TaxTMI 
TaxTMI 
2024 (5) TMI 1209
X X X X Extracts X X X X
X X X X Extracts X X X X
....erned officer or the jurisdictional officer in respect of the Appellant. 3. In terms of Section 103 (2) of the Act, this advance ruling shall be binding unless the law, facts or circumstances supporting the said Advance Ruling have changed. 4. In terms of Section 104 (1) of the Act, where the Appellate Authority finds that advance ruling pronounced by it under sub-section (1) of Section 101 has been obtained by the Appellant by fraud or suppression of material facts or misrepresentation of facts, it may, by order, declare such ruling to be void ab-initio and there upon all the provisions of this Act or the rules made thereunder shall apply to the Appellant as if such advance ruling has never been made. Order under Section 101 of Central Goods and Service Tax Act, 2017 / Haryana Goods and Service Tax Act, 2017 1. The present appeal has been filed by M/s. Subway Systems India Private Limited (Now Eversub India Pvt. Ltd.,) (hereinafter referred to as 'the Appellant') under Section 100 (1) of Central Goods and Service Tax Act, 2017/Haryana Goods and Service Tax Act, 2017 (hereinafter referred to as "the Act") against the Advance Ruling No. HR/ARL/07/2021-22 dated 10.01.2022....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Netherlands and the Appellant. The relevant extracts of the TLA are reproduced below: "WHEREAS the parties wish to grant SSIPL the right to use the Trademarks in India under the terms and conditions set forth in this Agreement. (...) 1. GRANT OF LICENSE SIP, through a series of license agreements described above, has granted SSIPL a non-exclusive right to use and sub-license others to use the System, the System IP and the Trademarks in India and the right to use the System, the System IP and the Trademarks for the purpose of entering into franchise agreements with qualified individuals and certain approved entities so they may establish and operate SUBWAY restaurants in India" 1.6 The TLA makes it clear that only a limited license and right to use the System and Trademarks, and to sub-license the said System and Trademarks had been granted to the Appellant, and the substantive rights in the System and Trademarks had not been transferred and remained with the foreign entities. The relevant extracts of the TLA in this regard are reproduced below: "3. TRADEMARK RIGHTS AND OWNERSHIP SSIPL agrees and acknowledge that; a) SIP is the exclusive owner of all right, title and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T rate SERVICE CODE ADOPTED BY THE APPELLANT: 1.12 The Appellant classified the licensing services received from SIBV under MSA read with the TSA under service code 997336 (hereinafter referred to as "Entry 1"), The classification is based on the extant Scheme of Classification of Services annexed to Notification No. 8/2017-Integrated Tax (Rate) dated 28 June 2017 (the "Rate Notification") for the purpose of payment under reverse-charge. 1.13 The relevant extract of the scheme is reproduced below (showing the service code adopted by the Applicant): Chapter, Section, Heading or Group Service code (Tariff) Service Description Chapter 99 All Services Section 7 Financial and related services; real estate services; and rental and leasing services Heading 9973 Leasing or rental services without operator Group 99733 Licensing services for the right to use intellectual property and similar products 997336 Licensing services for the right to use trademarks and franchises. 1.14 Alternatively, another reasonably plausible service code applicable to the services provided by the Appellant could be service code 997339. This is because the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st 12% Entry 17 (ii) Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right in respect of Information Technology software Temporary or permanent transfer or permitting the use of enjoyment Intellectual Property (IP) right 18% 1.18 It is pertinent to note that Entry No. 17 (i) was a specific entry dealing with licensing of Intellectual Property (IP) right in respect of Subway System and the Subway Trademark. Post amendment, vide the Amending Notification, Entry No. 17 (i) ceases to exist and the only specific entry that deals with IP rights is Entry No. 17 (iii) read with entry No. 243 of Notification No. 1/2017-Integrated Tax (Rate), dated 28.06.2017 (the "Goods Rate Notification"), which exclusively deals with Intellectual Property (IP) rights. Relevant extracts of the said entries are as under: Entry No. 17 (iii) of Service Rate Notification (i.e. Notification No. 8/2017-IT(Rate) dated 28 June 2017) Sl.No. Chapter, Section or Heading Description of Service Rate (percent) Condition (1) (2) (3) (4) (5) 17. Heading 9973 (Leasing or rental services, with or without operator) (iii) Transfer of the right to us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....operty ("IP") in respect of "goods" other than Information Technology software (CTH 9973). 1.22 It is well settled that intellectual property rights are considered as "goods" for the purpose of tax legislations. Reliance in this regard is placed on the decision of the Supreme Court in Vikas Sales Corporation vs. Commissioner of Commercial Taxes, [1996] 102 STC 106 (SC) and Tata Consultancy Services vs. State of Andhra Pradesh, (2004] 137 STC 620 (SC). 1.23 However, it is equally weil settled that temporary transfer or permitting the use of intellectual property rights is a supply of "services". In the context of GST laws, reference in this regard is made to Schedule Il of the CGST Act, which deems the following transactions to be supply of services: a) Any transfer of right in goods without the transfer of title thereof [Para 1(b)] b) Temporary transfer or permitting the use or enjoyment of any intellectual property right [Para 5 (c)]: c) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration [Para 5 (f)]: 1.24 Transaction (b) and transaction (c) above i.e. permitting the use....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bare permission to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway's case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark 'Subway' and its trade dress, and all other permissions would also end... In Subway's case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement. We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else.... 72... The so-called 'system' is controlled by Subway and it is exclusive to Subway. At the end of the franchise term, it cannot be used. Some (though not all) of the ingredients-breads, salad dressings and other 'key' items are to be sourced from Subway or Subway-authorised vendors and nowhere else. This gives Subway deep and pervasive control and dominion over the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4453/2013 and Writ Petition (C) No. 3404/2015." 1.32 The relevant extracts of the judgment delivered in McDonalds India (supra) are reproduced below: "46. For a transfer of the right to use goods to be effective, such transfer of right should be one that the transferee can exercise in exclusion of others; which is not the case in the present appeals and petitions, as the franchise agreement only grants a non-exclusive right, retaining the franchisor's right to transfer the composite bunch of services to other parties, apart from it retaining ownership to the same. The ownership in the trade mark, logo, service marks, and brand name is solely vested in Appellant and the Petitioners and has not been transferred; as is clearly manifested in the various clauses of the franchise agreements. The Appellant and the Petitioners grant a non-exclusive license to the franchisees, which can be revoked upon non-compliance of the terms and conditions as stipulated in their franchise arrangement. Clearly, this does not amount to a transfer of the right to use goods. 47... In the case of the franchise agreements involved in the present case, none of the franchisees or in the case of the trade....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an Information Technology Software. 1.35. Entry No. 17 (ii) is a general entry that deals with temporary or permanent transfer or permitting use or enjoyment of all IPR. A specific entry should prevail over a general entry when classifying a product for a particular entry. 1.36. It is well-settled that when one entry/ code is specific and the other is general/residuary, the concerned product or service should be classified in the specific entry/ code. Reliance in this regard is placed on the decisions of the Supreme Court in Moorco (India) Ltd., Madras v. Collector of Customs, Madras, 1994 (74) ELT 5 (S.C.) and Speedway Rubber Co. v. Commissioner, Central Excise, Chandigarh and Ors, 2002 (143) ELT 8 (S.C.). 1.37. Further, a commodity cannot be classified in a residuary entry, in the presence of a specific entry. A residuary entry can be taken refuge of only in the absence of a specific entry; that is to say, the latter will always prevail over the former. Reliance in this regard is placed on the decision of the Supreme Court in Commissioner of Central Excise v. M/s. Wockhardt Life Sciences Ltd, 2012 (3) TMI 40-SC. 1.38. Moreover, Para 3 of the preface to the Explanatory Notes ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... APPEAL: A. AUTHORITY HAD VERY LIMITED QUESTION TO DEAL WITH: 5.1 It is submitted that the Appellant had preferred the Application to ascertain whether with effect from 01.10.2021, licensing services received by it from SIBV, under the MLA and TLA will be taxable at 18% under Entry 17 (ii) or continue to be taxable at 12% under Entry 17 (iii) of the Service Rate Notification, w.e.f. 01.10.2021. 5.2 In view of the foregoing, it is indicated that, the Appellant approached the Authority to seek limited clarification on the applicability of said Notification on the licensing services received by it from SIBV pursuant to 01.10.2021. However, the authority has failed to provide any discussion or finding in ruling in respect to the specific clarification requested. More so, the Authority acted beyond the limit of the Application and provided a ruling in respect of classification which was not asked for. The Authority transgressed the limit of application which was restricted to the question of applicability of a specific entry over a general entry with effect from 1 October 2021, which was not discussed at all in the Impugned Ruling. A ruling on classification was completely needless a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cannot be issued. It is also evident from the press release of the 45th GST Council vis-a-vis licensing services in respect of quick Services Restaurants, as the Amending Notification purports. C. SEVERAL SUBMISSIONS HAVE NOT BEEN CONSIDERED BY AAR; THE RULING HAS BEEN PASSED WITHOUT ANY INDEPENDENT APPLICATION OF MIND AND THIS RENDERS THE ORDER A NON-SPEAKING ORDER: 5.7 It is submitted that the Impugned Ruling dated 10.01.2022 passed by the Hon'ble AAR is a non-speaking order and has hence been passed in violation of the principles of natural justice. 5.8 The Impugned Ruling in paragraph 2.4 notes that the license in question received by the Appellant was granted by way of a Master License Agreement. In paragraph 2.5 of the impugned Ruling, it is further observed that the Appellant has been granted the right to use and sub-license others to use "System and Trademark" in India by way of a Trademark License Agreement. In Para 2.6 of the Impugned Ruling, the AAR notes that the Trademark License Agreement makes it clear that only a limited license and right to use the "System and Trademark" and to sublicense the said System and Trademarks had been granted to the Appellant and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Hon'ble Supreme Court, relying several landmark decisions relating to the principles of natural justice, laid down comprehensive guidelines as follows: "51. Summarizing the above discussion, this Court holds a) In India the judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially. b) A quasi-judicial authority must record reasons in support of its conclusions. c) Insistence on recording of reasons is meant to serve the wider principle of justice that justice must not only be done it must also appear to be done as well. d) Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quasi-judicial or even administrative power. e) Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations. f) Reasons have virtually become as indispensable a component of a decision making process as observing principles of natural justice by judicial, quasi-judicial and even by administrative bodies. g) Reasons facilitate the process of judicial review by superior Courts. h) The o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd is also placed upon the following judgments: a. State of Orissa vs. Dhaniram Luhar [(2004) 5 SCC 568] "In Alexander Machinery (Dudley) Ltd. v. Crabtree (1974 ICR 120) (NIRC) it was observed: "Failure to give reasons amounts to denial of justice". Reasons are live links between the mind of the decision-taker to the controversy in question and the decision or conclusion arrived at". Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the "inscrutable face of the sphinx", it can, by ifs silence, render it virtually impossible for the Courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right of reason is an indispensable part of a sound judicial system, reasons at least sufficient to indicate an application of mind to the matter before Court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made,' in other words, a speaking out. The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or q....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5.19 However, it is submitted that there is no franchise fee for SIBV in the present case, instead there is only collection of Royalty. The same fact was made immensely clear in the Application filed by the Appellant; however, the AAR has failed to even go through the facts provided by the Appellant and has mechanically passed a ruling on the last day of the statutory time limit. The impugned ruling evidences that the same has been passed in a haphazard manner as the reasoning, facts and submissions made in the Application has not been addressed by the AAR. The impugned ruling has been passed in a mechanical manner without attempting to understand the ambiguity which is prevalent in respect of the genuine query of the Appellant. It is further submitted that the services under MLA and TLA are not professional, technical and business services in relation to trademarks and franchises. SIBV doesn't enter into franchise agreement 5.20 The finding of the impugned ruling that the Appellant has entered into franchise agreements with the third parties whereby the Appellant transfers the right to use its trademark, brand name and other proprietary knowledge (Intellectual Property) to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....est laid by the Hon'ble Supreme Court in Columbia Sportswear Co. (supra), the Respondent No. 2 is also a Tribunal as it is determining the rights and liabilities of various stakeholders. 5.26 It is submitted that appointment of a judicial member is a sin qua non for any authority which is performing judicial functions of determining rights and liabilities of a person. To the extent an authority undertakes such functions, it is acting in the capacity of a 'court' and therefore it becomes imperative to appoint a judicial member with expertise and experience in dealing with legal and interpretational issues. Reliance is placed on the judgments of the Hon'ble Supreme Court in Madras Bar Association vs. Union of India, reported at (2015) 8 SCC 583, and Madras Bar Association vs. Union of India, reported at 2010 (11) SCC 1 and L. Chandra Kumar vs Union of India and Others, reported at 1997 (3) SCC 261. 5.27 It is thus submitted that the constitution of Ld. Authority is against the judgment of the Hon'ble Supreme Court as all members appointed are technical members. 5.28 Constitution of Ld. Authority is also against the judgment of the Hon'ble Supreme Cour....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e covered under service code 998396 (Entry 3). 5.32 The term "license" means "permitting someone to do something". Accordingly, the services covered under the said codes involve a permissible use certain IP products with certain conditions and restrictions. The said service codes contemplate a permissive use of the underlying IP and in that sense, confer a very limited and conditional right. 5.33 This is further substantiated by the fact that the explanatory note to Group 99733 specifically states that the group includes permitting, granting or otherwise authorizing the use of intellectual property products, which covers licensing to third parties. 5.34 It is submitted that as per the MLA and TLA, the Appellant enjoys only the right to sub-license the "System" and the 'SUBWAY@ trademark to franchisees in the territory for limited permissive use to operate respective sandwich restaurants. It is well-settled that a person cannot transfer a better title than he himself has (as enshrined in the Latin maxim nemo dat quod non habet). Accordingly, the question of the Appellant transferring such right to use to franchisees does not arise. Judgment of the Bombay and Delhi High Court....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt is irrelevant. An agreement styled as a franchise might, on a proper examination, turn out to be nothing more than a mere license (as in Subway's case).. ...As discussed above, we find that Subway's franchise agreement grants to the franchisee nothing more than mere permissive use of defined intangible rights." 5.36 Further, the Delhi High Court, in the Appellant's own case [Subway Systems India Private Limited v. Government of NCT of Delhi & Ors., W.P. (C) 5340/2018] has also taken an identical view. In doing so, the High Court followed its previous decision dated 17 May 2017 in McDonalds India Private Limited v. Commissioner of Trade and Taxes, New Delhi, 2017 (5) TMI 999 - Delhi HC, which had held that the franchisee agreements entered into by the petitioners therein permitted a limited right to use the system of the petitioners to the franchisees and the intention therein was not to transfer the right to use goods. 5.37 The relevant extracts of the judgment delivered by the Delhi High Court in Subway Systems (supra) are reproduced below: "This Court is of the opinion that it would be appropriate to follow the judgment of 17.05.2017 because the issues are id....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ilding or brand benefit accrues or arises to the franchisee/licensee. 48. From the above analysis, what irrefutably follows is that the franchise agreements in the three cases (and trade mark licensing agreement in GSK's petition) permit a limited right to use the composite system of the respective businesses of the Appellant and the Petitioners to the franchisors/licensee, and the dominant intention, as well as the specific provisions arising from the franchise agreements are not of a transfer of the right to use goods." 5.39 The Bombay High Court has clearly held that the Franchise Agreement entered into by the Appellant is essentially a license since it involves a mere permission to use of defined intellectual property rights. Similarly, the Delhi High Court, by following the decision in McDonalds India (supra) and recording an observation that the facts in the Appellant's case were identical, has held that the relevant agreements merely involved grant of a non-exclusive conditional right to use the system and no transfer of right to use goods had taken place. The Franchise Agreement between the Appellant and the SIBV is nothing but a result of assignment of right to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....RC-OIA bearing CBIC DIN 202307ADGEE000000ACA dated 17.07.2023 issued for Tax amount Rs. 499918567/- for the period July-2017 to March-2022 due to mis-classification of services provided and received, short payment of IGST on import of services under RCM and nonpayment of GST on account of not raising the invoices in respect of services provided to distinct entities without consideration for supply of Trademark/license fees. In reply to the DRC-01A, the Appellant submitted that the Liability is not acceptable because their submissions have not been considered and GST on the said transactions has already been discharged. As connected AAAR was pending on the issue and writ petition was coming for hearing on 03.07.2023, they requested for a virtual hearing on 09.07.2023. The Appellant, received letter bearing CBIC DIN 202308ADGEE000210645 dated 03.08.2023 for Personal Hearing before issuance of SCN on 16.08.2023. 6.2 The Appellant filed CWP No. 23895 of 2023 in the High Court of Punjab & Haryana for directions to dispose the appeals in time bound manner as the same is pending and it has been directed by the Hon'ble High Court vide Order dated 19.10.2023 to complete the proceedings....