2018 (11) TMI 1382 - AT - Service Tax

Classification of Technology License as Franchise Services for Tax Liability Upheld

The Tribunal upheld the classification of services under a Technology License and Technical Assistance Agreement as Franchise Services for service tax ... Classification of services - appellant desires to acquire license to manufacture products manufactured with the use of Timken (USA)’s proprietary technical information and to service the products by using Timken (USA)’s proprietary technical information - classified under Franchisee service or under intellectual property service - Time Limitation - Held that:- The agreement between the appellant and the Timken (USA) is not limited to use Timken’s Intellectual Property i.e. proprietary technical information, knowhow etc. for manufacture of products and for service of the main products as is defined in the intellectual property service. Rather the various terms of the contract as given above indicate that the appellant has to represent the Timken (USA) to their various customers in such a way that the appellant looses its own individual identity and would perhaps be known only by the identity of Timken (USA). The services availed by the appellant are more akin to franchise services rather than intellectual property right service - the services availed by the appellant are franchise services and they need to pay service tax as applicable on the same. Time limitation - Held that:- As the assessee is working in the era of self-assessment and therefore the responsibility lies with them to classify the service availed/provided by them correctly and if any confusion or difficulty they are certainly free to approach the revenue authorities for necessary clarifications - the extended time proviso for demanding service tax has rightly been involved in their case. Appeal dismissed - decided against appellant. Issues:Classification of services under Technology License and Technical Assistance Agreement as Franchise Services for service tax liability.Analysis:The appellant entered into a new contract with Timken, USA, expanding on an earlier agreement. The Department alleged the appellant was receiving 'Franchisee service' and demanded service tax under reverse charge mechanism. The Adjudicating Authority classified the contract as a franchise, imposing service tax and penalty. The appellant contended that the services received did not fall under the definition of a franchise as per the Finance Act, 1994. The contract did not fulfill the conditions of a franchise, as the appellant was not granted representational rights and engaged in various services not identified with Timken, USA.The appellant argued that the grant of permission to use the trademark should be classified under Intellectual Property Right Services, not Franchise Services. The appellant was not granted the right to represent Timken, USA, and thus the usage of the trademark should not be taxable under Franchise Services. The key issue was whether the services availed were more akin to franchise services or intellectual property right services.The Tribunal analyzed the definitions of Franchise Services and Intellectual Property Rights under the Finance Act, 1994. The contract between the appellant and Timken, USA indicated that the appellant had to represent Timken to customers, losing its individual identity. The services received were deemed more aligned with franchise services rather than intellectual property right services. Referring to a Delhi High Court judgment, the Tribunal upheld the classification of services as Franchise Services.On the issue of limitation, the Tribunal held that the appellant, being an old assessee, should have sought clarification on service tax classification. As the responsibility for correct classification lies with the assessee, the extended time provision for demanding service tax was rightly invoked. Consequently, the Tribunal upheld the order-in-original, dismissing the appeals filed by the appellant for lacking merit.