AI Drafter 
TaxTMI 
TaxTMI 
2020 (7) TMI 384
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....of the Act. 2. The Appellant is engaged in the manufacture and sale of various formulations (fast moving consumer goods) and is interalia registered with the Service Tax Division, Gurgaon under "Intellectual Property Right Services, IPR Service". The Appellant entered into licensing agreements with two licensors, namely, M/s Rackitt and Colman Overseas and M/s Rackitt Benckiser, N. V. The Appellant discharged Service Tax liability on the royalty paid by the Appellant to the licensors under the category of IPR Service under reverse charge mechanism. The Appellant also paid R & D cess @5% and availed the benefit of a Notification dated 10 September, 2004 that exempts the taxable service provided by the holder of IPR to any person in relation to IPR service from so much of Service Tax which is equivalent to the amount of cess paid towards the import of technology under the provisions of section 3 of The Research and Development Cess Act, 1986. These facts were stated by the Appellant in the ST-3 returns by the Appellant during the relevant period. 3. A show cause notice dated 22 October, 2010 was, however, issued to the Appellant proposing to classify the services received by th....
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....rvice under section 65(105)(zze) of Act means a service provided or to be provided to a franchisee, by the franchisor in relation to franchise. 11. To appreciate the issue involved in this Appeal, it will be appropriate at this stage to refer to the relevant terms of the agreement, because the terms of the agreement would determine whether the service received by the Appellant is "IPR service" or "franchise service". The agreement which is titled as "License Agreement" was executed on 15 September, 2005 between Reckitt Benkiser N.V. and Reckitt Benckiser (India) Limited. The relevant clauses are reproduced below:- "Whereas A. the Licensor is entitled to grant licenses to its group companies with respect to the use of the Intellectual Property Rights (as hereinafter defined); B. the Licensor has granted the Licensee the sole license with respect to the use of the Intellectual Property Rights (s) in the Territory (as hereinafter defined) for the production, sale, distribution and marketing of the products (as hereinafter defined); C. In view of the merger between the Reckitt & Colman and Benckiser Group of Companies, the Licensor is desirous of ....
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....not assign, charge encumber or transfer (any part of) the rights granted under this Agreement without prior consent of the Licensor. Any sub-licenses granted shall contain the limitations set out in this Agreement. The Licensee shall be responsible as between itself and the Licensor for the observance by its sub-licensees of the obligations contained in this Agreement as if such sub-licensees were party to this Agreement. 2.6 On the (partial) termination of this Agreement, the Licensee shall immediately terminate all sub-licensees granted under the terminated (part of the) Agreement, unless the Licensor, in its absolute discretion, agrees to treat any sub-license as a continuing license subject to the whole or part of the term of such continuing license being agreed." (emphasis supplied) 14. Article 3 of the agreement deals with Intellectual Property Right and clause 3.1 is reproduced below:- "Article-3 Intellectual Property Right 3.1 The Licensee acknowledges that all right, title, interest and goodwill in the intellectual property rights is and remains vested in the Licensor and shall not impair the rights of Licensor in the Intellectual ....
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....rements, the Licensor will inform the Licensee thereof and the Licensor and the Licensee will then discuss what reasonable changes are necessary to bring about the desired conformity, which reasonable changes the Licensee shall carry out without delay and at its own cost." (emphasis supplied) 16. Article 6 of the agreement deals with royalties and is as follows:- "Article - 6 Royalties 6. In consideration of the rights and Intellectual Property Rights granted by the Licensor under this Agreement, the Licensee shall pay the Licensor: (i) royalty equivalent to 5% of net sales of Product(s) in India or such other percentage as may be permitted by the laws for the time being in force in India. (ii) royalty equivalent to 8% on exports from India or such other percentage as may be permitted by the laws for the time being in force in India. Any costs either directly or indirectly paid by the Licensee for any and all costs including legal services in relation to any Intellectual Property Rights owned by an RB group entity including without limitation for advise, registry related work, litigation (both civil and criminal), counterf....
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....ice" was not sustainable since an analysis of the agreement would indicate that licensing had taken place in relation to Intellectual Property Rights. The Appellant also pointed out that the extended period of limitation could not have been invoked. 22. The Commissioner, however, did not accept the contentions advanced by the Appellant. According to the Commissioner, when a transaction is in relation to use of only intangible property, such a transaction would merit classification of service under IPR services, but when in addition to the use of intangible property, the transaction involves a right to sell or manufacture the goods or to provide service or undertake any process identified with franchisor, it would merit classification under "franchise service". The Commissioner found that the Appellant was engaged in manufacture and sale of products, identified with the franchisor and so the service received by the Appellant would merit classification under "franchise service". The relevant portion of the order passed by the Commissioner is reproduced below:- "To make the coverage of franchise service more comprehensive, effective from 16-6-2005, amendments have been mad....
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....red under the category of "franchisee services" and not under "intellectual property services" and the submissions of the noticee that the agreement between them and the licensor is for IPR services, have not grounds." 24. The Commissioner, however, found that the Appellant was not liable to pay Service Tax under the reverse charge mechanism for the period prior to 18 April, 2006 and, therefore, dropped the demand contained in the show cause notice for a period prior to 18 April, 2006. 25. The Commissioner did not examine whether the Appellant was entitled to abatement under the Notification dated 10 September, 2004 to a holder of Intellectual Property Rights. The said notification is reproduced below:- "ABATEMENT IN SERVICE TAX TO HOLDER OF INTELLECTUAL PROPERTY RIGHT NOTIFICATION NO. 17/2004-SERVICE TAX, DATED 10.09.2004. In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service provided by the holder of intellectual property right to any person, in relation to intellectual property ....
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....be clear that the notification would be applicable where a taxable service is provided by an IPR holder to any person in relation to a 'temporary transfer' or permission to use/enjoy any IPR; (vi) In this connection, it has been submitted that the Commissioner also noticed in the impugned order that the right to use IPR was provided by the licensors to the Appellant. In support of this contention, learned Counsel placed reliance upon decisions of the Supreme Court in Abrol Watches Pvt. Ltd. Vs. Collector of Customs, Bombay 1997 (92) ELT 311 (S.C.), and Commissioner of Customs, Mumbai vs. Airport Authority of India 2015 (325) ELT 823 (S.C.); and (viii) In any view of the matter, the extended period of limitation could not have been invoked in the facts and circumstances of the case, as the Appellant had submitted the Service Tax Return under the category of IPR service mentioning therein that the Appellant had availed the benefit of the notification dated 10 September, 2004. Learned Counsel pointed out that the Department had failed to substantiate that there was any intention on the part of the Appellant to evade payment of Service Tax. To substantiate this submis....
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....under the category of "franchise service" with effect from 16 June, 2005. 31. Prior to 16 June, 2005, the definition of "franchise" was: "65(47) "franchise" means an agreement by which- (i) franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be is involved; (ii) the franchisor provides concepts of business operation to franchisee, including know-how, method of operation, managerial expertise, marketing technique or training and standards of quality control except passing on the ownership of all know-how to franchisee; (iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and (iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person." 32. The amended definition of "franchisee" contains only the first condition of the definition as it stood prior to 16 June, 2005 and the other three conditions have been left out. U....
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....d also observed that the foremost requisite for a service to qualify as a taxable 'franchise' service is that the "franchisee" should have been granted a representational right and that in a franchisee transaction, the "franchisee" loses its individual identity and represents the identity of the franchisor to the outside world. 35. In Tata Consultancy Services Ltd., the Mumbai Tribunal observed that the grant of a representational right would imply that the person to whom such rights have been granted undertakes the entire activity as if it had been undertaken by the person granting such rights. 36. In National Internet Exchange of India, the Principal Bench at Delhi, after examining the definition of "franchise", observed as follows:- "Representational right permits the person to represent himself as someone else to the external world such that the external world feels that he is procuring goods or services from the brand owner which can be termed as franchise rights. For the purpose franchise must surrender his own identity and in addition must step into the shoes of the franchisor." (emphasis supplied) 37. To examine whether the agreement of the Appellant wi....
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....l clearly shows that the licensor does not have any significant control over the manner in which the Appellant conducts its operation. The Appellant is free to procure the raw materials as per its will and it has a right to fix the selling price of the final product. It is also free to run its business, marketing, distribution, sourcing and other activities as per its own choice without any inference by the licensors. It also makes its own marketing strategy. The only right which the licensor have is to supervise whether the products manufactured by the Appellant are in conformity with the quality, since the brand name of the licensor is being used by the Appellant. This singular right under the agreement will not constitute any control, much less significant control over the operations of the Appellant. Therefore, also the arrangement between the Appellant and the licensors will not constitute a franchisee agreement, since the licensor does not have any significant control over the operations of the Appellant. 43. In this connection it would be pertinent to refer to the decision of the United States District Court in Englert, INC. The Court examined an agreement that was execut....
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.... of the product of the defendant other than LeafGuard gutters which was one of the multiple products and services provided by the defendants. The level of control exerted by Englert over the defendant's method of operation was, therefore, not "significant" for the purpose of the FTC Franchise Rule and so the agreement between the parties was not 'franchise' but a 'license agreement'. 45. It would now have to be seen whether the services received by the Appellant can be classified as 'IPR service'. 46. The definitions of IPR and intellectual property service as contained in section 65(55)(a) and section 65(55)(b) of the Act have been reproduced above. The taxable service under section 65(55)(zze) of the Act has been defined to mean any service provided or to be provided to any person by the holder of intellectual property right, in relation to intellectual property service. The agreement executed between the parties is clearly for a temporary transfer of IPR as will be seen from the Preamble and Article 2 of the Agreement. Under Article 3 of the Agreement, the licensee acknowledged that all rights, title, interest or goodwill in the IPR is and remains vested in the licensor an....