2008 (7) TMI 59 - AT - Service Tax

FEN, appellants is a courier agency - Commissioner demanded tax towards the service rendered by FEN as franchisors - persons whom the Commissioner found to be franchisees are only agents of appellants carrying out part of the operations of appellants - FEN cannot be held to be imparting any know-how or skill to these agents and the agents do not carryout any branded service with the autonomy of a franchisee - impugned order finding FEN as rendering franchise service to be not sustainable

Summary

Issues Involved:
1. Whether the demand for service tax on Franch Express Network Pvt. Ltd. (FEN) is justified.
2. Whether the relationship between FEN and its agents constitutes a franchise arrangement.
3. Interpretation of the definition of "Franchise" under section 65(47) of the Act.
4. Comparison of the activities of FEN with the definition of franchise service.
5. Analysis of the Tribunal's decision in a similar case regarding franchise service.

Issue 1:
The Commissioner demanded a significant amount as tax from FEN for services rendered as franchisors. The demand included tax, Education Cess, penalty, and interest on service tax yet to be paid. The demand was based on the total income of FEN during a specific period.

Issue 2:
FEN argued that the relationship between FEN and its agents was that of principal and agent, not a franchise arrangement. FEN controlled the agents through agreements, but the agents were not granted representational rights. The agents did not pay any fee to FEN and operated under the brand name of FEN. FEN claimed that no service was rendered to the agents under a franchise agreement.

Issue 3:
The Act defined "Franchise" under section 65(47) and was amended in 2005. The definition included representational rights, payment of fees, and restrictions on engaging with other similar services. The Tribunal analyzed the agreement between FEN and its agents to determine if it aligned with the definition of a franchise.

Issue 4:
The Tribunal compared the activities of FEN with the definition of franchise service. It noted that FEN did not impart know-how or skill to its agents, who operated as part of the courier agency service. The Tribunal found that the agents were not franchisees, and FEN was not a franchisor in a franchise arrangement.

Issue 5:
The Tribunal discussed a previous case where franchise service was upheld based on providing training and course material to franchisees. In contrast, the Tribunal found that the agents of FEN were not franchisees but operated as part of FEN's courier agency service. Therefore, the Tribunal concluded that the demand for service tax on FEN as a franchisor was not sustainable, setting aside the impugned order and allowing FEN's appeal.