2024 (12) TMI 409 - AT - Service Tax

Franchisee advertisement contribution for own outlets cannot be included in franchise service valuation for service tax

CESTAT Delhi held that advertisement contribution amounts paid by a franchisee for promoting its own outlets cannot be included in the valuation of ... Valuation - amount paid as contribution towards advertisement - promotion of franchise outlets - includable in the value of Franchise Services for service tax purposes or not - time limitation - HELD THAT:- Section 67 of the Finance Act talks about valuation of taxable services for charging service tax. The provision defines consideration to include any amount that is payable for the taxable services provided or to be provided. The expression considerations was decided by Hon’ble Supreme Court in the case of SONIA BHATIA VERSUS STATE OF UP. [1981 (3) TMI 250 - SUPREME COURT] in reference to U. P. Imposition of ceiling on land building Acts 1961. Since, the Act was not defining consideration its meaning as defined from expression in Section 2(d) of the Contract Act 1872 for consider with a reference to its meaning in Black’s law dictionary it was held that the consideration means a reasonable equivalent for other valuable benefit passed on by the Promisor to the Promissee or by the transferor or by the transferee. A Larger Bench of the Tribunal in M/S BHAYANA BUILDERS (P) LTD. & OTHERS VERSUS CST, DELHI & OTHERS. [2013 (9) TMI 294 - CESTAT NEW DELHI-LB] observed that 'implicit in the legal architecture is the concept that any consideration whether monetary or otherwise, should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the latter.'' Apparently and Admittedly, the appellant is paying service tax under RCM with respect to royalty fee and even on advertisement fee for advertising the trade name of Costa/IFHL. The amount in question is an amount for advertising the Costa/ IFHL outlets which are operated by appellant for its own Business Department has not produced anything to falsify these observations. Hence, the amount is question is an amount towards promotion of appellant’s own outlets in this arrangement presence of the two people to Constitute Service rendered by one & received by another is are missing vis-a-vis the promotion the promotional activity for the appellant operated outlets. Hence, the said amount has wrongly been included in gross value towards franchise service received by the appellant from the two overseas Franchisors. The confirmation of demand of service tax on this amount is therefore, liable to be set aside. The show cause notice is also held to have wrongly invoked. Rule 5 of the Valuation Rules, 2006 as the said Rule has already been held ultra vires by Hon’ble High Court Delhi in the case on INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD. VERSUS UOI. & ANR. [2012 (12) TMI 150 - DELHI HIGH COURT] where it was held that 'It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider 'in the course of providing taxable service'. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.' The show cause notice is time bared and is vague also. The demand based on such show cause notice is not sustainable - appeal allowed. Issues Involved:1. Whether the amount spent by the appellant on advertising and promotion of franchise outlets is includable in the value of Franchise Services for service tax purposes.2. Whether the extended period of limitation was correctly invoked in issuing the show cause notice.3. Whether Rule 5 of the Service Tax (Determination of Value) Rules, 2006 was rightly applied.Issue-wise Detailed Analysis:1. Inclusion of Advertisement Expenses in Franchise Services Value:The primary issue was whether the appellant's expenditure on advertising and promotion, as per franchise agreements with Costa International Limited and International Franchise Holding (Labuan) Ltd., should be considered part of the taxable value of Franchise Services. The department argued that these expenses constituted extra consideration for Business Support Services provided to the franchisors. However, the tribunal observed that the advertising expenditures were for promoting the appellant's own retail outlets in India, not the franchisors' brand names or trademarks. The tribunal referenced the decision in Bhayana Builders Pvt. Ltd. vs. Commissioner of Service Tax, which clarified that consideration should directly benefit the service provider. Since the appellant benefitted from the advertising, not the franchisors, the expenses could not be considered additional consideration for Franchise Services. Thus, the tribunal concluded that these expenses should not be included in the taxable value of Franchise Services.2. Extended Period of Limitation:The tribunal addressed whether the extended period of limitation was appropriately invoked for the show cause notice covering the period from 2007-08 to 2011-12. The tribunal found no evidence of suppression or willful misstatement by the appellant to evade tax, which is necessary to justify the extended period. The tribunal noted the reduction of penalties by the Commissioner (Appeals) as indicative of the absence of such intent. Citing the Supreme Court's decision in Uniworth Textile, the tribunal held that the extended period was wrongly invoked, rendering the show cause notice time-barred.3. Application of Rule 5 of the Service Tax (Determination of Value) Rules, 2006:The tribunal examined the applicability of Rule 5, which was invoked in the show cause notice. The Delhi High Court had previously struck down Rule 5 as ultra vires in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India, stating that it breached the boundaries of Section 67 of the Finance Act, 1994. The tribunal reiterated that Rule 5 sought to include expenses beyond the consideration for taxable services, which contradicted the charging provisions. Therefore, the tribunal held that the invocation of Rule 5 was incorrect and contributed to the unsustainability of the demand.Conclusion:The tribunal set aside the order-in-appeal and the demand for service tax, ruling in favor of the appellant. The appeal was allowed, and the tribunal emphasized that the advertising expenses were not taxable under Franchise Services, the extended period was improperly invoked, and Rule 5 was wrongly applied.