2015 (11) TMI 228 - AT - Service Tax

Leviability of service tax - franchise service - Held that - With effect from 16.6.2005 and that amount has already been paid along with interest and duly appropriated. Indeed we find that while imposing penalty under Section 78 ibid only the amount of service tax leviable for the period prior to 16.6.2005 has been taken into account and no penalty was levied in relation to the amount of service tax leviable with effect from on 16.6.2005. As is evident from the forgoing the only issue involved in this case is whether condition No. iv of the definition of franchise given in Section 65(47) of Finance Act, 1994 was satisfied in terms of the franchise agreement entered into by the appellant. - franchisee was obliged not to open any school with any name in the existing premises/building operational area of the school. In other words, the franchisee was free to open any school with any name in a different premises/building operational area of the school . Thus in our view condition No. iv of the definition of franchise quoted above is not satisfied in the present case and consequently the agreement does not fall in the category of franchise agreement as defined under Section 65(47) ibid prior to 16.6.2005 - no service tax is leviable under franchise service prior to 16.6.2005 - Impugned order is set aside - Decided in favour of assessee.

Summary

Issues:
Service tax demand confirmation under franchise service, interpretation of franchise agreement conditions pre and post amendment, leviability of service tax prior to 16.6.2005, penalty imposition under Section 78, applicability of franchise definition under Section 65(47) Finance Act, 1994.

Analysis:
The case involves a stay application and appeal against an order confirming a service tax demand under franchise service, with penalties and interest. The appellant argued that pre-16.6.2005, their franchise agreement did not meet all conditions of the franchise definition under Section 65(47) of the Finance Act, 1994, specifically regarding the obligation not to engage in similar services. The Revenue contended that the franchisee was indeed obligated not to provide similar services. The Tribunal noted that there was no dispute about service tax post the 2005 amendment, which had been paid. The critical issue was whether the franchise agreement satisfied condition (iv) of the pre-2005 franchise definition. The agreement stated that the franchisee could not open a similar school in the same premises for two years post-cancellation, allowing them to do so elsewhere. The Tribunal referenced a previous case to emphasize that the burden of proving a franchise agreement lies with the Revenue.

The Tribunal analyzed the agreement clause and concluded that the franchisee was only restricted from opening a similar school in the same premises, leaving them free to do so elsewhere. This condition did not align with the complete obligation not to engage in similar services as required by the pre-2005 franchise definition. Citing a previous case, the Tribunal emphasized that the Revenue must prove the existence of a franchise agreement. Consequently, the Tribunal allowed the appeal, ruling that no service tax was leviable under franchise service pre-16.6.2005, leading to the setting aside of demands, interest, and penalties related to that period.