2015 (10) TMI 2412 - AT - Service Tax

Franchise Service appellant, it is alleged, granted franchise for manufacture of firebricks of specifications, design and quality prescribed by it to some other small manufacturing units located at Katni. - Whether service rendered by appellant to manufacturers fell under scope of franchise service? - Appellant contends that it is not a franchise agreement and there was no franchise fee and goods manufactured were property of appellant and so called franchisees had no right over them - Sales tax was paid on entire value and thus service tax could not be levied on the same. Held That - It comes out loud and clear from agreement that manufacturers did not have any representational right to manufacture goods identified with appellant - Appellant did not provide any service to manufacturers nor did manufacturers make any payment to appellant for any service - Merely because words franchise and franchisee have been used in agreement does not ipso facto mean that as per that agreement franchise service was rendered and thus agreement miserably fails to qualify as franchise agreement - Goods were sold to appellant and were consigned only to those persons whom he directed manufacturer to consign them to Actual transactions between appellant and manufacturer are also in conformity with agreement Impugned demand not sustainable Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the service rendered by the appellant to the manufacturers fell under the scope of franchise service.
2. The interpretation of the agreement between the appellant and the manufacturers.
3. The applicability of service tax on the transactions.
4. The time-barred nature of the demand.
5. The applicability of cum-tax benefit.

Detailed Analysis:

1. Scope of Franchise Service:
The primary issue was whether the service rendered by the appellant to the manufacturers constituted a franchise service. The adjudicating authority had confirmed a service tax demand of Rs. 4,65,42,505/- on the appellant, asserting that the difference between the sales amount and the purchase price paid by the appellant represented the value of the franchise service. However, the appellant contended that their agreements with the manufacturers did not constitute a franchise agreement as defined under Section 65(47) and Section 65(48) of the Finance Act, 1994. The definition of "franchise" requires that the franchisee is granted a representational right to sell or manufacture goods identified with the franchisor and that the franchisee pays a fee to the franchisor. The tribunal found that the manufacturers did not have any representational right to manufacture goods identified with the appellant and did not pay any fees to the appellant. Therefore, the tribunal concluded that the appellant did not provide franchise service.

2. Interpretation of the Agreement:
The tribunal examined the agreement between the appellant and the manufacturers. The agreement stipulated that the manufacturers could only manufacture and dispatch goods as per the appellant's directions and could not sell these goods to anyone else. The payment for the goods was made by the appellant to the manufacturers, not the other way around. The tribunal emphasized that the use of the terms "franchise" and "franchisee" in the agreement did not automatically qualify the agreement as a franchise agreement. The tribunal applied principles of contract interpretation, noting that the intent and content of the agreement must be considered. The tribunal concluded that the agreement did not grant the manufacturers any representational right to manufacture goods identified with the appellant and thus did not constitute a franchise agreement.

3. Applicability of Service Tax:
The appellant argued that the difference between the purchase price and the sales amount was their trading profit and not a service charge. The tribunal agreed, noting that the manufacturers' invoices showed the appellant as the buyer and the consignees as directed by the appellant. The tribunal found that the flow of payment was from the appellant to the manufacturers, which would not be the case if the appellant were providing a service. The tribunal also noted that the manufacturers paid excise duty on the full value of the goods, which included the appellant's trading profit. Therefore, the tribunal concluded that no service tax could be levied on the same amount.

4. Time-Barred Nature of Demand:
The appellant contended that the demand was time-barred, as the first interaction with the revenue authorities occurred in 2005, and the nature of the transactions was known to the revenue at least from that time. The tribunal did not specifically address this issue in detail, as it had already concluded that the appellant did not provide franchise service and thus the demand was not sustainable.

5. Cum-Tax Benefit:
The appellant argued that if the demand were held to be sustainable, the cum-tax benefit should be extended. However, since the tribunal concluded that the appellant did not provide franchise service, this issue became moot.

Conclusion:
The tribunal declared that the appellant did not provide franchise service, and the impugned demand was not sustainable. The tribunal set aside the order in original and allowed the appeal. The tribunal's decision was based on a detailed analysis of the agreement, the definitions of franchise and franchisor, and the actual transactions between the appellant and the manufacturers.