2014 (8) TMI 591 - AT - Service Tax

Franchisee service - registration of website domain names - Reverse charge mechanism - whether the appellants are a franchisee service provider - Held that - demand notices have been issued under the Franchise Service. The terms Franchisee and Franchiser have been defined under Section 65 (47) and 65 (48) of the Finance Act, 1994 - It would thus be seen from the definitions that franchisee means an agreement by which the franchisee is granted representational rights to sell or manufacture goods or to provide service or undertake any process identified with franchisor. Appellants provided registrar service as per the powers under Article II of powers for ICANN, ICANN is prohibited from acting as registrar. From the agreements or from the bylaws, we are not able to find any process that has been developed by the ICANN and being used by the appellants. We find what is being done by the ICANN is to set minimum standards for the performance of registration function and recognize that the appellants are meeting those standards. Revenue has not been able to pinpoint to us either any service or any process for which ICANN is known and that process is being used or being provided by the appellants. In the absence of any such service or process we are unable to agree with the Revenue that the appellants are franchise service of ICANN. Even the agreement which permits the use of ICANN symbols clearly indicates that appellants are ICANN Accredited Registrar and nothing beyond that. Agreement between ICANN and Registry has not been produced either by Revenue or the appellant. We find that Revenue have not been able to bring on record any service or process identified with ICANN which is required to be provided by various registries accredited by ICANN. It appears that registries are also accredited like registrars. ICANN might have provided minimum standards for registries but that does not imply that registries are providing any service or process identified with ICANN. Resellers are specifically prohibited from using the name of ICANN. They only represent the appellant. In fact they are reselling the services of registrar being provided by the appellant. After selling the services of the registrar they remit the money to the appellant as per the agreement. We find that the agreement is of a nature of principal to principal basis and resellers cannot be considered as franchisee or associate franchisor of ICANN. Appellant cannot be considered as a franchisee of ICANN and therefore resellers cannot considered as franchisee of the associate franchisor. In view of above position, in our view the Revenue s contention that the resellers are providing the franchisee services of the ICANN does not hold water. In view of the above analysis we do not find any strength in the second demand notices also. Accordingly we hold no service tax is leviable under the franchise service and hence demand and penalties are not sustainable - Decided in favour of assessee.

Issues Involved:
1. Whether the activities carried out by the appellant qualify as franchise services under Section 65 (105) (zze) of the Finance Act, 1994.
2. Whether the remittances made to ICANN and ICANN accredited registries are subject to service tax under the reverse charge mechanism.
3. Whether the appellant's relationship with resellers constitutes a franchise arrangement.
4. Applicability of the extended period of limitation.
5. Eligibility for benefits such as export services, Cenvat credit, cum-duty benefit, and restriction of service value to annual accreditation fees.
6. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis:

1. Qualification as Franchise Services:
The appellant argued that their activities do not qualify as franchise services. They contended that for a franchise relationship, there must be a "grant of representational right" and "identification with the franchisor." The appellant claimed that they are merely accredited by ICANN and do not represent ICANN or use its logo independently. The Tribunal found that ICANN sets minimum standards and accredits the appellant but does not provide any service or process identified with ICANN that the appellant uses. Thus, the appellant's activities do not constitute franchise services.

2. Remittances to ICANN and Accredited Registries:
The first Show Cause Notice demanded service tax on remittances made to ICANN and ICANN accredited registries on a reverse charge basis, classifying them under "franchise services." The Tribunal noted that ICANN is prohibited from acting as a registrar and only accredits entities. The relationship between ICANN and the appellant is one of accreditation, not franchising. Therefore, the remittances do not attract service tax under franchise services.

3. Relationship with Resellers:
The second Show Cause Notice addressed amounts received from resellers, alleging a franchise relationship. The Tribunal found that resellers are prohibited from using ICANN's name and only represent the appellant. The agreement between the appellant and resellers is on a principal-to-principal basis. Since the appellant is not a franchisee of ICANN, the resellers cannot be considered franchisees of an associate franchisor. Thus, the relationship with resellers does not constitute a franchise arrangement.

4. Extended Period of Limitation:
The appellant argued that part of the demand is for a period prior to April 18, 2006, and is not sustainable based on the Hon'ble Bombay High Court's decision in Indian National Ship Owners Association vs Union of India. The Tribunal did not find it necessary to delve into this issue as the appeal was allowed on merits.

5. Benefits and Restrictions:
The appellant contended that even if service tax is payable, benefits such as export services, Cenvat credit, cum-duty benefit, and restriction of service value to annual accreditation fees should be considered. The Tribunal did not address these arguments in detail, as the appeal was allowed on the primary issue of non-qualification as franchise services.

6. Imposition of Penalties:
The appellant argued against the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The Tribunal did not find it necessary to address this issue separately, given the primary finding that no service tax is leviable under franchise services.

Conclusion:
The Tribunal concluded that the activities of the appellant do not qualify as franchise services. Consequently, no service tax is leviable on the remittances made to ICANN and ICANN accredited registries or on amounts received from resellers. The demands and penalties were deemed unsustainable, and the appeal was allowed.

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