2026 (3) TMI 1056 - HC - Central Excise

Franchise Service not attracted where contracts and invoices show manufacture-for-sale, not representational franchise; finding upheld.

Whether the agreements constitute a taxable Franchise Service was tested against the statutory requirement of a representational right to sell or ... Interpretation of 'Franchise' agreement - granted 'Franchise' for the manufacture of goods of specifications, design and quality described to some other small manufacturing units, under the Notarised Agreements - representational right to sell or manufacture - Franchise Agreement, as defined under Section 65(48) of the Finance Act, 1994 - franchise service along with interest - imposition of penalty - HELD THAT: - 'Franchise' is an agreement, by which the franchisee is granted a representational right to sell or manufacture goods of a trademark, service mark, trade name or logo. The franchisee is an individual or a Company that buys the right to operate a business using the branding product and proven business model of an established company that is the franchisor. The franchisee pays upfront initial franchise fees and royalties, usually a percentage of gross sales of the franchisor, subject to following the specific rules on how to run a business with the exact ingredients, quality, specifications etc. In the present case, the respondent did not give any right to manufacture its brand to the small unit and sell it directly to the customer. The franchisees were given only specifications, quantity of firebricks, or were directly supplied to the assessee or to the customer at a given rate mentioned in the purchase order. Therefore, there is no Authority to manufacture bricks under the brand name of the assessee and the liberty to sell in the open market. Thus, it has been wrongly treated as a 'Franchise Agreement'. The Tribunal has rightly examined the issue involved in this case, and it found that the agreement entered into by the respondent with the manufacturer was not in the nature of a 'Franchise Agreement' and the appellant did not provide franchise services to the manufacturer. All the conditions of the franchise agreements are not being fulfilled in this case. We are in full agreement with the view taken by the learned Tribunal and do not find any ground to interfere with the impugned order. Hence, the question of law is answered negatively against the appellant. Final Conclusion: The High Court affirmed the Tribunal's finding that the arrangements were not franchise agreements within the statutory definition and dismissed the appeal. Issues: (i) Whether the agreements and facts establish a taxable 'Franchise Service' under the definitions in Section 65(47) / 65(48) of the Finance Act, 1994 (as amended); (ii) Whether the Tribunal misread the agreement by treating the transactions as sale to the assessee rather than a franchise arrangement.Issue (i): Whether the agreements and facts establish a taxable 'Franchise Service' under the definitions in Section 65(47) / 65(48) of the Finance Act, 1994 (as amended).Analysis: The agreements required manufacturers to produce goods to the specifications, design and quality directed by the respondent and to consign goods only to customers specified by the respondent; manufacturers issued invoices showing sale to the respondent and received only the agreed manufacturing amount, with adjustments by credit notes; no right was granted to manufacturers to manufacture under the respondent's brand and sell in the open market; the statutory definition requires a representational right to sell or manufacture identified with the franchisor and a fee paid by the franchisee.Conclusion: The activity is not a 'Franchise Service' as per the statutory definition and related facts; the franchise conditions are not fulfilled, and the respondent did not provide franchise services.Issue (ii): Whether the Tribunal misread the agreement by treating the transactions as sale to the assessee rather than a franchise arrangement.Analysis: The invoices, consignments, payment flow and contractual terms show goods were sold to the respondent and consigned to customers by respondent's direction; manufacturers lacked authority to sell directly; financial mechanisms (invoices and credit notes) reflect agreed manufacture payments rather than a representational franchise arrangement.Conclusion: The Tribunal correctly interpreted the agreement as showing sale to the respondent and not a franchise arrangement; there is no misreading of the agreement.Final Conclusion: The Tribunal's finding that the agreements do not constitute a franchise agreement is upheld and the appellant's challenge is rejected.Ratio Decidendi: Where contractual terms and transactional documents establish that manufacturing units lack representational rights to sell under the principal's brand and payment flows reflect agreed manufacture consideration rather than franchise fees, the arrangement does not qualify as a taxable 'Franchise Service' under the Finance Act, 1994.