TaxTMI 
TaxTMI 
2021 (10) TMI 640
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....rds and service levels through independent service providers called 'Home Solutions Service Provider'. 2.2 As per the arrangement for the provisions of home solution services through home solution service provider and the fact that consideration flowing from the service provider to the party in the form of major shares of provide, Revenue was of the view that these services will fall under a category of franchisee service as defined under Section 65(105)(zze) of the Finance Act, 1994. Accordingly a show cause notice dated 19.04.2011 was issued to the respondent asking them to show cause as to why: "(i) The service provided by the noticee should not be classified as 'Franchisee Services', which are taxable services under Section 65(47) of Finance Act, 1994, as amended. (ii) The Service tax amounting to Rs. 5,98,66,424/- (Rupees Five Crore Ninety Eight Lakhs Sixty Six Thousand Four Hundred And Twenty Four only) including Ed. Cess and Secondary & Higher Ed. Cess, should not be demanded and recovered from them for the period 01.10.2005 to 31.12.2010, under the provision to section 73(1) of the Finance Act, 1994. (iii) Interest should not be demanded & reco....
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.... Respondent. 9. Employees of the service provider approach the customers as representatives of the Respondent. Also, the profit is shared with the Respondent in the ratio of 90:10, which is the normal practice in Franchise service. • In the Bills raised by the Service Providers, it has been clearly stated: "For any queries call - customer care no 18000-209-5678 or email us at [email protected]". For all services provided by the service provider, one year warranty has been provided by Asian Paints Ltd. • Detailed reading of the agreement and reading of the process by which the ultimate customers procure the service and their execution, it can be concluded that home solution service providers are franchisee of the respondent bound by an exclusive contract and also carry out those processes as defined by the respondent. • The money received is deposited in the ratio of 90% towards the respondent and 10% towards the home solution service provider. • He also relies on the FAQ on Home Painting Solutions as provided on the website of the respondent. • The Commissioner has held that home ....
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....to pay a royalty on sales from his premises and to buy at least part of his stock from the franchisor or from suppliers nominated by the franchisor. The franchisor provides know-how which may include staff training and guidance as well as allowing the franchisee to use the marketing image which usually has proven customer appeal. Franchise agreements and Article 85. In the leading case of Pronuptia the Court of Justice considered the terms of a standard form franchise agreement for the well known bridal outfitters. The Court held that those clauses which were essential to the proper operation of the franchise system did not fall within Article 85(1). Thus, since it was essential that the franchisor be able to protect the knowhow and other expertise that he provides to the franchisee, Article 85(1) is not infringed if the franchisee is not prohibited from opening a shop of the same nature in an area where he may compete with another member of the network. Similarly, since it is essential that the uniformity of appearance and quality of the outlets in the franchise network is maintained, obligations on the franchisee to decorate his premises in a certain way or, in some circ....
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.... purpose of providing painting service to its customers. The arrangement, as explained by the noticee and as apparent from the agreements is as follows. The noticee comes to know about a potential customer (customer leads) through its helpline, branch offices, website, field force etc. The noticee passes this information to the HSSP of the area, who contacts the customer on behalf of the noticee and attempts to obtain the contract for painting for the noticee. The HSSP executes the contract and raises bill on the customer. In these bills it charges service tax to the customer under the heads commercial or industrial construction service, construction of complex service or works contract. 4.3 Although the HSSPs raise bills on customer in their own name, they receive and hold the money on behalf of the noticee. However, the entire amount received from the customer remains property of the noticee. The money belongs to the noticee and the HSSPs are required to provide account to the noticee. The HSSPs are required to create a separate bank account for dealing with the money of the noticee. Clause 5(vi) of the agreement reads: "All such amount collected and/or deposite....
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.... trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved; (48) "Franchisor" means any person who enters into franchise with a franchisee and includes any associate of franchisor or a person designated by franchiser to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly; 4.6 It would be naïve to contend that every agent, contractor or sub-contractor appointed by a person is a franchisee. All agents are not franchisee through the very purpose of agency is to represent another person. All sub-contractors are not franchisee, though they essentially carry out the same work as was required to be done by the principal contractor. To take an example, in the case of a contract awarded for setting up of a thermal power project, if the contractor in turn engages a subcontractor who undertakes actual execution of the contract, it cannot be said that the sub-contractor is a franchisee. The fact remains that the sub-contractor acts as agent of the contractor and does, in that sense, represent the contractor. Yet, the subcontractor is not disguised as the contractor. He retains his separate ide....
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....e is the 10% share in 'net contribution'. This in itself cannot convert them into status of a franchisee. I wholly agree with the submission of the noticee that in the nature of the contracts under consideration: (i) the commercial motivation of the Service Provider is to earn its fixed and variable consideration, (ii) the commercial motivation of the Noticee is to earn profits from the Home Solutions operations, and (iii) there is also no financial risk to the Service Providers. 4.8 I therefore, hold that the noticee does not provide franchise service to HSSPs and is not liable to pay tax as 'franchisee' under clause (zze) of Section 65(105) of the Finance Act, 1994." 4.3 It is not settled law that unless and until representational rights have been actually transferred to the franchisee, the service tax could not have been levied under the category of franchisee services. 4.4 The Tribunal in the case of Sity Cable Network Ltd. [2020- TIOL-1379-CESTAT-DEL] has held as follows:- "5.The amendment made in the definition of "franchise" under Section 65(47) of the Finance Act with effect from June 16, 2005 is the reason that has persuad....
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....une 16, 2005, and the other three conditions have been omitted. 24.The dispute in the present appeal is with regard to the levy of service tax on Siti Cable with effect from June 16, 2005 under the amended definition of "franchise". It has been defined under Section 65(47) of the Finance Act to mean an agreement by which the franchisee is granted a representational right to provide service or undertake any process identified with the franchisor, whether or not a trademark, service mark, trade name or logo or such symbol, as the case may be, is involved. 25.Thus, what is important to note is that the party should be granted a representational right to provide service or undertake any process identified with the franchisor. In other words, if the condition relating to "representational right" is not satisfied, there can be no "franchise" service. 26."Representational right" means a right that is available with the "franchisee" to represent the "franchisor" and in that case the "franchisee" loses its individual identity and is known only by the identity of the "franchisor". 27.The Delhi High Court in Delhi International Airport laid down the require....
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....eone else to the external world such that the external world feels that he is procuring goods or services from the brand owner 19 Service Tax Appeal No. 55357 of 2013 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) 31.The same view has been expressed by the Tribunal in National Internet Exchange and M/s. Easy Bill Ltd. 32.In the decision of the United States District Court, D. South Carolina, Florence Division in Englert, Inc. v. Leafguard USA [Civil Action No. 4:09-cv-00253-TLW. (D.S.C Dec 14, 2009)], decided on December 14, 2009, the Court emphasised that there must be a significant control over the method of operation of the party for the agreement to be called a "franchise" agreement. 33.An analysis of the agreement between Siti Cable and Ashirwad Cable clearly establishes that no "franchise" service has been rendered by Siti Cable to Ashirwad Cable for the following reasons : (i) The agreement is for the 'right to use" assets. Siti Cable provides equipment to the cable operators for rendition of cable operato....
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....ers had to be done with the prior written approval of the Appellant lest these bring down or cast aspersions on or discredit the Appellant. Owing to the fact that Learning Centers represented the Appellant with regard to providing education, MOU laid down strict requirements of infrastructure, processes, qualifications of staff, etc. as elaborated in the MOU. Though the MOU states that it is not a franchise arrangement and is a model of public-private partnership for deciding classification of the service rendered thereunder, we have to see the nature, terms and conditions thereof; it is immaterial as to what nomenclature is assigned to it. Thus, notwithstanding that the MOU states that it is not a franchise agreement, the aforesaid analysis leaves no doubt that it satisfies all ingredients of franchise as defined in section 65(47) of the Finance Act, 1994 in as much as Learning Centers were granted representational rights to provide service and to undertake various activities identified with the Appellant." (emphasis supplied) 36.It is for the aforesaid reasons that the Tribunal held that the arrangement between Punjab Technical University and the Learning Centers was ....
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....tional Airport and other decisions on subject stated that for determination of the relationship of franchisor and franchisee, the necessary test is to consider the terms of agreement between the parties. 4.6.To examine whether the agreement of the Appellant with Home Solution Service Providers would fall under the category of a "franchisee" agreement, it would be necessary to examine the relevant terms of the agreement. One such agreement is available in the file and we refer to the said agreement for determining whether this agreement can be considered as the Franchisee Agreement or not, in terms of the test that emerges in the above decisions. In the present case, the terms of the agreement defines the parties as follows:- "ASIAN PAINTS LIMITED, a company incorporated under the Indian Companies Act, 1913 and having its registered office at 6 A Shanti Nagar, Santacruz (East), Mumbai - 400 055, (hereinafter referred to as 'the Company' which expression shall, unless repugnant to the context or meaning thereof be deemed to include its successors and assigns) of the One Part AND Ms Pramila M Gandhi carrying on business in the name and style of M/s. Colou....
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....er Service Provider in Mumbai for the purpose. 3. PERSONNEL OF THE SERVICE PROVIDER: i) The Service Provider shall manage all the operations in respect of the Services through its trained personnel in the city of Mumbai. ii) The Service Provider shall also appoint his employees for customer interactions and execution of contracts at its sole discretion, provided they are efficient and can perform quality work as per the standards laid down by the Company. At no point of time the employees of Service Provider shall be considered as the employees of the Company. iii) The personnel of the Service Provider shall typically consist of Sales Associates, Relationship Associates, Team Leaders, Office Assistants and Tele callers. New positions in the workforce may be created by the Service Provider depending on the business priorities and in consultation of the Company. iv) The Service Provider personnel shall always be and remain the employees of Service Provider and the Company shall at no point of time be construed as their employer. v) The Service Provider and/or its staff shall not in any manner make any statement on behalf of the Co....
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....s d) Remittance of profit to the Company as per clause 5(x). vii) The Service Provider shall, at the end of every month, deposit in the aforesaid Bank Account, whatever amount has been deducted by customers as TDS for the Service undertaken. The account of such deductions made by customers and the deposit made to the said Bank Account shall be provided to the Company every month. ix) The Company and the Service Provider hereby agree that they shall share the net contribution in the ratio of 90:10 respectively, subject to a maximum sharing of Rs. 3 lks per annum with the Service provider. Such net contribution shall be computed after the end of each financial year in accordance with the methodology which is more fully described in the Annexure I of this Agreement. In the event the Agreement is terminated before the end of the financial year during its tenure, there will not be any sharing of net contribution. The remittance of the profit to the Service Provider will be only on completion of the job undertaken by the Service Provider and upon sufficient evidence being submitted to the Company that the job is finished. 6. COMPANY'S COVENANT: ....
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....the definitions which are reproduced below :- "47. "franchise" means an agreement by which the 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] 48. "franchisor" any person who enters in to franchise with a franchisee and includes any associates of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly." From the aforementioned definitions, it is crystal clear that in the facts and circumstances, no services have been provided by the appellant to FIPL under the classification of "Franchise Service" and "IPR Service". 4.8 In view of the above discussions, nothing has been brought on record by which it can be stated that such representational rights were granted to the home solution service provider. The reliance placed by Revenue in the case of Australian Foods India Ltd. [2013 (287) ELT 385 (SC)] is totally misplaced as the Hon'ble Supreme Court in para 19....