2009 (11) TMI 223 - HC - Service Tax

Kerala High Court rules courier service not subject to franchise service tax.

The High Court of Kerala allowed the appeals of a courier service agency, setting aside the Customs, Excise & Service Tax Appellate Tribunal's ... Double taxation of services - Taxable value as gross amount under Section 67 - Distinction between franchise and agency in levy of service tax - Applicability of franchise service when no fee is paid to franchisorDouble taxation of services - Taxable value as gross amount under Section 67 - Whether the same courier service charges already taxed at the hands of agents/franchisees can be subjected again to service tax as 'franchise service' on the net amount retained by the appellant. - HELD THAT: - The Court found that taxable service is the gross amount of money consideration received from customers under Section 67 and that the agents/franchisees, having registered and remitted service tax on the entire courier service charges collected from customers, have discharged the tax liability on that consideration. There is no provision in the Finance Act, 1994 permitting taxation of the same service charges twice under two different heads. Consequently, imposing service tax on the net portion retained by the appellant as an additional tax for 'franchise service' amounted to double assessment on the same service receipts and was unsustainable. [Paras 5]Assessment and demand of service tax from the appellant on the net amount as 'franchise service' is untenable and cannot be sustained.Distinction between franchise and agency in levy of service tax - Applicability of franchise service when no fee is paid to franchisor - Whether the contractual arrangement with agents/franchisees in the courier business satisfies the definition of 'franchise' so as to attract service tax under the head 'franchise service'. - HELD THAT: - The Court examined the statutory definition of 'franchise' and noted its key elements: representational right to use franchisor's identity, provision of business concepts/know-how by franchisor, payment of fee by franchisee to franchisor, and exclusivity obligations. The factual finding was that the so-called franchisees in this case acted as agents who collected and delivered articles for the appellant and were remunerated for services performed; they did not pay a fee to the appellant for use of trade name or business concept, nor did the appellant provide franchisor-type services. Therefore the arrangement did not fall within the statutory concept of 'franchise' and Section 65(47) read with Section 65(105)(zze) was not attracted. [Paras 5]The agreement with agents/franchisees does not constitute a 'franchise' within the meaning of the Act; levy under 'franchise service' is not applicable.Verification and cross-check by department - Whether the Court's decision precludes departmental verification of receipts and remittances by agents/franchisees. - HELD THAT: - Although the Court allowed the appeals and vacated the impugned orders, it expressly permitted the department to cross-check the amounts received by the appellant from agents/franchisees and to verify whether the agents/franchisees have remitted service tax on the entire courier service charges collected, thereby allowing factual verification without reopening the legal conclusion reached. [Paras 5]Appeals allowed but department may verify remittances by agents/franchisees as a factual exercise.Final Conclusion: The appeals are allowed; the Tribunal's and lower authorities' assessments and demands treating the net receipts of the appellant as taxable under 'franchise service' are vacated as untenable, while permitting the department to verify factual compliance by the agents/franchisees regarding remittance of service tax on courier charges. Issues:Challenge to levy of service tax on courier service agency for franchisee service under the Finance Act, 1994.Analysis:The High Court of Kerala heard appeals filed by a courier service agency against Customs, Excise & Service Tax Appellate Tribunal's orders upholding the levy of service tax on the appellant for franchisee service under the Finance Act, 1994. The appellant engaged agents named Franchisees who collected articles from customers along with service charges and remitted service tax to the Central Excise Department. The appellant shared service charges with Franchisees based on agreements. The Tribunal assessed the net amount retained by the appellant for franchise service, leading to double taxation under 'tax on courier service' and 'tax on franchise service'. The appellant approached the Court under section 35G of the Central Excise Act, 1944, challenging the Tribunal's decision.The Court noted that while second appeals against non-compliance with pre-deposit orders are not maintainable, a connected appeal was decided on merit by the Tribunal. The appellant's primary activity was courier service involving collection and delivery of articles. The service charges collected were shared between the appellant and Franchisees. The issue was whether the net service charges retained by the appellant after payment to Franchisees were subject to further tax under 'franchise service'. The Court analyzed Section 67 and found no provision in the Finance Act, 1994 for double taxation of the same service charges. It held that the appellant's courier service with Franchisees did not fall under 'franchise' as defined in the Act.The Court clarified that a franchise agreement involves representational rights and payments for using the franchisor's name or trademark, which was not the case with the appellant and Franchisees. The appellant was not providing services to Franchisees beyond appointing them for courier service. The only applicable tax provision was for courier service under Section 65(33) read with Section 65(105)(f) of the Act. The Court allowed the appeals, vacating the Tribunal's orders on tax and penalties, with a directive for the department to verify service tax remittances by Franchisees based on the appellant's submissions.