2019 (7) TMI 830 - AT - Service Tax

Tribunal rules management and warranty fees not taxable under 'Franchise Service'

The Tribunal held that the management fee and warranty fee charged by the appellant were not taxable under 'Franchise Service'. The demand for service tax ... Classification of services - Franchise Service or not - sharing of profit - Management fee and Warranty fee - Revenue entertained a view that the Management fee and Warranty fee are chargeable to service tax under the category of ‘Franchise Service’ - HELD THAT:- In this case the franchise is providing infrastructure for refurbished the car and also provide facility to the employees and franchise also making efforts to marketing to MTV cars on the basis of market support and guidance provided by the appellant. The appellant only provide guideline how to ascertain the value of car and how to refurbish the car and after the sale of car, the appellant share the profit with the licensee 25% and 75% respectively. As the agreement between the appellant and the licensee/dealer is in nature of share of profit in the ratio of 25% and 75% and in cases where there is a loss, the appellant does not received any amount towards the activity, in that circumstances, we categorically held that the agreement between the appellant and the dealer is in nature of joint venture for which no service tax is payable by the appellant. Warranty service - HELD THAT:- The appellant has undertaken to provide warranty service to the customers and receiving the payment through dealers for warranty during the period of warranty. It is like an assurance given by the appellant to the customers that during the period of warranty, if any, defect arises the same will be make good without any fees - The said activity cannot be termed as ‘Franchise Service’ and same is not liable to pay service tax under ‘Franchise Service’. The management service and warranty fee recovered by the appellant from the dealers is not taxable under the category of ‘Franchise Service’ - demand set aside - penalty also set aside. Appeal allowed - decided in favor of appellant. Issues Involved:1. Whether the management fee and warranty fee recovered by the appellant is liable to service tax under the category of 'Franchise Service' as per Section 65(105)(zze) of the Finance Act, 1994.Issue-Wise Detailed Analysis:1. Nature of Agreement:The appellant, engaged in the manufacture and sale of motor vehicles, developed a system for the sale and purchase of pre-owned vehicles under the brand 'Maruti True Value' (MTV). The appellant entered into agreements with dealers for the purchase, exchange, refurbishing, and sale of pre-owned vehicles. The agreement involved sharing resources and profits, with the appellant earning a management fee (25% of the profit) and a fixed warranty fee. The Revenue contended that these fees were chargeable to service tax under 'Franchise Service'.2. Argument by Appellant:The appellant argued that the agreement was a profit-sharing co-venture, not a franchise. Both parties shared resources and risks, and the management fee was a share of profit, not a fixed fee typical of franchise arrangements. The appellant's role included providing guidelines for valuing and refurbishing cars, marketing support, and warranty services. The appellant cited several legal precedents to support their claim that the arrangement was a co-venture and not a franchise.3. Legal Definitions and Precedents:The Tribunal examined the definition of 'Franchise' under Section 65(47) and 'Franchisor' under Section 65(48) of the Finance Act, 1994. A franchise involves granting representational rights to sell or manufacture goods or provide services identified with the franchisor. The Tribunal referenced the case of Mormugao Port Trust v. Commissioner, where it was held that activities undertaken by a partner for the joint venture's benefit cannot be regarded as a service rendered for consideration. This view was affirmed by the Supreme Court.4. Analysis of Agreement:The Tribunal found that the agreement between the appellant and the dealers involved sharing profits and risks, with no fixed fee for services. The management fee fluctuated based on profits, and losses meant no fee was paid. The agreement did not grant representational rights typical of a franchise. The Tribunal concluded that the arrangement was a joint venture, not a franchise, and thus not liable for service tax under 'Franchise Service'.5. Warranty Fee:The Tribunal also addressed the warranty fee, which the appellant charged for providing warranty services to customers through dealers. The warranty fee was for ensuring defect-free vehicles during the warranty period, not for franchise services. The Tribunal cited the Delhi International Airport P. Ltd. v. UOI case, where it was held that representational rights must subsume the franchisee's identity into the franchisor's, which was not the case here.6. Conclusion:The Tribunal held that the management fee and warranty fee were not taxable under 'Franchise Service'. The demand for service tax and penalties were set aside, and the appeals were allowed with consequential relief.Judgment:The impugned orders were set aside, and the appeals filed by the appellant were allowed with consequential relief. The Tribunal pronounced the order on 16.07.2019.