AI Drafter 
TaxTMI 
TaxTMI 
2024 (5) TMI 1209
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.... Section 97 for advance ruling: (b) on the concerned 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") a....
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....LA") dated 18.11.2019 entered into between Subway IP LLC, USA, Subway Internal B.V., 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. TR....
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....s Tax Act ("IGST Act") read with Sl. No. I of Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 ("Reverse Charge Notification"). Classification of services and applicable GST 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 L....
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....tification) Post 01.10.2021 (After operation of Amending Notification) Applicable Tax Entry 17 (i) Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology software Entry omitted, ceases to exist 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.....
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....eived under codes 997336/997339 were taxable at 12% prior to October 2021 1.21 From 01.07.2017 till 30.09.2021 Tax rate covering royalty payments in respect of licensing of Intellectual Property Rights ("IPR") was determinable at 12% under Entry 17 (i) of the Service Rate Notification which covers temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property ("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 with....
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....ia & Ors, 2016 (8) TMI 717-Bombay HC]. The Hon'ble Bombay High Court has held that the franchisee Agreement entered into by the Appellant merely granted permissive use of defined intangible rights to the franchisees. The relevant extracts of the judgment are reproduced below:- "69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a 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 ex....
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.... in any way set aside, modified or clarified by the Supreme Court in the pending proceedings before it, that decision will be binding upon the parties... It is pointed out on behalf of the petitioner that similar judgment was delivered by the Bombay High Court [Subway Systems India Private Limited vs. State of Maharashtra, W.P. No. 497/2015 decided 11.08.2016. Writ petition is accordingly disposed of in terms of the judgment dated 17.05.2017 in Writ Petition (C) No. 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 t....
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....t from SIBV through the MLA and TLA. Services received under codes 997336/997339 should continue to be taxable at 12% under Entry 17 (iii) of the Service Rate Notification read with Entry 243 of the Goods Rate Notification with effect from I October 2021. 1.34. Entry No. 17 (iii) of the Service Rate Notification read with Entry 243 of the Goods Rate Notification, is the only specific entry in the Service Rate Notification that deals with the service of licensing of IPR in respect of goods other than 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 ....
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.... services received by the Appellant under the MLA and TLA, for which a periodic consideration is charged by SIBV, are liable to IGST at the rate of 12% under Entry 17 (iii) of Notification No. 8/2017-IT(Rate) dated 28 June 2017 read with the Entry No. 243 of the Notification No. 1/2017-IT(Rate) dated 28 June 2017; c) Grant a personal hearing through video conferencing mode in view of COVID pandemic; d) Pass any such further or other order(s) as may be deemed fit and proper in facts and circumstances of the case. 5. GROUNDS OF 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 au....
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....ermanent 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 of Intellectual Property (IP) right 18% 5.6 The Appellant understands that this forum may not have the jurisdiction to decide on the constitutional matters. However, the unconstitutionality of the government action may be recorded by way of absence of minutes of meeting of the 45th GST Council Meeting, in public domain, pursuant to which the amending Notification 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....
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....ely neglected while arriving at Conclusion. 5.12 Further, the conclusion drawn in the impugned order, that "licensing services received by the Appellant from SIBV under MLA and TLA will be taxable at 18% under Entry 17 (ii) of the Service Rate Notification and will not be taxable at 12% under Entry 17 (iii) of the Service Rate Notification." is not backed by any reason, independent discussion or finding. 5.13 Reliance in this regard is placed on the decision of Hon'ble Supreme Court in case of Kranti Associates Pvt Ltd vs. Masood Ahmed Khan [2011 (273) ELT 345 (SC)], wherein the 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 mus....
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....y is of the opinion that they have carefully analysed the records however, the ruling completely fail to consider the clauses of the MLA and TLA extracted and submitted along with the application. 5.15 Therefore, the AAR ought to have recorded reasons and relevant provisions for holding as to how licensing services received by the Appellant from SIBV under the MLA and TLA will be taxable at 18% under Entry 17 (ii) and not at 12% under Entry 17 (iii) without sanction of the GST Council as mandated under Article 279A of the Constitution. The AAR has merely proceeded mechanically and denied the Appellant's contention without recording any reasons. On this aspect, reliance in this regard 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 d....
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....t is submitted in this regard that impugned ruling is non-speaking and arbitrary in its very essence and shall be set aside to the extent it is against the Appellant on this count alone. D. THERE IS NO FRANCHISEE FEE FOR SIBV ONLY ROYALTY IS PRESENT: 5.18 As per the findings of impugned advance ruling dated 10.01.2022 the classification of services for which "Franchisee Fee" received in lump sum by them at the time of entering into Franchise Agreement with franchisee and "Royalty" amount received on monthly basis, at a pre-determined rate on gross sales revenue of the franchisee or fixed pre-determined amount, whichever is higher from the franchisee, for right to use their trademark, brand name and other proprietary knowledge (Intellectual Property). 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....
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....g the AAR frivolous and no effort of providing a reasoning or analysis has been attempted by the AAR. E. GROSS FAILURE OF THE MACHINERY OF ADVANCE RULING AUTHORITY IS ATTRIBUTED TO ABSENCE OF A JUDICIAL MEMBER: 5.24 In absence of a judicial member, the constitution of Authority for Advance Rulings, (Respondent No. 2) is unconstitutional. 5.25 In support of this contention, the Petitioners rely on the judgment of the Hon'ble Supreme Court in Columbia Sportswear Company vs. Director of Income Tax, Bangalore, reported at (2012) 11 SCC 224, wherein it was held that the Authority for Advance Ruling constituted under the provisions of Income Tax Act, 1962 is a 'tribunal' within the meaning of Article 136/227, as it is exercising judicial powers. In terms of the test 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 u....
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....(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)]. It is the case of the Appellant that: • transaction (b) above i.e. permitting the use or enjoyment of intellectual property right (in other words, licensing the right to use intellectual property right, being the Appellant's services under the Franchise Agreement) is covered under service codes 997336 (Entry 1)/997339 (Entry 2); and • transactions (a) and (e) above, i.e. transfer of right to use goods or in goods, in the context of trademarks and franchises, are covered under service code 998396 (Entry 3). • transactions (a) and (e) above, i.e. transfer of right to use goods or in goods, in the context of trademarks and franchises, are 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....
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....dients - 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 franchisee's daily operations, without, at the same time, ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology. 73... Indeed, it seems to us clear that if we accept that a franchise agreement is, by definition, one that requires territorial exclusivity, then the Subway agreements are not franchise agreements at all, but purely licensing agreement. 74... What must be looked at is the real nature of the transaction and the actual intention of the parties. The agreement must be considered holistically, and effect must be given to the contracting parties" intentions. The label or description of the document 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 ....
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.... 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 mark licensee (or in GSK's petition the trade mark licensee), are empowered to safeguard violation of the mark, through enforcement mechanisms, such as filing suits for injunction or damages. This underlines that the most important attribute of ownership or transfer (even in the most evanescent sense) is absent. Furthermore, by reason of Section 48 of the Trade Marks Act, the utilization of the mark by the franchisee/licensee would accrue to the trade mark owner. Therefore, the reputation or brand building which accrues on account of increased volume of business because of the franchise/licensing arrangement, continues to be with the owner. No brand building 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 ....
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....fic 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. 5.44 Moreover, para 3 of the preface to the Explanatory Notes states that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description. 5.45 Relying on the above, the Appellant submits that the services received by the Appellant should be classified under Entry 17 (iii) which is a specific entry, instead of Entry 17 (ii), which is a general entry for all IPRs (including Information Technology related IPRs) and therefore, must continue to be taxable at 12%. 6. Record of Personal Hearing: 6.1 As per the records available, an enquiry was initiated by the DGGI-Gurugram Unit against the Appellant and DRC-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 ....