TaxTMI 
TaxTMI 
TaxTMI 
2023 (9) TMI 134
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....f the Finance Act, 1994. The department issued impugned show cause notice dated 12.05.2011 whereunder the service tax of Rs. 20,43,893/- has been demanded under Section 73(1) of Finance Act, 1994 for providing franchisee service to its various dealers. Penal provisions under Section 76, 77 and 78 of the Finance Act, 1994 has also been invoked. 2. Shri Hemal Zaveri, Senior Manager Accounts of M/s. Itw India Limited has also been made liable for penal action under Section 76 of the Finance Act, 1994. 3. The matter has been adjudicated vide impugned order-in-original dated 17.05.2012 whereunder all the charges leveled in the show cause notice have been confirmed by the Adjudicating Authority and penalty of Rs. 10,000/- has also been imposed on Shri Hemal Zaveri under Section 77(2) of the Finance Act, 1994. The appellant have challenged the impugned order-in-original before Commissioner (Appeals) who vide his order dated 02.04.2013 has upheld the findings given in the impugned order-in-original except that he has allowed benefit of cum-tax value in terms of Section 67(2) of the Finance Act, 1994. The appellants are before us against the above mentioned order-in-appeal. 4. Learned Ad....
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.... to its distributors. The agreement which have been entered into by the appellant with these distributors is purely of purchase and sale and no element of transfer of representation rights is involved in this deal. 6. With regards to the "Exclusivity Fee" recovered by them from their distributors, it has been submitted that "Exclusivity Fee" is refundable amount and in the event of early termination of the agreement due to any reason, the appellant are duty bound to refund "Exclusivity Fee" on pro-rata basis for the unexpired period to the distributor. The learned advocate has given an example that as, if the distributor has agreement for 5 years and the agreement gets terminated after two years and one month, the period reckoned is two years and six months and the distributor will be entitled for refund of "Exclusivity Fee" on pro-rata basis for two years and six months. 7. In sum and substance, it has been the contention of the learned advocate that the relationship between the appellant and its distributors is that the distributors are wholesale buyers of their product and they further distribute and sale their goods in the market and no representational right has been provide....
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.... providing services identified with any other person. 23.2 To make the coverage of franchise service more comprehensive, effective from 16-6-2005, amendments have been made to define "franchise" as an agreement by which the franchisor grants representational rights to franchisee to sell or manufacture goods or provide service or undertake any process identified with the franchisor, by any symbol such as a trade mark, service mark, trade name or logo. No other condition is required to be fulfilled for levy of service tax. 23.3 In view of the amended definition, License Production Agreements where principal allows production of goods bearing his brand name by another person would be covered under the purview of service tax under this category. Similarly, if rights are granted for rendering services identified with the principal on his behalf, such services by the principal to the service recipient would be taxable. Details of franchisees may be obtained from Yellow Pages, website http://franchiseindia.com/ and other advertisements. Field formations may undertake a survey and suitably advise the potential tax payers. 24 to 28 .......... ......... The learned advocate has also r....
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....chisee satisfies all of the following conditions [as mentioned in section 65(47)] : (i) Franchisor grants representational right to franchisee to sell or manufacture goods or provide service identified with the franchisor; (ii) Franchisor provides expertise in business operation, know how, quality control etc. to the franchisee; (iii) Franchisee pays fees to the franchisor; (iv) The franchisee is under an obligation not to engage in selling goods or providing services identified with any other person. 23.2 To make the coverage of franchise service more comprehensive, effective from 16-6-2005, amendments have been made to define "franchise" as an agreement by which the franchisor grants representational rights to franchisee to sell or manufacture goods or provide service or undertake any process identified with the franchisor, by any symbol such as a trade mark, service mark, trade name or logo. No other condition is required to be fulfilled for levy of service tax. 23.3 In view of the amended definition, License Production Agreements where principal allows production of goods bearing his brand name by another person would be covered under the purview of service tax unde....
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....he terms and conditions hereinafter appearing. ....... ....... ....... 6. DISTRIBUTOR'S RESPONSIBILITIES : distributor be responsible for, operating its business as a distributor, including for the provisions enumerated in the standard procedure (as amended from time to time by ITW), specifically the following, the costs of which shall be borne by the distributor; unless the contrary is expressly stated herein: (i) To use its distribution network for the purposes of this agreement, in the territory. (ii) To provide sufficient and suitable space for stocking the products, including refurbishment, partitions, air conditioning, communication, equipment, etc. For running of the Distributorship. (iii) To provide requisite amount of dedicated and trained sales and service personnel and office staff as per ITW's requirement. Distributor agrees to change any of the above personnel, if ITW so deems it fit. ITW will train the above personnel, as required, on an ongoing basis. All such training shall be at the expense of the distributor other than the new product launch training and technology training provided by ITW for which the costs shall be borne by ITW. To: (a) Exploi....
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.... respect of any loss incurred by it by reason of an delay in delivery occasioned by shortage of stock or delays in transit delays caused by accidents or strikes (iii) Distributor agrees and understands it shall not have any power whatsoever to commit ITW to any financial outlay or any other responsibility or commitment of whatsoever nature and shall indemnify ITW from and against any and all losses, costs, claims, actions damages, liabilities, fines, penalties or expenses arising out of o resulting from any gross negligence or willful misconduct of the distributor. (iv) Distributor agrees and understands that during the term of this agreement, the distributor shall not deal with, associate with, store or display any competitor's/ competing products in the distributor's showroom or other premises. (v) Distributor agrees and undertakes that it shall only stock and sell genuine spare parts of the products, which shall be purchased by the distributor from ITW only. 10. FINANCIAL TERMS: (i) The distributor shall pay to ITW an amount of Rs.30,00,000/- (Rupees thirty lakhs only) ("Exclusivity Fee") in consideration for the appointment of the distributorship as an exclus....
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....ent, to our understanding, it appears that the distributor is given a responsibility to provide after sale service of the products of the appellant which will be sold by the distributors and this AMC charges are to be shared by the distributors with the appellant. We are of the view that from the terms of agreement it becomes clear that the appellant have created distribution cum sale-marketing and after sale maintenance network by appointing various distributors in India. The Exclusivity Fee which is being charged by the appellant from its distributors is a kind of guarantee amount rather than any franchisee fee. 10.4 From the terms of agreement which we have referred above, we are of the opinion that appellant is not given any representational right to its distributors to sale or manufacture goods or provide service or undertake any process identify with the franchisor and the agreement is purely for marketing of product and therefore same cannot be termed as agreement between the franchisor and franchisee. 10.5 We also take shelter of this Tribunal in the case of M/s. Siti Cable Network Limited vs. CST, Delhi - 2020 (8) TMI 79 - CESTAT NEW DELHI. The relevant portion of the de....
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....right to use the assets of the First Party, the Second Party has agreed to pay 20% of net revenue to the First Party. Net revenue being defined as gross receipts less pay channel cost and operative expenses of the network. The gross receipt includes the receipts from all sources relating to cable network business in Panipat and its surrounding areas. The net revenue shall be calculated at the end of every quarter and in no case can be less than 1.50 lacs per month. The Second party shall pay the above amount to the First Party every month being the minimum amount of consideration on right to use. The said amount is to be paid by the 7th day of the succeeding month for the month. The Second Party shall send a detailed statement of affairs to the First Party showing total receipts received and operational expense incurred, every quarter, on the basis of which the surplus as mentioned above has been calculated. Any adjustments to amount receivable in excess of minimum amount are to be carried out every quarter. xxxxxxxx 4. ELECTRICITY POLE RENTALS: That it is understood by the Second Party that the permission for using the electricity poles for laying the cable has been granted by....
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.... or accessories of equal value of the materials, equipments and other accessories installed in the network by the First Party. xxxxxxx 14. TRANSFER/SUB-LEASE OF NETWORK: The Second Party shall not remove or shift the control room/ Head end from the said premises at 8, Marla Colony, Behind Power House, Panipat, Haryana. Further, Second Party shall not sell, assign, mortgage, transfer/sub-let, encumber or any part of the running network of the First Party to any third person, firm, company or any other agency. If the Second Party does any of the above acts, deeds, transactions, the act, deed/ transactions shall be null and void ab initio and Second Party shall be liable for criminal breach of trust. Further, if Second Party is found doing the above act, deed or transaction, this agreement shall stand automatically terminated. 15. INSPECTION: The first party's authorised officer/ representative shall inspect the running network at any time with prior notice, during the term of this agreement. The Second Party shall provide all facilities and assistance during such inspection, which the Second Party may be reasonably expected to give. xxxxxxx 18. OWNERSHIP: It is understood b....
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....aterials/equipment supplied by it from time to time as per the records maintained by Siti Cable. The lists of the materials/ equipment installed/used as on July 7, 2003 forms part of Annexure 1 to the Agreement. Clause 12 of the agreement provides that Ashirwad Cable shall use and operate the equipments carefully and in workmanship manner and shall keep the equipments in good and serviceable condition. It shall also be responsible for repair, replacement of the damaged or broken parts installed in the network by Siti Cable. Clause 15 permits the authorized officers of Siti Cable to inspect the running network at any time. Clause 18 makes it clear that all the assets, equipments and materials used in establishing and running the network exclusively belong to Siti Cable and Ashirwad Cable shall not have any right/ claim. Clause 19 notes that Siti Cable logo is a registered trademark and provides that Siti Cable has authorized Ashirwad Cable to use its logo during the currency of the agreement only for business under the agreement. 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....
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....ribunal in Global Transgene Limited 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 franchise transaction, the franchisee loses its individual identity and represents the identity of the "franchisor" to the outside world. 29. In Tata Consultancy Services Ltd., the Mumbai Tribunal observed that the grant of a representational right would imply that the person to whom such a right has been granted undertakes the entire activity as if it had been undertaken by the person granting such rights. 30. In National Internet Exchange of India, the Principal Bench of the Tribunal 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 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." (emp....
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.... effect. It is in this context that the Tribunal observed: "4........... From the foregoing there remains no doubt that LCs were authorized to take students by claiming and making it clear that the education they were providing was on behalf of the appellant. They were allowed even to advertise to that effect. It was because Learning Centers were representing the Appellant with regard to providing education, that the MOU cast strict obligations on learning Centers to ensure that the quality of education remained as per the standards of the Appellant. It also comes out from the MOU that RCs framed marketing strategies to be implemented by Learning Centers in consultation with the Appellant. As per the MOU, the format and style of any advertisement or hoarding to be placed by RCs/ Learning Centers 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 i....
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....en he is taken to represent Amway in some (however limited) capacity. (emphasis supplied) 38. The said decision is distinguishable for the factual aspect itself as neither does Siti Cable grant any representational right to the cable operators nor the cable operators are required make themselves known as Siti Cable franchisee/distributor. 39. In Board of Control for Cricket in India, the Tribunal interpreted the meaning of term 'representational right', in the context of "franchise" services and observed: "In light of the above observations, the phrase representational right would not mean, extinguishing the identity of the franchisee, but is only to grant representational right in respect of the transaction in relation to the services that is being provided by the franchisor." 40. The principle laid down by the Tribunal in Board of Control for Cricket in India is in direct conflict with the principle laid down by the Delhi High Court in Delhi International Airport. The relevant portion of the judgment of the Delhi High Court has been reproduced above. The decision of the Tribunal in Board of Control for Cricket India, thus, does not help the Department. 41. Learned coun....
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....asons stated above, it is not possible to hold that the service contemplated under the agreement is a "franchise" service. The confirmation of demand for the period commencing June 16, 2005 upto March 31, 2008 cannot, therefore, be sustained. It is, accordingly, set aside. The confirmation of demand for interest under section 75 and penalty under section 76 of the Finance Act has also to be set aside and is set aside. The Appeal filed by Siti Cable is, accordingly, allowed." The same view has also been taken by this Tribunal in the case of Tata Consultancy Service Limited vs. CCE - 2019 (6) TMI 109 CESTAT-Mumbai, the same is reproduced below:- 4.3.1 Franchisee Service- a. As per the order of Commissioner demand under this category has been confirmed for the period from 04/2005 to 12/2006. While confirming the demand under this category Commissioner has considered demand made under two categories as per the show cause notice Annexure 1 and confirmed the same under the category of Franchisee Services. The two demands as per the Show Cause Notice are as listed below: Service 4/05 to 9/05 10/05 to 12/06 Total 'Rs Service Tax Cess Service Tax Cess Franchisee Service 2787....
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....standards of quality control to them. Thus, the agreement doesn't pass test of second clause. vi. It has been rightly noted in the show cause notice that in order to be recognized as a 'franchise' for the period prior to 16/06/2005, the agreement must fulfill all the four conditions. Since the agreement doesn't meet terms of second clause, it cannot be termed as Franchise. Consequently the, the demand for the period upto 15.06.2005 is dropped. vii. For the period from 16/06/2005 onwards, the clause (ii) to (iv) were absent in the definition and only the first clause was retained. It has already been noted above that the agreement completely meets requirement of first clause. Therefore, the agreement did amount to a franchise for the period from 16/06/2005" d. The findings recorded by the Commissioner clearly show that he has not been able to appreciate as to what is meant by "grant of representational right". Grant of representational right would imply that the person to whom such rights have been granted under takes the entire activity as if it had been undertaken by the person granting such right. In this case the so called Sub Certifying authorities and Sub CA Administrato....
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....mbol, as the case may be, is involved. Board, vide Circular No. 5918/2003-S.T. and Circular No. B1/6/2005-TRU, has recognized this aspect. 5.3 Undisputedly, the appellants have imported the Technology which is owned by BTC and patented in China. The said technology is imported in the form of the mother seeds and the same are multiplied in the laboratory by or on behalf of the appellants and given to the sub-licencee to further multiply for onward sale by them to the farmers for the purpose of growing commercial crop. The appellants are not granted any 'representational right' from BTC to represent them in India, nor entitled to grant or they have actually granted any representational right to the sublicensees. 5.4 The Revenue's case rests on the premise that the logo or hallmark belonging to the appellant is put on the seed package manufactured/marketed by the sublicensees. The appellants produced a few samples of the product package labels before us. On perusal of the samples, we agree with the appellant that the packages contain a mark "Fusion BT" which only denotes that the seeds being sold contain Fusion BT genes, and it does not denote that the said mark is eithe....