Tuesday, 30 November 2010

JUDGEMENTS AGAINST MULTI-LEVEL MARKETING (MLM) A CAMOUFLAGED ILLEGAL MONEY CIRCULATION SCHEME


1. Amway Vs. State of A.P. and others                         A.P. High Court
2. Apple FMCG Vs. State of T.N. and others                   Madras High Court
3. Geminitech, Amway and others Vs. State of A.P.        A.P. High Court
4. Commissioner of Income Tax Vs. Amarjeet Kaur        Karnataka High Court
5. Kuria Chan Chako Vs. State of Kerala and others        Supreme Court


 2007 (4) ALT 808(D.B.)

IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD
HON’BLE SHRI G.S.SINGHVI, CHIEF JUSTICE
AND
HON’BLE SHRI JUSTICE C.V.NAGARJUNA REDDY

WRIT PETITION Nos. 20470 AND 20471 OF 2006 – DECIDED ON 19-07-2007.
Between:
Amway India Enterprises, (a Private Company with unlimited liability),
Through Mr.Yoginder Singh, Authorised Signatory and another                                          … Petitioners
Vs.
Union of India, rep., by Secretary, Ministry of Home, New Delhi and others.             

                   … Respondents

PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978, Sections 2(c) and 3 – Money Circulation Schemes – Applicability of provisions of Act to Pyramid Structured marketing Scheme being run by first petitioner through which money is earned by enrolling members – Scheme whether attracts definition of ‘Money Circulation Scheme’ banned under the Act – Writ petitions filed to declare that provisions of the Act have no application to the scheme run by 1pst petitioner and to restrain the respondents from interfering with petitioners’ business – Complaint made again petitioners that it is a money circulation scheme prohibited under Section 3 of the Act which petitioners denied – Plea taken by petitioners that none of the ingredients of Section 2(c) of the Act exist in the business carried on by them as there is neither quick or easy money involved in the scheme nor the money received by promoter or sponsor member depends on any event or contingency relative or applicable to enrolment of new members into the scheme – Petitioners further pleaded that the scheme does not provide for payment of money on a mere enrolment to attract Section 2(c) of the Act – Respondents taken a plea that scheme involved easy quick money by enrolling members into the scheme which is prohibited under the Act – ingredients of Section 2(c) – It must be proved that first petitioner is promoting or conducting a scheme for the making of quick or easy money and the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to enrolment of members into that scheme – Held that scheme of first petitioner provides for easy / quick money to its distributors – The money which the sponsor member at the top of the line gets depends upon members whom he enrolls or the members enrolled by him enroll – Payment made by a member on his enrolment and his future earnings by enrolling other members constitute event or contingency relative to his enrolment – Distributor gets all the said money as a consideration for a promise made by the sponsor at the time of his enrolment – Thus, held that both the ingredients of Section 2(c) of the Act in respect of distributor satisfied – Inducement for aggressive enrolment of new members to earn more commission is inherent in the scheme – Scheme provides for sufficient inducements for its members to chase for new members to make quick  easy money – By promising payment of commission on the business turned out by down-line members sponsored either directly or indirectly by the up-line members constituting a contingency relative to enrolment of members, first petitioner (promoter) is earning quick / easy money from its distributors apart from ensuring its distributors to earn quick/easy money – The two ingredients are thus satisfied in the case of promoter too – Held that the scheme run by petitioners squarely attracts the definition of ‘Money Circulation Scheme’ as provided in Section 2(c) of the Act.
Held:  As is evident from the contentions advanced on behalf of the petitioners as noted earlier, the petitioners have taken the stand that there is no quick or easy money involved in the scheme and that the money which the sponsor member gets does not depend on any event or contingency relative or applicable to the enrollment of the members into the scheme.  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 all 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.  This conclusion can be tested by a further analysis of the income figures given in the earlier paragraph.  Supposing the sponsor member at the top does not introduce any member and if he merely sells the products given to him, he gets an income of Rs.12,420/-.  If he sponsors only six people and they in turn do not sponsor any member, then he will get an additional income of Rs.23,760/-.  If those six members whom he sponsored again sponsor four members each, he will get a further income of Rs.1,14,480/- and if the 24 members sponsor three members each, he will get a further sum of Rs.6,83,300/-.  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. (Para 28).
          From the aforementioned discussion, it is proved that the scheme provides for easy/quick money to its distributors.  The first ingredient is thus satisfied (Para 30).
          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 (Para 31). 
         As pleaded by the petitioners themselves, out of Rs.4,400/- a substantial part, namely Rs.1,800/- is collected as subscription fee, license fee, business kit etc.  To qualify for earning commission a member has to earn the minimum monthly PV of 50 which he will get by selling products worth Rs.2,000/-.  Respondent No.6 in para-11(c) of his counter affidavit specifically pleaded that  “Amway” (First petitioner) 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”.  Significantly, this assertion made in the counter affidavit is not denied in the rejoinder of the petitioners. They have merely tried to explain the said allegation by offering certain justifications.  The petitioners have not specifically denied that the first petitioner would get a sum of Rs.1,080/- crores by ensuring that each distributor maintains the minimum sales level.  Even though the scheme per se does not stipulate that each distributor has to maintain the minimum required business level, prescription of minimum level of 50 PV to qualify for getting commission is sufficient inducement for the members to relentlessly strive for maintaining the PV level at or above the said minimum levels.  (Para 33).
          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 sales 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.  In addition to this, it is an admitted fact that each person in order to continue to be the distributor, shall pay renewal subscription fee of Rs.995/- per annum.  In para-11(b) of the counter affidavit on the admitted number of distributors of  4,50,000 this amount is calculated at about Rs.45 crores per annum.  These figures are not denied by the first petitioner in its rejoinder.  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. (Para 34).
          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.  In any event the petitioners have not specifically denied the turnover they are achieving and the income they are earning towards the initial enrollment of the distributors, the renewal subscription fee and the minimum sales being achieved by the distributors as alleged in the counter affidavit.  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. (Para 35).

          PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978, Sections 2(c), 3, 4 5, 6 and 7 – Indian Penal code, 1860, Sections 385 and 420 – Constitution of India Article 226 – Criminal Procedure Code 1973, Section 482 – Money Circulation Scheme – Interference in criminal investigation by High Court -  Complaint made that Pyramid Structured Marketing scheme being run by first petitioner is a money circulation scheme prohibited under the Act – C.I.D. Police registered a crime – Petitioners taken a plea that the scheme was approved by Government of India and that as it was not cancelled, they cannot be prosecuted – None of the brochures referred to in writ petition not placed before Government of India – Committee which recommended for the approval – Secretary, Government of India clarified that the scheme of first petition falls within the provisions of the Act – Fact that it is not cancelled or withdrawn by Government of India not a ground to stultify the investigation of case – On admitted material, court held that it is a Money Circulation Scheme – Allegations contained in complaint taken on their face value make out an offence punishable under sections 4, 5 and 6 of the Act – No warrant for restraining investigating agency from proceeding with criminal case – Plea taken by petitioners that their business cannot be interfered with until they are found guilty of the offence – Rejected – Police empowered to take action under Section 7 of the Act for offence committed under the Act – Alleged that police sealed the various office premises of petitioners after registering crime – Held that action complained of falls well within the powers of Police vested under Section 7 of the Act.

Held:  Though the petitioners herein have not specifically sought for quashing of FIR and it is stated in para-27 of the writ affidavit that the petitioners are reserving their right to initiate appropriate action for annulment of the action of respondents 5 and 6 in registering the case against the petitioners, in reality granting of relief claimed in these writ petitions would virtually have the effect of quashing the criminal proceedings initiated against the 1st petitioner.   Therefore it is necessary for us to consider the contents of the complaint in the light of the law laid down by the Supreme Court on the scope of interference by the High Courts in criminal investigation/trial while exercising power under Article 226 of the Constitution or Section 482 of the Code of Criminal Procedure.  (Para  40).
          The complaint submitted to the CID Police, Hyderabad in this case is exhaustive. The complainant graphically described how the scheme run by petitioner No.1 through the other petitioners and various distributors in the country constitutes money circulation scheme.  The gist of the complaint has already been extracted herein before.  From the conclusion arrived at by us on the analysis of the admitted material available before us concerning the scheme, we have no doubt whatsoever that if the allegations contained in the report of C.No.1474/C-27/CID/2006 dated 24.9.2006 are taken on their face value they make out an offence punishable under the provisions of Sections 4, 5 and 6 of the Act.  (Para 41).
          By applying the principles set out in the aforementioned judgments, we hold that there is no warrant for us to restrain the investigating agency from proceeding with the criminal case. (Para 48).
          Section 7 of the Act empowers the police officer not below the rank of an officer in charge of a police station to exercise all or any of the powers enumerated therein.  (Para 49).
          In para-28 of the affidavit filed in support of the writ petition it is averred that after registering the crime respondents 5 and 6 have conducted simultaneous raids on the petitioners’ branches at 9 centers in Andhra Pradesh and sealed the various office premises of the petitioners.  The action complained of in the writ petition falls well within the powers of the police vested in them by Section 7 of the Act.  However, we would like to observe that if in the process of exercising such powers the police exceed their powers, it is always open to the petitioners to approach the competent court of law for redressal of their grievance. (Para 50).

Quotable points : (1) Money Circulation Scheme – Scheme promoted to make quick or easy money depending upon contingency relative or applicable to enrolment of members into that scheme comes under Money Circulation Scheme prohibited under Prize Chits and Money Circulation Schemes (Banning) Act of 1978.
          (2) Criminal case in regard to Money Circulation Scheme – Police has power to make investigation into an offence of Money Circulation Scheme and seal the office premises.
CASES REFERRED :
1.       State of West Bengal V. Swapan Kumar Guha: (1982) 1 SCC 561. (Para 6).
2.       State of Haryana and others V. Bhajan Lal and others : 1992 Supp. (1) SCC 335. (Para 42).
3.       State of Bihar V. P.P. Sharma, IAS and another 1992 Supp. (1) SCC 222 (Para 43).
4.       State of Orissa V. Saroj Kumar Sahoo. 2005(2) SCJ 804 = 2005 (2) ALT (Crl.) 16(SC). (Para 44).
5.       A.V. Mohan Rao V. M. Krishan Rao: (2002) 6 SCC 174. (Para 45).
6.       State of Bihar V.Murad Ali Khan. (1988) 4 SCC 655. (Para 45).
7.       Mahavir Prasad Gupta V. State of National Capital, Territory of Delhi: (2000) 8 SCC 115. (Para 45).
8.       State of Karnataka V. M.Devendrappa: (2002) 3 SCC 89. (Para 46).
9.       State of Maharashtra V. Ishwar Piraji Kalpatri. (1996) 1 SCC 542. (Para 47).

Mr. B. Adinarayana Rao for Mr. C. Sudesh Anand, Counsel for the Petitioners in W.P.No.20470 of 06 and for Respondents No.7 in W.P.20471 of 2006.  
Mr. S.R. Ashok for Mr. S. Niranjan Reddy, Counsel for the Petitioners in W.P. 20471 of 2006.
Mr. A. Rajasekhar Reddy, Assistant Solicitor General for Respondent Nos.1 and 2.
Advocate General for Respondent Nos.3 to 6 in W.P.20470 of 2006.
Avocate General for Mr. J. Sudheer, for Respondent Nos.3 to 6 in W.P.20471 of 2006.
Mr. D.Seshadri Naidu, Counsel for Respondent No.8 in W.P.20471 of 2006.

IN THE HIGH COURT OF JUDICATURE AT MADRAS

7.1.2005/W.P.No:22674 OF 2004 AND W.P.M.P.No:27411 OF 2004

Hon’ble A.K.Rajan, J.

M/s. Apple FMCG Marketing (Pvt) Limited, rep. by its Chief Executive Oficer 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, Chennai-600 009.
3.       The Director General of Police, Kamarajar Salai, Mylaport, Chennai-600 004              …           Respondents.

Petition filed under Article 226 of the Constitution of India praying for a writ of declaration that selling products through 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 their bank accounts or interfering in the conduct of the seminars and promotional meetings held for the distributors and prospective distributors and pass such further orders.

Prize Chits and Money Circulation Schemes (Banning) Act (1978), Sections 2 ©, 7, Constitution of India, Articles 19(1) (a) (2), (g), 226 – Writ Petition for declaration that selling products through the Network Marketing System is legal and not in contravention of the Act- Prayer further to forbear respondents (authorities of the Government) from interfering with the lawful business activities of petitioner- company, or freezing accounts, etc.- Mere fact that no complaints were received does not make an act legal, if it be otherwise illegal (Para 15).

Contention of the petitioner that there is no chain of customers appears not acceptable- Scheme 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 the extent- Therefore, it is not correct to say that there is no chain of customers in the process (Para 16).

Definition in S. 2© 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 be enrolment as members into the scheme is ‘money circulation scheme’ – 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’. (Para 20)

It is suffice to say that it is not for Union of India or any Member of Parliament to interpret the provisions of any legislation- 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. (Para 21)

Grievance of the petitioners is that the petitioners are conducting conferences and lectures in order to propagate the scheme and they are under surveillance by the police, and this would amount to violation of the petitioner’s fundamental rights under Article 19(1) (a) and 19(1) (g)- This argument is not acceptable- It is true that they have the right to freedom of speech and expression and also to the freedom to carry on business- But, both the rights are subject to reasonable restrictions as contemplated under Articles 19(2) and 19(g)- The right to freedom of speech is subject to reasonable restriction on the ground of ‘public order’ and the right to freedom to carry on business is subject to reasonable restriction in the interest of ‘general pubic’. (Para 32)

Argument of the learned counsel for the petitioners that there is no promise of quick or easy money is not correct for the reasons stated above- Thus, the so-called Multi-level Marketing, though called by a very attractive name, squarely falls within the definition of ‘Money Circulation Scheme’ under the Act- Hence, it is prohibited by the Act- It is for the law enforcing authorities to take appropriate action- Writ Petition dismissed.

Constitution of India, Articles 19(1) (a) (2), (g), 226 – See Prize Chits and Money Circulation Schemes (Banning) Act (1978), Section 2 (c), 7.

The Writ petition was filed praying for a writ of declaration that selling products through 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 their banks accounts or interfering in the conduct of the seminars and promotional meetings held for the distributors and prospective distributors and pass such further orders. The main contentions of the petitioner are as follows:-

(1)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. 1989 (Hereinafter referred to as ‘The Act’). Paras 1.14.

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 (Para 21).
Held: 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.” (Para 22 ).
In this part of India, people are gullible and fall an easy prey to the tall promises made through the media. That was the reason why the lottery tickets were sold in large numbers in the State. Many companies want to exploit this attitude of people and float many schemes and lure the people to join the schemes. The petitioner is not entitled for direction for prohibiting the authorities from keeping surveillance over any meeting. Sec. 7 of the Act confers the right on the police officer to enter any premises, where he has got a reason to suspect that the premises are 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. (Para 33. ).

According to the Prize Chits and Money Circulation Schemes (Banning ) Act, “Money Circulation Scheme” means-
.. any scheme, by whatever name called:-
(i) for making quick or easy money; or
(ii) for the receipt of any money or valuable thing as the consideration ( or a promise to pay money), on any event or contingency relative to the enrolment of members into the scheme.
Thus the definition covers two aspects : -
(i) A scheme for making quick or easy money :
(ii) for receipt or any money or a promise to pay money: on an event relative to the enrolment in the scheme.
It is applicable to both- the sponserer and the participants or subscribers. (Para 34.).
The event is enrolment of new members: the commission received is relative to such enrolment of new members into the scheme. Therefore, the argument of the learned counsel for the petitioners that there is no promise of quick or easy money is not correct for the reasons stated above. Thus, the so-called Multi-level Marketing, though called by a very attractive name, squarely falls within the definition of ‘Money Circulation Scheme” under the Act. Hence, it is prohibited by the Act. It is for the law enforcing authorities to take appropriate action. In the result, the writ petition is dismissed (Para 36 ).

Reserve Bank of India v…Peerless G.F. & I.Co. Ltd (AIR 1987 SC 1023) : and
State of Wet Bengal v… Sanchaita Investments (AIR 1982 SC 949): Referred to
Writ petition dismissed.
For petitioners:: Mr. P.V.S.Giridhar
For respondents:: Mr. R.Kanniappan G.A.

IN THE HIGH COURT OF JUDICATURE

ANDHRA PRADESH AT HYDERABAD

 

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

GEMINITECH MARKETING PVT. LTD, AMWAY INDIA ENTERPRISES AND OTHERS Vs. State of A.P. and others

 

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][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:-

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][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][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


[1][1] (2008) 8 SCC 708
[2][2] (1982) 1 SCC 561
[3][3] 2007(4) ALT 808

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