2013 (12) TMI 1217 - AT - Service Tax

Demand of service tax - Penalty u/s 76, 77 & 78 - Franchise services - Held that - distributors are appointed by the Company for buying the goods from them and selling the same to the home consumers or to sell the same to the dealers who may be further appointed by them. As such, in the process, they act as independent contractors and does not have any relationship with the appellants brand name. They simply procure the goods from the appellants and further sell the same on commission basis. There is no representational right to their distributors to sell the goods in the market. And as such, at this prima facie stage, it can be safely concluded that the appellants cannot be held providing promotional services to the said distributors. Distribution agreement was examined by DGCEI in the year 2005. It is not the Revenue s case that the agreement examined by Audit and by DGCEI were different. The DGCEI authorities having examined the distribution agreement and on being satisfied did not proceed ahead in the year 2005. As such, the issuance of show cause notice in 2009 invoking the longer period of limitation cannot be said to be a valid show cause notice. As such, we are of the view that the appellants have a good case on limitation also. Apart from the above, the appellants have deposited a part amount - By treating the same as sufficient for the purpose of Section 35, we dispense with the condition of pre-deposit of balance amount of duties and penalties imposed upon the applicant-appellant - Stay granted.

Summary

Issues:
Service Tax demand on franchise services provided by the appellant, imposition of penalties under various sections of the Finance Act, 1994, arguments on merits and limitation, relationship between the appellant and distributors, validity of the show cause notice invoking longer period of limitation.

Analysis:
The judgment revolves around the confirmation of Service Tax demand amounting to Rs. 10,08,45,013/- against the appellant for providing franchise services to distributors under distribution agreements. The Commissioner also imposed penalties under Section 78, Section 76, and Section 77 of the Finance Act, 1994. The appellant, engaged in selling cosmetics, home care, and health care products, was alleged to have earned income under the heading 'subscription fee' for appointing dealers, fulfilling the definition of 'franchise' under Section 65(47) of the Finance Act.

During the adjudication process, the appellant argued on the merits and limitation, stating that distributors were independent contractors procuring goods for sale without any representational right to the appellant's brand name. The appellant contended that the subscription fee was a market strategy and did not grant distributors the right to represent the brand. The appellant also highlighted that investigations conducted by DGCEI in 2005 did not lead to any adverse findings against them, indicating no suppression of information.

The Tribunal analyzed the relationship between the appellant and distributors, concluding that distributors acted as independent contractors without any representational right to the appellant's brand. The Tribunal disagreed with the Commissioner's observations, noting that investigations conducted by DGCEI in 2005 did not raise any concerns regarding franchise services. The Tribunal found the show cause notice issued in 2009, invoking the longer period of limitation, to be invalid based on previous examinations of the distribution agreement.

Ultimately, the Tribunal ruled in favor of the appellant, considering their arguments on merits and limitation. The Tribunal also took into account the partial amounts already deposited by the appellant and dispensed with the requirement of pre-deposit of the remaining balance. The stay petition was disposed of accordingly, providing relief to the appellant in terms of the Service Tax demand and penalties imposed.