2023 (7) TMI 364 - AT - Service Tax

Appellant's Services Deemed Franchisee, Not Joint Venture: Service Tax Confirmed, Penalties Relieved

M/s. Kitco Ltd. Versus The Commissioner of Central Excise and Service Tax, Cochin

The Tribunal determined that the services provided by the appellant to the Institute of Hotel Management Studies qualified as 'Franchisee Service,' ... Classification of service - Franchisee service or not - Joint Venture Agreement - sharing of profits - services provided by the appellant under written agreement dated 20.05.2006 with Institute of Hotel Management Studies - existence of relation of franchisor and franchisee or not - HELD THAT:- A cumulative reading of the stipulations/conditions under the said agreement does not lead to an inference that the arrangement between the appellant and the Institute is that of a Joint Venture. More or less similar circumstances were considered by this Tribunal in the case of The THE DELHI PUBLIC SCHOOL SOCIETY VERSUS CST, NEW DELHI [2013 (8) TMI 92 - CESTAT NEW DELHI]. In that case, while summarising the arrangement between The Delhi Public School Society and several schools in Delhi and elsewhere in India, the Tribunal had an occasion to examine and lay down the characteristics in identifying between Joint Venture agreement and that of a franchisee. After referring to the principles relating to interpretation of the agreements laid down by the House of Lords in series of cases, the Tribunal observed In the totality of circumstances neither the indicia of a partnership or a joint venture is discernable from the terms and conditions of the agreements between the parties, particularly since there is neither a contribution of assets nor a sharing of profits and / or losses provided in the agreements between the parties. These normative ingredients of a partnership or a joint venture are absent. Applying the principle laid down in the said judgment of the Tribunal, it is found that there is no arrangement of sharing of profits and losses between the parties nor there is contribution of assets by the appellant in implementing the project; entire burden of raising the infrastructure, maintenance, etc., rests with the Institute only. Also, there is no participation in preparing the syllabus but exclusively under the control of the appellant. The Trade name or logo of the appellant has been used and displayed for advertisement of the course, and it cannot be liberally used by the Institute - In the present case, the Institute is given right to use their logo etc., and advertise the said project to attract students to join the training programme and thereby representational right has been extended by the appellant to the Appellant. The demand is issued for normal period, on the basis of interpretation of the relevant provisions, in scrutinising the the claim of the assessee that that the arrangement with the institute is not a franchisee services, but joint venture agreement, hence imposition of penalty, in the facts of the present case under various provisions of Finance Act,1994 is not sustainable. Appeal allowed in part. Issues Involved:1. Whether the services provided by the appellant under the agreement with the Institute of Hotel Management Studies qualify as 'Franchisee Service' attracting service tax.2. Whether the agreement between the appellant and the Institute of Hotel Management Studies is a Joint Venture agreement or a Franchisee agreement.3. Imposition of penalties under various provisions of the Finance Act, 1994.Summary:Issue 1: Qualification as 'Franchisee Service'The main issue for determination was whether the services provided by the appellant under the agreement dated 20.05.2006 with the Institute of Hotel Management Studies qualify as 'Franchisee Service' attracting service tax. The appellant argued that the agreement was in the nature of a Joint Venture and not a Franchisee agreement. The Tribunal examined the agreement and found that it involved the appellant prescribing the syllabus, conducting final examinations, and providing certification, while the Institute conducted the courses, provided infrastructure, and adhered to the appellant's guidelines. The Tribunal concluded that the arrangement satisfied the criteria for 'Franchisee Service' as it involved the grant of representational rights to the Institute to use the appellant's name, logo, and emblem for advertising the course.Issue 2: Nature of the AgreementThe appellant contended that the agreement was a Joint Venture and not a Franchisee agreement. The Tribunal analyzed the agreement's clauses and found no sharing of profits and losses or contribution of assets between the parties. The Institute bore the entire burden of infrastructure and maintenance, while the appellant controlled the syllabus and certification. The Tribunal referred to a similar case, The Delhi Public School Society vs. CST, New Delhi, where it was held that the absence of profit-sharing and asset contribution indicated a Franchisee agreement rather than a Joint Venture. Applying this principle, the Tribunal concluded that the agreement was indeed a Franchisee agreement.Issue 3: Imposition of PenaltiesThe Tribunal found that the demand was issued for the normal period based on the interpretation of relevant provisions. Given the appellant's claim that the arrangement was not a Franchisee service but a Joint Venture, the Tribunal held that the imposition of penalties under various provisions of the Finance Act, 1994, was not sustainable. Consequently, the penalties were set aside.Conclusion:The Tribunal upheld the impugned order in part, confirming the demand for service tax under 'Franchisee Service' but set aside the penalties imposed. The appeal was partly allowed to the extent of penalty relief.