Corporate Frauds Watch: AP High Court slams Amway India once again

Here is the Full text of the judgement delivered by the Division Bench of Andhra Pradesh High Court which slammed the business model of Amway India once again in its judgement.

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

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 (Win Win Vartaka Pvt Ltd) 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 (Mr R Uma Maheswara Rao) 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 2^nd 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 7^th respondent (Corporate Frauds Watch) 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.

[1][1] (2008) 8 SCC 708

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