Separate valuation of franchise equipment supply required under service tax rules; demand could not stand without it.

A franchise arrangement involving franchise services and supply of standard equipment required separate valuation of the equipment component under the statutory valuation framework. Where no separate amount was charged, the value had to be determined under Section 67 of the Finance Act, 1994 and Rule 3 of the Service Tax (Determination of Value) Rules, 2006. The order did not show any such valuation exercise and relied instead on general observations and external material. On that basis, the demand confirmation could not be sustained as passed, and the matter was remitted for fresh adjudication on valuation of the equipment-supply service.

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Issues: Whether the demand confirmed in the impugned order could be sustained without determining the taxable value of the supply of standard equipment under the prescribed valuation rules and whether the matter required fresh adjudication.

Analysis: The dispute involved two distinct components under the franchise arrangement, namely franchise services and supply of standard equipment. The franchise fee was treated as having suffered tax, but the order did not separately identify or value the consideration attributable to the supply of equipment. Where no amount is separately charged for a taxable service, valuation must be undertaken under the statutory valuation framework, including Section 67 of the Finance Act, 1994 and Rule 3 of the Service Tax (Determination of Value) Rules, 2006. The impugned order did not disclose any such exercise and instead proceeded on general observations and external material. In the absence of a proper valuation determination, the confirmation of demand could not be sustained as passed.

Conclusion: The impugned order was quashed and the matter was remitted for fresh adjudication on valuation of the service relating to supply of standard equipment.

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