The Consumer Protection Act: Understanding The Exception To “Commercial Purpose”

Gaurav Mitra explains the exception to the term ‘commercial purpose’ provided for in the Consumer Protection Act.

Introduction

The Consumer Protection Act was enacted in the year 1986. As explained in the preamble to the act, the Consumer Protection Act, 1986 (hereinafter referred to as “Act”) was enacted with the main purpose of protecting the interest of consumers ¹. The Act protects the rights of consumers against any businesses which might indulge in fraud or unfair trade practices, with a view to defraud consumers. The Act, when enacted, was an innovative piece of legislation and to this day continues to strengthen the rights of consumers and aims to provide them with an easy and speedy mechanism for resolution of consumer disputes through the various Consumer Dispute Redressal Forums established under the Act. The following persons/authorities/organizations can file a complaint under the Act:

• (i) Any consumer
• (ii) Any recognized consumer association
• (iii) One or more consumers, where there are numerous consumers having the same interest
• (iv) Central Government or State Government
• (v) In case of death of a consumer, their legal heir or representative

ANALYSIS

As can be seen, apart from the Central or State Government it is only consumers or consumer associations which can file a complaint before the Consumer Dispute Redressal Forums.

The definition of a consumer can be found in Section 2(1)(d) of the Act:

• “(d) “consumer” means any person who—
• (i) buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose; or
• (ii) hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial purpose.
• Explanation—For the purposes of this clause, “commercial purpose” does not include use by a person of goods bought and used by him and services availed by him exclusively for the purposes of earning his livelihood by means of self-employment.” ²

On a reading of Section 2(1)(d) of the Act, it becomes clear that the Act specifically excludes any person from its purview who intends to use the purchased/hired goods or services for a commercial purpose. However, the intention behind this exception was to exclude commercial transactions with profit as the motive from taking the benefit of the beneficial legislation, that is the Act. However, the ambit of the exception was found to be too broad and the legislature subsequently stepped in to carve out an exclusion to the exception in order to ensure that deserving parties would still benefit from the provisions of the Act. The legislature, vide The Consumer Protection (Amendment) Act, 1993 ³, introduced the said exclusion to the exception in the Act by adding an explanation to Section 2(1)(d). By way of the explanation, it has been clarified that if a “person uses the goods/services bought/availed by him exclusively for the purpose of earning his livelihood by means of self-employment”, then the purchase/hire of those goods or services would not be included within the meaning of commercial purpose under Section 2(1)(d). Any person who is using the purchased/hired goods or services exclusively for the purpose of earning a livelihood would be included within the meaning of a consumer within the Act.

Before the Consumer Protection (Amendment) Act, 1993, ⁴ had been passed by the legislature, the judiciary had already carved out an exception in the interpretation of Section 2(1)(d). In a case before the Hon’ble National Consumer Disputes Redressal Forum (hereinafter referred to as “NCDRC”) titled “Synco Textiles Pvt. Ltd. Vs. Greaves Cotton and Company Ltd.” ⁵ a 4 member bench of the NCDRC while interpreting Section 2(1)(d) of the Act held that “It would thus follow that cases of purchase of goods for consumption or use in the manufacture of goods or commodities on a large scale with a view to make profit will all fall outside the scope of the definition. It is obvious that Parliament intended to restrict the benefits of the Act to ordinary consumers purchasing goods either for their own consumption or even for use in some small venture which they may have embarked upon in order to make a living as distinct from large scale manufacturing or processing activity carried on for profit.” ⁶. This was the first time that the Hon’ble NCDRC was interpreting the Act to include people who purchase goods or services with the sole purpose of earning a livelihood.

After the Consumer Protection (Amendment) Act, 1993, had come into force, the Hon’ble Supreme Court of India had the opportunity to interpret Section 2(1)(d) of the Act in the case of “Laxmi Engineering Works Vs. P.S.G. Industrial Institute” ⁷ (hereinafter referred to as “Laxmi Engineering”). The appellant had filed an appeal before the Hon’ble Supreme Court from an Order passed by the Hon’ble NCDRC in which it had been held that the appellant was not entitled to be regarded as a consumer within the purview of the Act as the appellant had purchased the machinery from the respondent for a commercial purpose. The question before the Hon’ble Supreme Court was the interpretation of the term “commercial purpose” under Section 2(1)(d) of the Act.

The Hon’ble Supreme Court while interpreting the explanation to Section 2(1)(d) stated that the “explanation excludes certain purposes from the purview of the expression "commercial purpose" - a case of exception to an exception. Let us elaborate: a person who buys a typewriter or a car and uses them for his personal use is certainly a consumer but a person who buys a typewriter or a car for typing others' work for consideration or for plying the car as a taxi can be said to be using the typewriter/car for a commercial purpose. The explanation however clarifies that in certain situations, purchase of goods for "commercial purpose" would not yet take the purchaser out of the definition of expression "consumer". If the commercial use is by the purchase himself for the purpose of earning his livelihood by means of self-employment, such purchaser of goods is yet a "consumer". In the illustration given above, if the purchaser himself works on typewriter or plies the car as a taxi himself, he does not cease to be a consumer. In other words, if the buyer of goods uses them himself, i.e., by self-employment, for earning his livelihood, it would not be treated as a "commercial purpose" and he does not cease to be a consumer for the purposes of the Act. The explanation reduces the question, what is a "commercial purpose", to a question of fact to be decided in the facts of each case. It is not the value of the goods that matters but the purpose to which the goods bought are put to. The several words employed in the explanation, viz., "uses them by himself', "exclusively for the purpose of earning his livelihood" and "by means of self-employment" make the intention of Parliament abundantly clear, that the goods bought must be used by the buyer himself, by employing himself for earning his livelihood.” ⁸

The Hon’ble Supreme Court further held in the same case that:

• “(i) the explanation added by The Consumer Protection (Amendment) Act 50 of 1993 (replacing Ordinance 24 of 1993) with effect from 18.6.1993 is clarificatory in nature and applies to all pending proceedings.
• (ii) Whether the purpose for which a person has bought goods is a "commercial purpose" within the meaning of the definition of expression "consumer" in Section 2(d) of the Act is always a question of fact to be decided in the facts and circumstances of each case.
• (iii) A person who buys goods and use them himself, exclusively for the purpose of earning his livelihood, by means of self-employment is within the definition of the expression "consumer".” ⁹

What can be seen from the above interpretation given by the Hon’ble Supreme Court is that the purpose for the purchase/hire of goods or services are of paramount importance when deciding the question of inclusion of a person within the meaning of “consumer” in the Act. As the Hon’ble Supreme Court has laid down in the judgment, if the purpose of the purchase/hire of the goods or services is for the sole purpose of earning a livelihood by way of self-employment, then the person would fall within the meaning of a “consumer” even though the said activity would be a commercial activity. While arriving at this conclusion, the Hon’ble Supreme Court has taken into account the specific words and terms used by the legislature while adding an explanation to Section 2(1)(d).

In any given case, the facts will be of paramount importance in ascertaining whether a person can take the benefit of the exclusion carved out to the exception laid down in Section 2(1)(d) of the Act. Purchase of goods or hiring of services in the course of normal business activity would certainly entail a profit motive at its core and thus would generally be covered by the exception disqualifying one from taking the benefit of the Act. However, in spite of purchasing goods or availing of services for a profit motive, if the person is able to satisfy 3 criteria laid down in the exclusion to the exception, one will still be entitled to take the benefit of the Act. The 3 elements needed to be proved are that:

• (a) goods or services are to be used by the person.
• (b) exclusively for the purpose of earning livelihood
• (c) by way of self-employment.

The first two criteria laid down in the exclusion requires the person intending to avail of the remedies under the Act to plead and prove that not only are the goods/services going to be utilized by the person (as opposed to situations where the goods/services are resold or passed on to a third party) but also that the person requires such utilization of goods/services for the purpose of earning his living. Thus, a person acquiring goods/services to supplement his income and/or expand his business will come under the exclusion of “earning his livelihood”.

The Hon’ble Supreme Court has expanded upon the meaning of “self-employment” in the context of Section 2(1)(d) of the Act in the case of “Cheema Engineering Services v. Rajan Singh” ¹⁰ (hereinafter referred to as “Cheema Engineering”). The Court held that “The word 'self-employment' is not defined. Therefore, it is a matter of evidence. Unless there is evidence and on consideration thereof it is concluded that the machine was used only for self-employment to earn his livelihood without a sense of commercial purpose by employing on regular basis the employee or workmen for trade in the manufacture and sale of bricks, it would be for self-employment. Manufacture and sale of bricks in a commercial way may also be to earn livelihood, but "merely earning livelihood in commercial business", does not mean that it is not for commercial purpose. Self-employment connotes altogether a different concept, namely, he alone uses the machinery purchased for the purpose of manufacture by employing himself in working out or producing the goods for earning his livelihood. 'He' includes the members of his family, Whether the respondent is using the machine exclusively by himself and the members of his family for preparation, manufacture and sale of bricks or whether he employed any workmen and if so, how many are matters of evidence.” ¹¹

It is pertinent to note that in the above mentioned judgment, the Court held that the term “He” used in the explanation to Section 2(1)(d) would include the family members of the person who has purchased the goods in the context of self-employment. The Court has further emphasized on the fact that a person needs to prove, by way of evidence, that he has purchased/hired goods or services for self-employment. It is to be noted that the Court has laid down that another important factor to analyze at the time of deciding if a commercial activity would qualify as self-employment for earning a livelihood would be the number of workmen employed, if any, by the purchaser. Thus, situations where a person enlists the aid of family members and/or a few employees to assist him in carrying out the activity would come within the ambit of the exclusion as opposed to situations where a full-fledged workforce is engaged by the person to carry out the activity.

In the case of “National Seeds Corporation Ltd. vs. M. Madhusudhan Reddy and Ors.” ¹², while relying upon the principle set down in the case of “Laxmi Engineering” ¹³, the Hon’ble Supreme Court held that farmers who had entered into a buyback agreement with seed companies for sale of the crops grown from the seeds purchased from the seed company would not be excluded from the ambit of the Act as the transaction could not be classified as a resale transaction, but rather a means of earning their livelihood by using their skills and labour.

The Hon’ble Supreme Court has further reiterated the principles laid down in the case of “Laxmi Engineering” ¹⁴ and “Cheema Engineering” ¹⁵ on multiple occasions. Recently, a bench comprising of 3 judges in the Hon’ble Supreme Court has passed a judgment in the case of “Sunil Kohli and Ors. Vs. Purearth Infrastructure Ltd.” ¹⁶ in which it has been held that if the commercial exploitation of goods is being done by the purchaser of the goods himself for the exclusive purpose of earing his livelihood by means of self-employment, such a purchaser would come within the ambit of the Act and would fall within the meaning of consumer for the purpose of the Act. The appellant had filed an appeal before the Hon’ble Supreme Court from an order passed by the Hon’ble NCDRC. It had been held by the Hon’ble NCDRC that as the appellant had booked a commercial premises with the respondent company with a view to run a distributorship from the said premises and that the purchase was for a commercial purpose, the appellant would not fall within the explanation to the definition of the term “consumer”. The matter came up on appeal before the Hon’ble Supreme Court, the Hon’ble Court took cognizance of the specific facts in that case that is the fact that the appellant had retired from his job abroad and had been planning to shift back to India setup the distributorship in order to secure a post retirement income. The Court held in favor of the appellant and remanded the matter back to the Hon’ble NCDRC for adjudication on merits.

At this point, it is also relevant to mention that the Consumer Protection Act, 1986 is on the verge of being replaced by the Consumer Protection Act, 2019. An interesting point to note is that in the Consumer Protection Act, 2019, Section 2(1)(d) has been retained along with the explanation to the said section which carves out the exception. Thus, the ratio and rationale of the previous cases will equally apply as and when the law is amended.

CONCLUSION

Thus an analysis of the aforesaid cases illustrate that each case will have to be considered on the parameters of the facts of that case. A case to case analysis will have to be carried out to ascertain whether even if the goods/services are being availed for the purpose of earning profit, the activity would come under the three prongs of the exclusion laid down to the exception. If it is pleaded and proved that the goods/services are being availed by the person himself for the purpose of securing a livelihood and the said activity is being done either by the person solely or with the help of family members and/or a few workmen, the person will be entitled to call himself a consumer for the purposes of the Act. On the other hand, if goods/services are being availed for the purpose of expanding and/or supplementing business income and/or a full-fledged workforce is being employed for the purpose of carrying out such activity then one may be hard pressed to claim benefit of the exclusion to the exception laid down in Section 2(1)(d) of the Act.