2013 (8) TMI 784 - AT - Service Tax

Tribunal rules in favor of appellant, clarifies payments as licensing services, not franchisee. Waiver granted for appeal admission.

The Tribunal found in favor of the appellant, ruling that the payments made were for licensing and support services, not franchisee services as claimed by ... Franchisee Service - Management, Maintenance and Repair - appellants engaged in marketing and licensing of the software 'SAP' - whether service tax was leviable on the activity done by the appellant – appellant contended that they are selling the software but is only granting a license to use the software - not doing any service or process identified when they are passing on the updates to the software - Held that:- it is prima facie clear that payments under the first two relate to licensing of software and for continued support for updates. The third payment does not involve any service to the clients of the appellant to consider it as franchisee service. We are prima facie in agreement with the argument that for the first two services the classification of service received by the appellants from their principals abroad and that rendered by the appellant to clients in India has to be the same because the nature of activities is the same. It is not in dispute that a new entry specifically covering the impugned services from 16/05/2008 came into force when the entry for taxing 'information technology service' was introduced in Finance Act, 1994. The question whether service tax was leviable on this activity done by the appellant prior to the said date under another heading viz., Management, Maintenance and Repair Service, was before the Tribunal earlier and the decision was given in favor of the appellant specifically observing that in view of the new taxable service it has to be considered that the service was not taxable earlier. Now Revenue has come up with their case under yet another old entry for the period prior to the date of introduction of the new entry. This old entry also is not one where the activity was specifically covered. In fact the old entry now proposed appears to be less suited to cover the activity as compared to 'Management, Maintenance and Repair'. So the principle adopted in the said decision should apply to the present case also. The Appellant is doing consultation and advisory services for business process re-engineering that is required for implementation of software and also customizing of the software to suit the business environment of each client. - It is difficult to agree with the argument of the Revenue that the appellant was receiving franchisee services. - Stay granted. Issues:Classification of services received by the appellant as 'franchisee service' and the demand for payment, interest, and penalties imposed by the impugned order.Analysis:The appellant received services from their principals abroad, classified as 'franchisee service' by the impugned order, leading to a demand of Rs.79,07,67,027 for the period April 2006 to March 2008. The appellants are engaged in marketing and licensing software and have an agreement with their principal, SAP AG, Germany, for licensing, maintenance, consulting, and training services. The Revenue seeks to tax payments made to SAP AG, Germany under Section 66A of the Finance Act, 1994, claiming the appellant acted as a franchisee of SAP AG, Germany when dealing with clients in India using SAP software.The counsel for the appellant argues that the payments made are for licensing software and continuous upgradation, not 'franchisee services'. They highlight that a new taxable entry was introduced in the Finance Act, 1994, from 16/05/2008, indicating a presumption that the service was not taxable before that date. The appellant contends they are not selling the software but granting a license, acting as agents, not franchisees of SAP AG, Germany. They assert that payments made do not relate to franchise charges.The Revenue representative argues that the appellant represents SAP, Germany in India, marketing and customizing software, remitting a part of the consideration as royalty to SAP, Germany. They claim the appellant acts as a franchisee of SAP, Germany, justifying the service tax demand.The Tribunal finds clarity lacking in the impugned order regarding the articles under which payments were made. Prima facie, it agrees with the appellant that payments relate to licensing and support services, not franchisee services. It notes the introduction of a new taxable entry from 16/05/2008 and applies the principle that a person merely selling or licensing a product cannot be considered a franchisee.The Tribunal observes that the appellant provides consultation and advisory services for business process re-engineering and customization, paying service tax on such activities without remitting any part to the principal in Germany. At this stage, it finds no reason to demand pre-deposit of dues, granting a waiver for appeal admission and staying the collection of dues during the appeal's pendency.