2006 (9) TMI 593 - Commissioner - Service Tax

Summary

Issues Involved:
1. Whether the agreement between the appellant and M/s. Ashok Pan Products Pvt. Ltd. constitutes a Franchise Agreement.
2. Whether the appellant is liable to pay service tax under the category of Franchise Services.
3. Whether penalties under sections 75A, 76, 77, and 78 of the Finance Act, 1994, are applicable.

Detailed Analysis:

1. Whether the agreement constitutes a Franchise Agreement:
The primary contention revolves around whether the agreement between the appellant and M/s. Ashok Pan Products Pvt. Ltd. qualifies as a Franchise Agreement. The Department relied on an agreement dated 2-9-2003 to assert that the appellant was providing franchise services. The appellant, however, argued that the agreement was a Trade Mark Licence Agreement, which allowed M/s. Ashok Pan Products Pvt. Ltd. to produce goods bearing the appellant's brand name. The appellant claimed that this type of agreement is exempt from franchise service as per CBEC Circular No. 59/8/2003 dated 20-6-2003.

The Circular specifies that for an agreement to be classified as a franchise agreement, it must satisfy four conditions:
(i) The franchisee is granted representational rights.
(ii) The franchisor provides business operation concepts.
(iii) The franchisee pays a fee to the franchisor.
(iv) The franchisee is restricted from engaging in similar activities with other entities.

The appellant argued that their agreement did not meet these conditions, particularly clauses (ii) and (iv), as they did not provide business operation concepts, managerial expertise, or impose any restriction on M/s. Ashok Pan Products Pvt. Ltd. from engaging in similar activities with other entities.

2. Liability to pay service tax under Franchise Services:
The Department contended that the agreement fulfilled all four conditions of a franchise agreement and thus, the appellant was liable to pay service tax amounting to Rs. 10,88,065/- for the period from July 2003 to December 2004. The appellant countered that the agreement was a Licence Production Agreement, which falls under Intellectual Property Service, brought under the service tax net only from 10-9-2004. The Intellectual Property Service involves transferring or permitting the use of intellectual property rights, which includes trademarks.

The appellant cited the case of Aviat Chemicals Pvt. Ltd., where it was held that leasing or selling a trademark is a transaction in intangible property and not subject to service tax as consultancy or advice.

3. Applicability of penalties under sections 75A, 76, 77, and 78:
The impugned order imposed penalties under various sections of the Finance Act, 1994. The appellant argued that no penalties should be imposed, referencing higher court pronouncements such as Rastriya Ispat Nigam Ltd., Bright Motors Pvt. Ltd., and Bharti Cellular Ltd., which provided relief in similar cases.

Judgment:
After reviewing the facts, submissions, and relevant legal provisions, the adjudicating authority concluded that the agreement in question was indeed a Licence Production Agreement and not a Franchise Agreement. This conclusion was based on the absence of essential conditions such as providing business operation concepts and restricting the franchisee from engaging in similar activities with other entities. Consequently, the agreement did not qualify as a franchise service, and the appellant was not liable to pay service tax under this category.

The impugned order was set aside, and the appeal was allowed with consequential relief, meaning that the penalties and service tax demands were nullified.