2013 (7) TMI 266 - AT - Service Tax

Import of service franchise services appellant was appointed as non exclusive independent contractor - Held that - Services received prior to the commencement of section 66A are not liable under service tax - issue of liability was settled in Indian National Ship Owners Association v/s Union of India (2008 (12) TMI 41 - HIGH COURT OF BOMBAY) - demand is not sustainable appeal decided in the favour of the assessee.

Issues Involved:

1. Demand of Service Tax under 'Franchise Services'
2. Demand of Service Tax under 'Management Consultancy Services'
3. Applicability of interest and penalties under various sections of the Finance Act, 1994
4. Interpretation of agreements between appellants and Contract Bottling Units (CBUs)
5. Applicability of the extended period of limitation for service tax demand
6. Liability for service tax on services received from outside India prior to 18.04.2006

Issue-Wise Detailed Analysis:

1. Demand of Service Tax under 'Franchise Services':

The appellants challenged the demand for Service Tax of Rs. 13,14,63,643/- under 'Franchise Services.' The Department alleged that the business arrangements between the appellants and various alcohol manufacturers were in the nature of a franchise, thereby making the appellants liable for service tax. The appellants argued that they did not grant any representational rights to the CBUs and that the CBUs acted merely as job workers. The Tribunal examined the agreements and found that the appellants controlled the entire manufacturing and sales process, bore commercial risks, and retained all intellectual property rights. The Tribunal concluded that the appellants did not provide 'Franchise Services' as defined under the Finance Act, 1994, and thus were not liable to pay service tax under this category.

2. Demand of Service Tax under 'Management Consultancy Services':

The appellants were also challenged for a small demand of Rs. 16,869/- under 'Management Consultancy Services.' They contended that the services were received from a law firm in Sri Lanka, which were in the nature of 'Legal Services' and not liable to service tax prior to the introduction of the taxing entry for 'Legal Consultancy Services' on 1.9.2009. The Tribunal agreed, citing the case of Indian National Ship Owners Association v. Union of India, which held that services received from outside India prior to 18.04.2006 were not liable to service tax under the reverse charge mechanism. Consequently, the demand under 'Management Consultancy Services' was also set aside.

3. Applicability of Interest and Penalties:

The Tribunal addressed the penalties imposed under Sections 76, 77, and 78 of the Finance Act, 1994. Given that the primary demands under 'Franchise Services' and 'Management Consultancy Services' were set aside, the associated penalties were also deemed unsustainable. The Tribunal emphasized that there was no suppression of facts by the appellants, further invalidating the applicability of penalties.

4. Interpretation of Agreements Between Appellants and CBUs:

The Tribunal scrutinized the agreements between the appellants and CBUs, noting that the CBUs were appointed as non-exclusive independent contractors to manufacture IMFL products. The appellants retained control over all commercial decisions, provided working capital, and identified suppliers. The CBUs had no rights to the appellants' intellectual property and were only entitled to a bottling fee. The Tribunal concluded that these arrangements did not constitute a franchise relationship but rather a contract bottling arrangement, as clarified by CBEC Circular No. 332/17/09 TRU dated 30.10.2009.

5. Applicability of the Extended Period of Limitation:

The appellants argued that the demand for the period from 1.7.2003 to 30.09.2006 was barred by limitation, as the show-cause notice was issued on 17.10.2007, beyond the normal period of limitation. The Tribunal agreed, noting that there was no suppression of facts by the appellants, and thus the extended period of limitation was not applicable.

6. Liability for Service Tax on Services Received from Outside India Prior to 18.04.2006:

The Tribunal considered the appellants' liability for service tax on services received from a law firm in Sri Lanka prior to 18.04.2006. Citing the case of Indian National Ship Owners Association v. Union of India and the CBEC Circular No. F.Bo.276/8/209-CE 2A dated 26.09.2011, the Tribunal held that the appellants were not liable to pay service tax under the reverse charge mechanism for services received from outside India before 18.04.2006.

Conclusion:

The Tribunal set aside the impugned order, allowing the appeal with consequential relief. The demands for service tax under 'Franchise Services' and 'Management Consultancy Services,' along with associated penalties and interest, were deemed unsustainable. The Tribunal emphasized that the appellants' arrangements with CBUs did not constitute a franchise relationship and that services received from outside India prior to 18.04.2006 were not liable to service tax. The judgment was pronounced in open court on 11/3/2013.

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