2013 (2) TMI 610 - AT - Service Tax

Franchise service - right to collect toll in respect of Yenam-Yedurulanka in Bridge - bridge was constructed by the appellant under a Build-Operate-Transfer (BOT) Agreement - assignment of the work to the subsidiary - held that - On a perusal of the definition of franchise given under Section 65(47) under the Finance Act, 1994, we note that it refers to an agreement by which the franchisee is granted representational right to provide service identified with the franchisor whether or not any service mark is involved. Prima facie, in the absence of such an agreement, the appellant themselves would have provided the service to the people/State Government in respect of the bridge under the BOT agreement. They did provide this service for nearly 41/2 years also. For the rest of the period, this right was granted to the subsidiary-company with all the obligations and rights associated with it and that company has been rendering the same service, apparently, in exercise of representational right granted by the appellant. Prima facie, therefore, the arrangement between the appellant and the subsidiary-company would fit in the definition of franchise and, for that matter, the appellant and the subsidiary- company should be appropriately called franchisor and franchisee. - pre-deposit ordered for an amount of Rs. 3 crores - stay granted partly.

Issues:
1. Waiver of pre-deposit and stay of recovery sought by the appellant in a case involving service tax and education cess under the head 'franchise service'.
2. Interpretation of the agreement between the appellant and its wholly owned subsidiary regarding toll collection on a bridge under a BOT agreement.
3. Determination of whether the transaction between the appellant and its subsidiary falls under the definition of 'franchise' as per Section 65(47) of the Finance Act, 1994.
4. Examination of the invocation of the extended period of limitation by the Department in issuing the show-cause notice.
5. Evaluation of the Board's Circular and previous Tribunal decisions in relation to the applicability of service tax on toll collection transactions.

Analysis:
1. The appellant sought waiver of pre-deposit and stay of recovery for an amount demanded towards service tax and education cess related to toll collection on a bridge under a BOT agreement. The appellant received Rs. 125 crores from its subsidiary for toll collection rights, leading to a dispute over the applicability of service tax under the 'franchise service' category.

2. The Tribunal examined the agreement between the appellant and its subsidiary, where the subsidiary was granted the right to collect toll on the bridge. The appellant's argument was that no representational right constituting a 'franchise' was transferred to the subsidiary, emphasizing the nature of toll collection as a non-taxable service based on the State List of Schedule VII to the Constitution.

3. The Tribunal analyzed whether the transaction between the appellant and its subsidiary fell within the definition of 'franchise' under Section 65(47) of the Finance Act, 1994. It was observed that the subsidiary represented itself as the grantee of the toll collection rights, indicating a potential franchisor-franchisee relationship, thereby prima facie making the transaction subject to service tax.

4. The Department's invocation of the extended period of limitation in issuing the show-cause notice was scrutinized. The Tribunal noted that the appellant did not disclose relevant information regarding the franchise arrangement, leading to the Department's reliance on the extended period of limitation based on the suppression of facts.

5. The Tribunal considered the Board's Circular and previous Tribunal decisions cited by the appellant. It was observed that the Circular did not directly address transactions involving toll collection like the present case, indicating that the tolls on bridges being in the State List did not automatically exempt such transactions from service tax. Despite this, the Tribunal directed the appellant to pre-deposit a specified amount and granted waiver of pre-deposit and stay of recovery subject to compliance.

This detailed analysis of the judgment showcases the complexities involved in determining the applicability of service tax in transactions involving toll collection rights and the interpretation of 'franchise' under relevant legal provisions.

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