2019 (9) TMI 1141 - AT - Service Tax

Tribunal overturns tax order on franchisee ad expenses, cenvat credit misuse, late fees.

The Tribunal set aside the Principal Commissioner's order on issues regarding non-payment of service tax on advertisement expenses by franchisees, short ... Non/short payment of service tax - Franchisee Service - Management Consultancy Service - Non-payment of service tax on advertisement expenses incurred by the local franchisees - Short payment of service tax due to wrong utilisation of cenvat credit - Non-payment of service tax on ‘management consultancy’ services by wrongly claiming the same as ‘export service’ - Interest on late payment of service tax on franchisee fees to McDonald’s USA. Non-Payment of Service Tax on Advertisement Expenses Incurred By Franchisees - SCN alleges that since the franchisee has to expend during each calendar year an amount which is not less than 5 per cent of the gross sale for advertising and promotion of the restaurant system owned by Mcdonald’s Corporation through the contractual obligation, the franchisor gets an extra consideration towards the advertisement from the franchisee for promotion of its own brand, instead of the franchisee, which amount will form part of the value of taxable service of the franchisor - Section 67 of the Act read with Rule 5 of the 2006 Rules - HELD THAT:- The franchisee had to expend not less than 5% of the gross sales in a particular year towards the advertisement of its Restaurant. The amount was not required to be deposited in any fund of the franchisor for advertisement or promotion of the franchisor - What further transpires from the agreement is that there is no obligation cast upon the franchisee to incur any expenditure on advertising the brand name, service marks and trademarks of the franchisor. Any indirect result, because of advertisement cannot, therefore, be called an extra consideration in terms of section 67 of the Act. Unless an amount is charged by the service provider to the service recipient, it does not enter into an equation for determining the value on which Service Tax is payable. The order has grossly erred in interpreting the franchise agreement, thereby, including the cost of advertisement in the franchise fee received by the Appellant. The amount incurred by the franchisees towards advertisement expenses, cannot, therefore, be said to be ‘consideration’ paid by the franchisee to the Appellant, as it is the franchisee themselves who are benefitting out of such expenses and not the Appellant. The value of material which is supplied free by the service recipient cannot be treated as “gross amount charged” as that is not a “consideration” for rendering the service - Decided against Revenue. Short payment of Service Tax due to wrong utilisation of cenvat credit - HELD THAT:- The franchisee services received by the Appellant and the ‘Management Consultant’ services rendered by the Appellant, are so inextricably linked, that, one cannot be rendered/received in the absence of the other. Where, on the other hand, the Appellant is receiving franchisee services from McDonald’s USA to set up the franchise business in India, at the same time, the Appellant is also providing consultancy to McDonald’s USA, in order to effectively carry out and supervise the franchise business. Accordingly, to state that, the franchise service could not be termed as an input service, for management consultancy is against the spirit of the CENVAT Credit mechanism - Decided against Revenue. Non-payment of Service Tax on ‘Management Consultancy’ services by wrongly claiming the same as export service - HELD THAT:- Rule 3(2) of the Export of Service Rules 2005 states that provision of any taxable service to qualify as export has to satisfy the condition that payment for such services is received in convertible foreign exchange - In the first instance, there is no time limit in Rule 3(2) of the Export Service Rules, 2005. Thus, any time limit prescribed by the Reserve Bank of India would not debar exporter from receiving remittances for the services even after one year. What has, therefore, to be examined is whether the Appellant received any remittances thereafter. This has not been examined in the impugned order - The matter, therefore, needs to be remitted to the Principal Commissioner for examining this issue and thereafter recording a finding. Interest on late payment of Service Tax on franchisee fees to McDonald’s USA - HELD THAT:- In the instant case, the date of entry and payment to overseas entity are on the same day. There is, therefore, no delay and the reasoning given by the Principal Commissioner to the effect that since the payment of franchisee fee from the local entities is on monthly basis, the same should be the basis with respect to the remittances to the overseas associated enterprises is not correct - the forward charge and reverse charge cannot be equated for the charge of interest as these are governed by different set of Rules - Demand of interest do not sustain. Extended period of limitation - HELD THAT:- The demand made in Issue No. 1, 2 and 4 has been set aside - With regard to Issue no. 3, the matter has been remitted to the Principal Commissioner to decide it afresh - Thus, it is not necessary to examine the issue relating to limitation, at this stage. Appeal allowed in part in favor of Assessee and part matter on remand. Issues Involved: Non-payment of service tax on advertisement expenses, short payment of service tax due to wrong utilization of cenvat credit, non-payment of service tax on management consultancy services by wrongly claiming the same as export service, interest on late payment of service tax on franchisee fees to McDonald’s USA.Issue-wise Detailed Analysis:1. Non-payment of Service Tax on Advertisement Expenses Incurred by Franchisees:The Department contended that the franchisees were contractually obligated to contribute 5% of their gross sales towards advertisement, which constituted extra consideration to the franchisor, forming part of the value of taxable service under Section 67 of the Finance Act, 1994. The Principal Commissioner upheld this view, stating that the advertisement expenses were extra consideration for the franchisor.The Tribunal found that the agreement required franchisees to expend on advertising for their own Restaurant (with a capital 'R'), not the franchisor’s brand. The Tribunal emphasized that the franchisees benefitted from the advertisement, not the franchisor, and thus, the expenses could not be considered extra consideration. The Tribunal also noted that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, which was used to determine the value of non-monetary consideration, had been struck down by the Delhi High Court and upheld by the Supreme Court. Consequently, the Tribunal set aside the Principal Commissioner’s order on this issue.2. Short Payment of Service Tax Due to Wrong Utilization of Cenvat Credit:The Principal Commissioner concluded that the franchise service imported by the appellant was not an input service for providing management consultancy services. The Tribunal disagreed, stating that there was no one-to-one correlation required for the utilization of input service as long as it qualified under Rule 2(l) of the Cenvat Credit Rules, 2004. The Tribunal held that the franchise services received by the appellant and the management consultancy services rendered were inextricably linked, and thus, the franchise service qualified as an input service. The Tribunal set aside the Principal Commissioner’s order on this issue.3. Non-payment of Service Tax on Management Consultancy Services by Wrongly Claiming the Same as Export Service:The Principal Commissioner noted that the appellant did not receive payment in convertible foreign exchange for the management consultancy services rendered to McDonald’s USA, thus disqualifying it as an export service under Rule 3(2) of the Export of Service Rules, 2005. The Tribunal found that there was no time limit prescribed in Rule 3(2) for receiving payment. The Tribunal remitted the matter to the Principal Commissioner to examine whether the appellant received any remittances thereafter and to record a finding accordingly.4. Interest on Late Payment of Service Tax on Franchisee Fees to McDonald’s USA:The Principal Commissioner found that the appellant delayed the payment of service tax by booking the franchisee fees in the ledger of McDonald’s USA in September and March each year, despite receiving the fees monthly. The Tribunal noted that the forward charge under Section 66 and the reverse charge under Section 66A of the Finance Act, 1994, were governed by different rules. The Tribunal held that there was no delay in payment as the date of entry and payment to the overseas entity were on the same day. Therefore, the interest claim for the entire period was set aside.Conclusion:The Tribunal set aside the Principal Commissioner’s order on issues 1, 2, and 4 and remitted issue 3 for fresh consideration. The appeal was allowed to the extent indicated.