2017 (2) TMI 775 - HC - Service Tax

Court rules OMDA not a franchise under Finance Act, transaction not taxable service

The court concluded that the Operation, Management, and Development Agreement (OMDA) does not constitute a franchise under the Finance Act. The ... Franchise - representational right - taxable service - provision of service by franchisor to franchisee - renting of immovable property - escrow appropriation / revenue shareFranchise - representational right - taxable service - provision of service by franchisor to franchisee - Whether the OMDA/Joint Venture Agreement between AAI and the Petitioners constitutes a 'franchise' under Section 65(47) of the Finance Act and whether the Annual Fee/Upfront Fee is a taxable service under Section 65(105)(zze) as a franchise service. - HELD THAT: - The statutory definition of 'franchise' requires grant of a 'representational right' enabling the franchisee to represent the franchisor such that the franchisee's identity is subsumed in the franchisor. Mere conferment of rights to provide services or undertake processes does not, without a representational right, convert an agreement into a franchise. The OMDA transfers to the petitioners the rights and obligations to operate, develop and manage the airports, contemplates novation/transfer of contracts to the petitioners, provides for transition support and limited operation support by AAI during a defined period, permits the petitioners to subcontract and sub-lease parts of the airport, and vests exclusive operational responsibility and liability in the petitioners who operate in their own name and with their own processes. The agreement does not confer any representational right on the petitioners to represent AAI, nor does the Revenue point to any concrete service being provided by AAI to the petitioners which would bring the transaction within the taxable franchise service entry. Absent a representational right and absent any provision of service by AAI to the petitioners in relation to a franchise, the OMDA cannot be characterised as a 'franchise' and the Annual Fee/Upfront Fee is not exigible to service tax as a franchise service. [Paras 56, 58, 61, 66, 69]OMDA does not constitute a 'franchise' under Section 65(47) and the transaction is not a taxable franchise service under Section 65(105)(zze) of the Finance Act.Renting of immovable property - escrow appropriation / revenue share - Whether AAI's action of blocking the petitioners' escrow accounts on the ground of exigibility of service tax (including under renting of immovable property) is sustainable. - HELD THAT: - The Revenue disavowed reliance on the taxing entry for renting of immovable property and asserted franchise service; the Court has held that the OMDA neither constitutes a franchise nor involves any taxable franchise service. In view of that conclusion, and given that the Revenue did not establish that the transaction attracted the renting-of-immovable-property taxing entry, the AAI's unilateral blocking of amounts in the escrow account on the ground of alleged service-tax exigibility cannot be sustained. [Paras 72]The action of AAI in blocking the petitioners' escrow account is quashed.Final Conclusion: The writ petitions are allowed: the OMDA is not a 'franchise' under Section 65(47) and the Annual/Upfront Fee is not a taxable franchise service under Section 65(105)(zze); the AAI's blocking of the petitioners' escrow accounts is quashed; no order as to costs. Issues Involved:1. Constitutional validity of Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994.2. Prohibition against charging and collecting Service Tax on the Annual Fee under the Finance Act, 1994.3. Quashing of the adjudication order denying CENVAT Credit and confirming tax demand under 'Franchise Service'.4. Restraint against levying and recovering Service Tax on annual fees under 'Renting of Immovable Property Service' and/or 'Franchise Services'.Issue-Wise Detailed Analysis:1. Constitutional Validity of Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994:The petitioners sought a declaration that the provisions of Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994, as amended, are ultra vires to various Entries of List-II of Schedule VII of the Constitution of India and certain Articles of the Constitution. The court did not specifically address the constitutional validity in detail but focused on the applicability of these provisions to the case at hand.2. Prohibition Against Charging and Collecting Service Tax on the Annual Fee:The petitioners argued that the Annual Fee payable under the OMDA is not for renting of immovable property but is a revenue share, thus not subject to Service Tax. The court examined whether the OMDA constitutes a franchise agreement under Section 65(47) of the Finance Act, which defines 'franchise' as an agreement granting representational rights. The court concluded that no representational right was granted by AAI to the petitioners, and hence, the OMDA does not constitute a franchise.3. Quashing of the Adjudication Order:The petitioners challenged the adjudication order that confirmed the tax demand under 'Franchise Service' and denied CENVAT Credit. The court held that the OMDA does not constitute a franchise and no service is being provided by AAI to the petitioners. Consequently, the adjudication order confirming the tax demand under 'Franchise Service' was quashed.4. Restraint Against Levying and Recovering Service Tax:The petitioners sought restraint against the levy and recovery of Service Tax under 'Renting of Immovable Property Service' and/or 'Franchise Services' on the annual fees. The court noted that the Revenue's stand was that the transaction is not exigible under 'Renting of Immovable Property Services' but under 'Franchise Service'. Since the court held that the OMDA does not constitute a franchise, the action of the AAI in blocking the Escrow account for recovering Service Tax was quashed.Reasoning and Analysis:The court analyzed the terms and conditions of the OMDA to determine if it constituted a franchise. Key clauses indicated that the petitioners were granted exclusive rights to operate, maintain, and develop the airports independently, without representational rights from AAI. The court emphasized that for an agreement to be a franchise, it must grant representational rights, which was not the case here. Additionally, no service was being provided by AAI to the petitioners under the OMDA, which is a requirement for the transaction to be taxable under 'Franchise Service'.Conclusion:The court concluded that the OMDA does not constitute a franchise under Section 65(47) of the Finance Act, and the transaction between the petitioners and AAI does not constitute a taxable service under Section 65(105)(zze). Consequently, the action of AAI in blocking the Escrow account was quashed, and the writ petitions were disposed of accordingly.