2009 (8) TMI 414 - AT - Service Tax

Appellate Tribunal CESTAT Upholds Decision on Service Tax Liability for Franchise Fees & Royalty

The Appellate Tribunal CESTAT, New Delhi, upheld the Commissioner's decision regarding service tax liability on franchise fees and royalty, emphasizing ... Service tax on franchise fees - service tax on royalty - service received or 'to be provided' principle - deposit of service tax realised before provision of service - requirement of a reasoned and speaking order - remand for fresh consideration on evidenceService tax on franchise fees - remand for fresh consideration on evidence - Franchise fees collected prior to taxation were held not taxable as a matter of principle but the factual basis for the Commissioner's conclusion requires reexamination. - HELD THAT: - The Tribunal agreed with the Commissioner (Appeals) that franchise fees collected during the period prior to levy of service tax shall not be taxed. However, the appellate order (para 5) does not disclose the documentary evidence on which that conclusion was reached apart from the respondent's submissions. The Tribunal therefore found that the Commissioner must examine documentary evidence thoroughly and apply the law to the settled facts. For these reasons the matter relating to franchise fees was remanded to the Commissioner (Appeals) for hearing and for passing a reasoned, speaking order based on evidence. [Paras 5, 7]Remand to the Commissioner (Appeals) to reexamine the franchise fees issue on the basis of documentary evidence, afford hearing, and pass a reasoned order.Service tax on royalty - service received or 'to be provided' principle - remand for fresh consideration on evidence - Partial relief granted by the Commissioner (Appeals) on royalty requires quantification and demonstration of evidence for relief under the 'to be provided' test. - HELD THAT: - The term 'to be provided' was inserted into the coverage of taxable services with effect from 16-6-2005, and services not provided at the material time cannot be taxed. The Commissioner granted partial relief on royalty (para 6) but did not set out the quantum of relief or articulate the evidence warranting relief. In view of settled law cited by the Tribunal, the Commissioner must demonstrate the evidence that supports relief and apply the legal test; accordingly the royalty issue is remanded for reconsideration on evidence and for a reasoned order. [Paras 6, 7]Remand to the Commissioner (Appeals) to determine the quantum and admissibility of relief on royalty after examining documentary evidence and to pass a speaking order.Application fees distinct from franchise fees - Application fees are not to be equated with franchise fees for the purpose of service tax. - HELD THAT: - The Commissioner (Appeals) found that application fees shall not be equated with franchise fees, and the Tribunal expressly agreed with that conclusion (para 6-7). On this point the revenue's contention failed and no further action was directed. [Paras 6, 7]Revenue does not succeed on the contention that application fees are equivalent to franchise fees; no tax is leviable on that count as held by the Commissioner (Appeals).Penalty reconsideration - remand for fresh consideration on evidence - Penalty issue not finally determined by the Tribunal and is left open for reconsideration by the Commissioner (Appeals). - HELD THAT: - Although there is no grievance from the revenue on penalty and some reasons in the impugned order appear to have force, the Tribunal, having remanded the substantive issues, left the Commissioner at liberty to reconsider the penalty aspect independently when the matter is reexamined. Thus the penalty question is to be reconsidered in the relitigated proceedings rather than being finally adjudicated by the Tribunal (para 8). [Paras 8]Penalty aspect to be reconsidered by the Commissioner (Appeals) upon remand; not finally adjudicated by the Tribunal.Final Conclusion: The appeal is allowed only to the limited extent of remanding the disputes in paras 5-6 (franchise fees and royalty) to the Commissioner (Appeals) for fresh consideration on documentary evidence, with opportunity of hearing and a reasoned, speaking order; the Tribunal upheld the finding that application fees are not franchise fees, and the Commissioner may also reconsider the penalty independently. Issues: Revenue's appeal against the order on service tax liability, franchise fees, and penalty imposition.In this judgment by the Appellate Tribunal CESTAT, New Delhi, the Revenue appealed against the order passed by the Commissioner (Appeals) regarding the service tax liability on royalty and franchise fees, as well as the penalty imposition. The Revenue contended that service tax realized by the respondent before providing the service should have been deposited into the treasury, as per the Finance Act, 1994. The Tribunal noted that the Commissioner had held that franchise fees collected before the levy of service tax should not be taxed, a proposition with which the Tribunal agreed. However, the Tribunal emphasized the need for documentary evidence to support such decisions to apply the law accurately.Regarding royalty, the Tribunal observed that the Commissioner had granted partial relief to the respondent but had not specified the quantum of relief based on the evidence before him. The Tribunal highlighted the necessity of demonstrating the evidence supporting relief for the 'service to be provided,' emphasizing that service not provided cannot be taxed without an express provision of law at the material time. The Tribunal cited a previous case law to support this position. Consequently, the Tribunal remanded the matter to the Commissioner for a proper order based on evidence and a fair opportunity for both sides to be heard.The judgment also addressed a dispute concerning service tax on application fees, where the Commissioner had correctly distinguished them from franchise fees. The Tribunal agreed with this distinction, indicating that the Revenue did not succeed on this issue. Additionally, the Tribunal highlighted the importance of a thorough examination based on evidence, emphasizing the need for a reasoned and speaking order to avoid further litigation. As a result, the appeal was remanded to the Commissioner for further consideration on the issues of franchise fees, royalty, and penalty imposition.Lastly, the Tribunal noted that there was no grievance from the Revenue regarding the penalty aspect, but allowed the Commissioner the liberty to reconsider the penalty independently when reviewing the case. The judgment concluded by remanding the appeal to the Commissioner for a limited extent as indicated above, ensuring a fair and thorough examination of the evidence and legal considerations involved in the case.