Franchise service requires representational rights; a mere distributorship for marketing and sales is not taxable.

A distributorship arrangement is not taxable as franchise service unless the agreement grants a representational right enabling the recipient to act as the franchisor in the market and lose its independent identity. Here, the distributors were appointed for marketing, promotion and distribution of products, and the exclusivity fee functioned as a refundable deposit linked to the distributorship term. The agreement did not make the distributors represent the appellant as franchisees, so the statutory definition of franchise was not satisfied. The service tax demand, interest and penalties therefore could not be sustained.

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Issues: Whether the distributor agreement granted representational rights so as to constitute a taxable franchise service under the Finance Act, 1994, and whether the service tax demand, interest and penalties could be sustained.

Analysis: The agreement was examined against the statutory definition of franchise and the departmental circular explaining the scope of the levy. The decisive requirement was that the distributor must be granted a representational right to sell or provide services identified with the franchisor. On the terms of the agreement, the distributors were appointed for marketing, promotion and distribution of products; the exclusivity fee functioned as a refundable deposit linked to the distributorship term; and the arrangement did not make the distributors represent the appellant as its franchisees in the market. The distributors retained their own identity and were not shown to have been authorised to act as the appellant in the sense required by the statutory definition.

Conclusion: The arrangement was not a franchise service and the service tax demand, interest and penalties could not be sustained.

Ratio Decidendi: A mere distributorship or right to market and sell products does not amount to franchise service unless the agreement confers a representational right whereby the recipient acts as the franchisor in the market and loses its own independent identity.

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