2020 (7) TMI 384 - AT - Service Tax

Tax Appeal Tribunal: Appellant's Services Classified as Intellectual Property Rights, Not Franchise

The Tribunal classified the services received by the Appellant as Intellectual Property Right (IPR) services, not franchise services. Consequently, the ... Classification of services - IPR service or franchise service? - manufacture and sale of various formulations (fast moving consumer goods) - benefit of a Notification dated 10 September, 2004 - reverse charge mechanism - HELD THAT:- The amended definition of “franchisee” contains only the first condition of the definition as it stood prior to 16 June, 2005 and the other three conditions have been left out. Under the amended definition, “franchise” means an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved. Thus, if the condition relating to “representational right” is not satisfied the transaction would not be classified as a “franchisee’ service. “Representational right” means that a right is available with the “franchisee” to represent the franchisor and in that case the “franchisee” loses its individual identity and would be known only by the identity of the franchisor. The Mumbai Tribunal in GLOBAL TRANSGENE LTD VERSUS COMMISSIONER OF CENTRAL EXCISE CUSTOMS & SERVICE TAX, AURANGABAD [2013 (8) TMI 748 - CESTAT MUMBAI] also observed that the foremost requisite for a service to qualify as a taxable ‘franchise’ service is that the “franchisee” should have been granted a representational right and that in a franchisee transaction, the “franchisee” loses its individual identity and represents the identity of the franchisor to the outside world. There is nothing in the agreement which may indicate that the “franchisee” has lost its individual identity and is representing the identity of the franchisor to the outside world. The arrangement is clearly a typical case of a licensing transaction and is in no way similar to a ‘franchisee’ agreement as understood in the commercial world. In a ‘franchisee’ agreement, the franchisor owns IPR and allows the franchisee to set up and run the business in the name of the franchisor. The customers coming to the outlets of the franchisor believe that they are directly dealing with the franchisor - The terms of the agreements leave no manner of doubt that the agreement is not a ‘franchisee’ agreement. Whether the services received by the Appellant can be classified as ‘IPR service’? - HELD THAT:- The definitions of IPR and intellectual property service as contained in section 65(55)(a) and section 65(55)(b) of the Act have been reproduced above. The taxable service under section 65(55)(zze) of the Act has been defined to mean any service provided or to be provided to any person by the holder of intellectual property right, in relation to intellectual property service. The agreement executed between the parties is clearly for a temporary transfer of IPR as will be seen from the Preamble and Article 2 of the Agreement. Under Article 3 of the Agreement, the licensee acknowledged that all rights, title, interest or goodwill in the IPR is and remains vested in the licensor and shall not impair the rights of the licensor in the IPR. Article 6 provides that in consideration of the rights and IPR granted by the licensor under the agreement, the licensee shall pay the licensor royalty equivalent to 5% of net sales of products in India and royalty equivalent to 8% on exports in India. It is, therefore, clear that the services have been correctly classified by the Appellant as IPR. When the services received by the Appellant would merit classification under IPR service, the Appellant would also be entitled to abatement of Service Tax available to a holder of IPR under the notification dated 10 September, 2004 - it is not necessary to examine whether the Appellant would also be entitled to the benefit of the Notification dated 10 September, 2004 even if it is held that the service received by the Appellant would be in the nature of a ‘franchisee’ agreement, nor would it be necessary to examine whether the extended period of limitation was correctly invoked in the show cause notice. The order passed by the Commissioner confirming the demand of service tax and imposing penalty cannot be sustained and is set aside - Appeal allowed - decided in favor of appellant. Issues Involved:1. Classification of services received by the Appellant: Whether they fall under 'Intellectual Property Right (IPR) Services' or 'Franchise Services'.2. Entitlement to exemption under the Notification dated 10 September 2004.3. Invocation of the extended period of limitation for demand of Service Tax.Detailed Analysis:1. Classification of Services:Issue: Whether the services received by the Appellant should be classified as IPR services under section 65(105)(zzr) of the Finance Act, 1994 or as franchise services under section 65(105)(zze).Relevant Definitions:- Intellectual Property Right (IPR): Defined under section 65(55a) as any right to intangible property such as trademarks, designs, patents, excluding copyright.- Intellectual Property Service: Defined under section 65(55b) as transferring temporarily or permitting the use or enjoyment of any intellectual property right.- Franchise: Defined under section 65(47) as an agreement granting representational rights to sell or manufacture goods or provide services identified with the franchisor.- Franchisor: Defined under section 65(48) as any person who enters into a franchise with a franchisee.Appellant's Argument:- The services received are classifiable as IPR services as per the agreements executed for the temporary transfer of IPR.- No representational right was granted, which is essential for a service to be classified as a franchise service.Department's Argument:- The services should be classified as franchise services because the Appellant was engaged in the manufacture and sale of products identified with the franchisor.Tribunal's Findings:- The agreement terms indicate a typical licensing transaction, not a franchise agreement.- The Appellant did not lose its individual identity and was not representing the identity of the franchisor to the outside world.- The licensor did not exert significant control over the Appellant's operations, which is a characteristic of a franchise agreement.Conclusion:- The services received by the Appellant are correctly classified as IPR services.2. Entitlement to Exemption:Issue: Whether the Appellant is entitled to the benefit of the exemption Notification dated 10 September 2004.Notification Details:- Exempts taxable service provided by the holder of IPR to any person in relation to IPR service from so much of the service tax as is equivalent to the amount of cess paid towards the import of technology under the Research and Development Cess Act, 1986.Appellant's Argument:- The Appellant discharged Service Tax liability on the royalty paid under the category of IPR service and availed the benefit of the exemption notification.Department's Argument:- The exemption is not applicable as the services should be classified under franchise services.Tribunal's Findings:- Since the services are classified as IPR services, the Appellant is entitled to the abatement of Service Tax available under the notification.Conclusion:- The Appellant is entitled to the benefit of the exemption Notification dated 10 September 2004.3. Invocation of Extended Period of Limitation:Issue: Whether the extended period of limitation was correctly invoked in the show cause notice.Appellant's Argument:- The extended period of limitation could not be invoked as the Appellant had submitted the Service Tax Return under the category of IPR service, and there was no intention to evade tax.Department's Argument:- The extended period was invoked because the Appellant deliberately classified the service under IPR service to avail abatement and suppressed facts to avoid Service Tax liability.Tribunal's Findings:- Since the primary classification of services as IPR services is upheld, there is no need to examine the invocation of the extended period of limitation.Conclusion:- The Tribunal did not find it necessary to examine the invocation of the extended period of limitation.Final Judgment:- The order dated 16 October 2012 passed by the Commissioner confirming the demand of Service Tax and imposing penalty is set aside.- The Appeal is allowed.