Amway's business plan is nothing but easy and quick money: AP High Court

What made the Andhra Pradesh High Court to come to the conclusion that Amway India has been making easy and quick money. The following paragraphs established that how Raja Naren, a diamond, made several hundreds of thousands of rupees every year without purchasing a single product.

14.       In his rejoinder, Shri B. Adinarayana Rao (counsel for the petitioner Amway India) reiterated that the Government of India has not taken a specific stand that the business activity of petitioner No.1 is hit by the provisions of the Act.  He submitted that the main ingredient of quick or easy money envisaged under Section 2(c) of the Act does not exist in the petitioners’ scheme.  He further submitted that the 1^st petitioner has an annual business turnover of 700 crores  and even assuming that all the 4,50,000 subscribers paid the annual renewal fees of Rs.995/-, the 1^st petitioner gets only about Rs.40 crores and by no stretch of imagination it can be said that the 1^st petitioner is getting quick or easy money on this count.  He referred to the instance pertaining to Accused No.4 (Raja Naren) in Crime No.10 of 2006 narrated in the counter affidavit wherein it is stated that the said person became a diamond member of the 1^st petitioner company in the month of August 2006 and that he has not purchased goods worth a single rupee, but still he has credited with points worth Rs.7,61,140/- during that year and submitted that even if these figures are correct, the provisions of Section 2(c) of the Act are not attracted because making of such a profit by a person is not forbidden by any law.  The learned counsel submitted that the commission credited to a sponsor on the purchases made by the downline distributors is only one of the components of the payments received by the sponsor members.  The learned counsel then submitted that even if the Court comes to the conclusion that Section 2 (c) is attracted in the case of the petitioners, they cannot be forced to close the business till the conclusion of the criminal proceedings and indiscriminate seizure of products being effected by the police should be declared illegal and nullified.

22.       We shall now examine whether on the admitted facts and the material available on record, the scheme envisaged by petitioner No.1 attracts the aforementioned ingredients of clause (c) of Section 2 of the Act. 

The Scheme:

23.       The purported theme behind the scheme appears to be direct selling which means sale of products to the customers by the distributors of the company without there being any wholesaler or retailer.  It is explained in the affidavit filed in support of the writ petition that a person becomes a distributor by purchasing a business kit at a cost of Rs.4,400/- comprising; a) Rs.2,600/- towards the products and other material (sales aid and literature) and b) Rs.1,800/- towards product literature and subscription fee.  In this process, the distributors are provided with incentives.  Annexure-7 (brochure) to the reply affidavit filed by the petitioner titled “Amway Sales and Marketing Plan in India” unfolds the entire scheme.  It is explained therein that distributors can generate income in two ways, namely; 1) by earning retail sales profit, and 2) through performance incentive; that the distributors purchase products from Amway at distributors cost and then sell these products at higher price (not more than printed MRP) which is the retail sales profit.  As regards performance incentive, it is appropriate to extract the relevant portion of the brochure:

“ Performance Incentive:

Your performance incentives are based on monthly calculation of your individual and group PV/BV.  This incentive is based on a slab system that ranges from 3% to 21@ depending on your business volume.  Your earnings would be proportionate to your efforts.

PV (Point Value) is a unit amount assigned to each product.  It is an effort index, which puts emphasis on the units sold and not the selling price.  Each month the PV is totaled in order to determine the performance incentive bracket.  These brackets range from 3% to 21%.

BV (Business Volume) is a monetary figure assigned to each product.  In order to calculate the Performance Incentive, the percentage amount determined by total PV is applied to the total BV for the month.  The ratio of PV to BV in India is 1 PV = 45 BV.

Performance Incentive table

If Total Monthly PV is          BV is           Performance incentive is

10,000                               4,50,000        21% of Your BV   7,000                               3,15,000              18%   4,000                               1,80,000              15%   2,000                                  90,000              12%   1,000                                  45,000                9%      500                                  22,500                6%      100                                    4,500                3%

27.       In the above given diagram drawn to a 1-6-4-3 pattern, the first member sponsors six members.  Each of the six members in turn sponsors four members and each of the twenty four members sponsors three members.  Thus the strength of the total group becomes 103.  At the minimum level of PV and BV, the profit margin and the commission the person heading the group, by taking his personal PV and BV gets is Rs.12,420/-, from the PV and BV of the six persons he sponsored he gets Rs.23,760/-, from the PV and BV of the 24 distributors who were sponsored by six distributors he gets Rs.1,14,480/- and from the PV and BV of 72 distributors whom the 24 distributors sponsored he will get Rs.6,83,300/.  This is the admitted position under the scheme.                         

28.       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.  

29.       In Para 21 of the counter affidavit of respondent No.6 the example of Raja Naren is cited and the petitioner did not dispute the averment relating to the income he earned in a year.  The said instance is illustrative of a person earning fabulous income without doing anything after he accomplishes his task of enrolling the required number of persons as members into the scheme. 

30.       From the aforementioned discussion, it is proved that the scheme provides for easy/quick money to its distributors.  The first ingredient is thus satisfied.

30.       From the aforementioned discussion, it is proved that the scheme provides for easy/quick money to its distributors.  The first ingredient is thus satisfied. 

31.       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.

After thoroughly going through the submitted material to the High Court only the Division Bench has come to conclusion that the Amway India's business model is nothing but a money circulation scheme.