2016 (2) TMI 24 - AT - Service Tax

Levy of service tax on franchisee and royalty fee paid to their US based franchiser - sharing of compensation - appellant is providing training and coaching service - Held that - It is evident from the above that the percentage of franchisee fee and royalty fee that is 60% paid to the overseas franchisee is 35.5% is the royalty fees is paid to the producer. Therefore, prima facie, we do not find any merit in the appellant s claim that they have already paid service tax on the consideration received from other distributors and only remitted the amount after the payment of service tax. The appellants are registered under training and coaching service in India for which they have discharged service tax and what is demanded in the present appeal is franchisee service which is clearly established as per the agreement. Accordingly, the appellants are liable to pay service tax on the amount remitted to the overseas franchisee as per the agreement. - Stay granted partly.

Summary

Issues:
- Waiver of pre-deposit of entire dues in a service tax case involving franchisee and royalty fee payments to an overseas franchiser.

Analysis:

The appellant sought a waiver of pre-deposit of the entire dues in a service tax case related to payments made towards franchisee and royalty fees to their US-based franchiser. The adjudicating authority confirmed a service tax demand of &8377; 20,84,270 along with interest and penalties under sections 77 and 78 of the Finance Act, 1994. The Commissioner (Appeals) upheld the order, leading to the appeal. The appellant argued that they had already paid service tax on the total consideration received before remitting the amount to the overseas franchiser. They highlighted the franchisee agreement terms, emphasizing the revenue sharing ratios and royalty fees. However, the Revenue contended that the payments made were for franchisee services falling under reverse charge mechanism.

Upon reviewing the franchisee agreement, the Tribunal noted that the compensation between producer and master distributor was to be shared as per the agreement. The agreement specified the division of proceeds from the initial franchisee and the royalty fee percentages. The Tribunal observed that the appellant's claim of having already paid service tax on the consideration received was not supported by evidence. It was established that the appellant was registered under training and coaching services in India, and the payments made were for franchisee services, necessitating service tax payment under reverse charge mechanism. Consequently, the Tribunal directed the appellant to pre-deposit &8377; 2,00,000 within eight weeks, with the balance dues pre-deposit waived and recovery stayed during the appeal's pendency.

In conclusion, the Tribunal's decision upheld the service tax liability on the payments made towards franchisee and royalty fees to the overseas franchiser, rejecting the appellant's plea for total waiver of pre-deposit. The analysis focused on the agreement terms, the nature of services provided, and the applicability of service tax under the reverse charge mechanism in such transactions. The judgment provided clarity on the tax treatment of such transactions, emphasizing compliance with tax obligations in cross-border service agreements.