applicable to enrolment of members, and on the efforts of the down line members, it is nothing but easy money; the petitioner is promoting an illegal money circulation scheme under the guise of sale of products; the amount of commission paid by the company is directly dependant on the sponsoring of new members into the scheme, not only on his personal efforts but also on the event of contingency relative or applicable to the enrolment of new members by their downline members without effecting any sales; and the scheme squarely falls within the definition of Section 2(c) of the Act. Reference is made to the judgment of the Supreme Court in Kuriachan Chacko v. State of Kerala[1] in this regard. The 7th respondent gives a graphical representation, of the enrolment scheme of the petitioner, in the form of a chart which, for convenience sake, is extracted hereunder:- Graphical representation of the enrolling scheme of the petitioner: It is contended on behalf of the respondents that the petitioners’ scheme requires enrolled members to sponsor new members called independent business associates; the members so enrolled are required to pay Rs.10,000/- as entrance fee for which the company claims that it would allot web space which is completely intangible in nature; subsequently the new members are required to sponsor more members for which attractive incentives are provided to them by the company; the sponsoring scheme is a binary system where each member sponsors two members; additional incentives are given for sponsoring of new members in addition to the normal merchandise; the sponsored member is treated as a down liner to the sponsorer and his upline members; this scheme of enrolment of new members, attracting them in the form of commission which is relative to the enrolment of new members into the scheme, falls within the definition of “Money Circulation Scheme” under the Act; these Money Circulation Schemes are pyramid schemes wherein the levels grow with induction of new members at every level; the scheme works to benefit those in the first level, and the vast majority of participants who join at lateral levels lose their original investments; while these companies could challenge their prosecution and contend in the criminal cases filed against them that the Act does not apply to their activities, they cannot pre-empt criminal action being initiated on the basis of a declaratory relief as sought for in the present writ petition. The Prize Chits and Money Circulation Scheme (Banning) Act, 1978, (hereinafter called the Act), is an Act to ban the promotion or conduct of prize chits and money circulation schemes, and for matters connected therewith or incidental thereto. Section 2(c) of the said Act defines money circulation scheme to mean any scheme, by whatever name called, for 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 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. Section 2(e) of the Act defines prize chit as under: “prize chit” includes transaction or arrangement by whatever name called under which a person collects whether as a promoter, foreman, agent or in any other capacity, moneys in one lumpsum or in instalments by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings, mutual benefit, thrift or any other scheme or arrangement by whatever name called, and utilises the moneys so collected or any part thereof or the income accruing from investment or other use of such monies for all or any of the following purposes, namely:- i. giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or kind, whether or not the recipient of the prize or gift is under liability to make any further payment in respect of such scheme or arrangement; ii. refunding to the subscribers or such of them as have not won any prize or gift, the whole or part of the subscriptions, contributions or other monies collected, with or without any bonus, premium, interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit. Under Section 3, no person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme. Under Section 4, 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 five thousand rupees or with both. Section 7 (1) of the Act confers powers on a police officer to enter any premises which he has reason to suspect is being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of the Act; to search the said premises and the persons he may find therein; to take into custody and produce before any Judicial Magistrate all such persons against whom a complaint has been received or a reasonable suspicion exists of their being concerned with the use of the said premises for purposes connected with, or with the promotion or conduct of any such prize chit or money circulation scheme; to seize all things found in the said premises which are intended to be used, or reasonably suspected to have been used, in connection with any such prize chit or money circulation scheme. What is within the mischief of the Act is not “any scheme, by whatever name called, for the making of quick or easy money” simpliciter, but a scheme for the making of quick or easy 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 their periodical subscriptions). Two conditions must be satisfied before a person can be held guilty of an offence under Section 4 read with Sections 3 and 2(c) of the Act. In the first place, it must be proved that he is promoting or conducting a scheme for the making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrolment of members into that scheme. It is necessary that the activity, charged as falling within the mischief of the Act, must be shown to be a part of a scheme for making quick or easy money, dependent upon the happening or non-happening of any event or contingency relative or applicable to the enrolment of members into that scheme. The systematic programme of action has to be a consensual arrangement between two or more persons under which the subscriber agrees to advance or lend money on the promise of being paid more money on the happening of any event or contingency relative or applicable to the enrolment of members into the programme. Reciprocally, the person who promotes or conducts the programme promises, on receipt of an advance or loan, to pay more money on the happening of such event or contingency. (State of W.B. v. Swapan Kumar Guha[2]). The event or contingency on the happening of which the amount would become payable must be relative or applicable to the enrolment of members into the Scheme. It is immaterial by whom such members are enrolled. It may be by members, by promoters or their agents or by gullible sections of the society suo motu (by themselves). The sole consideration is that payment of money must be dependent on an event or contingency relative or applicable to the enrolment of more persons into the Scheme, nothing more, though nothing less. (Kuriachan Chacko1). The petitioner sells its products through individuals called distributors in terms of a distributorship agreement. Under the terms of the agreement of distributorship, the company has reserved to itself the right to confirm the independent business associates only after receipt of full payment; all distributors/IBAs are advised to sponsor new distributor/IBA in their downline only after their personal distributor/IBA is confirmed; the terms and conditions also stipulate that the company would distribute 90% of its total revenues; the application form, for registration as a distributor, shows that Rs.2,688/- is required to be paid as agency fee/distributor fee/membership fee for which free gifts of a dinner set, an idly cooker set, and a kadai 3 pieces set, are given to the applicant; in addition Rs.10,000/- is required to be paid for which the distributor is insured under the Bajaj Allianz unit gain policy, and he receives as free gifts a dinner set, an idly cooker set and a kadai 3 pieces set; the application for registration also requires the applicant to disclose who his sponsor IBA/distributor is; his position, and whether it is to the left or to the right. It is this scheme which the respondents contend attracts the provisions of the Act. It is evident from the facts aforementioned that a person can become a “so called distributor” of the petitioner company, only if he is sponsored by another independent business associate/distributor. The incentives to which a newly enrolled distributor is entitled to is based on the number of distributors/independent business associates he sponsors. The petitioner company claims to distribute 90% of its total revenues among its distributors/IBAs. A substantial part of the income which the distributors/IBAs get, therefore, depends on an event or contingency relative or applicable to the enrollment of new distributors/IBAs into the scheme. The scheme is formulated as an inducement for enrollment of new distributors/IBAs to earn higher incentives. The lure of more incentives is the inducement for existing distributors/IBAs to aggressively pursue enrollment of new members, as distributors/IBAs, with a view to make quick/easy money. The petitioner company promises payment of incentives to the sponsorer distributors/IBAs, on the business turned out by the newly sponsored and enrolled distributors/IBAs, which constitutes an event or contingency relative to the enrollment of such members. The petitioner not only earns quick/easy money from its distributors, but it also provides attractive inducements to its distributors to earn quick/easy money. The ingredients of Section 2(c) of the Act, i.e., (a) making of quick or easy money; and (b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme, are satisfied in the cases on hand. As the provisions of the Act are attracted, Section 7 of the Act empowers the respondents to enter into the petitioner’s business premises, and take into custody the persons involved in the scheme. The action of the respondents in initiating criminal proceedings against the petitioners, who have promoted such schemes, does not, therefore, necessitate interference in proceedings under Article 226 of the Constitution of India. In more or less similar circumstances the Division Bench of this Court, in Amway India Enterprises v. Union of India[3], observed:- “……But on a careful analysis of the true nature of the scheme as explained above, it is quite apparent that one of the components of the income earned by a sponsor member is the commission which is calculated not only on the personal PV of the sponsor member, but also from the PV earned by the remaining 102 members falling within his group. There is, therefore, no gainsaying that a substantial part of the income which the first sponsor member of the group gets depends on the event or contingency relative or applicable to the enrollment of members into the scheme…….. Thus the money which the member at the top of the line gets depends upon the members whom he enrolls or the members enrolled by him enroll……..” “………Whether second ingredient is also satisfied or not is to be considered now. As seen above, each member on his enrollment pays Rs. 4,400/ -. Payment of Rs. 4,400/- by a member on his enrollment and his future earnings through marketing/enrolling other members constitutes event or contingency relative to his enrollment the distributor gets all this money as a consideration for promise made by the sponsor at the time of his enrollment Thus as far as the member joining the scheme is concerned, both the ingredients of Section 2 (c) of the Act, i. e. , a)making of quick or easy money, and b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme are satisfied. …….” …….It is, thus, evident that the whole scheme is so ingeniously conceived that the inducement for aggressive enrollment of new members to earn more and more commission is inherent in the scheme. By holding out attractive commission on the business turned out by the downline members, the scheme provides for sufficient inducements for its members to chase for the new members in their hot pursuit to make quick/easy money. On the part of the promoter by pushing each member to achieve the minimum sates worth Rs. 2,000/- per month, (this sale includes enrollment of new members) he is assured of about 1000 crores per annum. All this squarely satisfy the description of quick/easy money….. The plea of the first petitioner that there is no compulsion that a member shall renew his distributorship looks to us to be specious. Once a person becomes a distributor in a scheme of this nature where the sops in the shape of commission are so luring, it would be very difficult for a member to withdraw from their membership to avoid payment of the annual renewal subscription fee. ……” “…..FROM the whole analysis of the scheme and the way in which it is structured it is quite apparent that once a person gets into this scheme he will find it difficult to come out of the web and it becomes a vicious circle for him….. By no means can it be said that the money which the first petitioner is earning is not the quick/easy money. By promising payment of commission on the business turned out by the down-line members sponsored either directly or indirectly by the up-line members (which constitutes an event or contingency relative to enrollment of members), (the first petitioner is earning quick/easy money from its distributors, apart from ensuring its distributor earn quick/easy money. Thus the two ingredients are satisfied in the case of promoter too. We are, therefore, of the considered view that the scheme run by the petitioners squarely attracts the definition of "money Circulation scheme" as provided in Section 2 (c) of the Act…..” (emphasis supplied) The petitioners in W.P. No.22914 of 2006, 22916 of 2006 and 23737 of 2006 are not entitled to the relief sought for in the writ petitions filed by them. These writ petitions fail and are, accordingly, dismissed. Writ Petition No.25749 of 2006 is disposed of accordingly. However, in the circumstances, without costs. ______________________ GODA RAGHURAM, J ____________________________ RAMESH RANGANATHAN, J Date: 30.07.2010 MRKR/ASP [1] (2008) 8 SCC 708 [2] (1982) 1 SCC 561 [3] 2007(4) ALT 808