2008 (8) TMI 50 - AT - Service Tax

Appellants provide Computer education via online and Real time centres centres are managed through franchisees - whether the activity of providing online computer training is classifiable as commercial Training or Coaching u/s 65 (27) and on this basis exempt under Notification No. 9/2003-ST - Held, yes - whether the franchise fee being received by the Appellants from their franchisees is liable to service tax under Franchise Service Held, no - appeal of assessee is allowed

Summary

Issues Involved:
1. Classification of online computer training: Whether it falls under "commercial training or coaching" or "online information and data base access and/or retrieval service."
2. Taxability of franchise fees: Whether the franchise fees received by the appellants are liable to service tax under "Franchise Service."

Detailed Analysis:

Issue 1: Classification of Online Computer Training

Nature of Activity:
The appellants provide online computer training through an interactive website. This includes access to lessons, interaction with experts and other students, online tests, and issuance of certificates upon passing these tests. The service offered is akin to traditional computer classes but delivered via the internet.

Competing Entries:
- Online Information and Data Access and/or Retrieval Service (Section 65(75)): Defined as providing data or information in electronic form through a computer network.
- Commercial Training or Coaching (Section 65(27)): Defined as any institute providing commercial training or coaching for imparting skill or knowledge, excluding pre-school coaching or training centers, or institutes issuing recognized certificates, diplomas, or degrees.

Arguments by Appellants:
1. The service is more than mere access to data; it is e-learning through an interactive website.
2. The service involves conducting online tests and issuing certificates, which aligns with commercial training or coaching.
3. Citing TRU's letter and Board's Circular, they argued that e-commerce transactions and similar services are not covered by "online information and data base access and/or retrieval services."
4. Online education is distinct from mere dissemination of information/data, which is taxable under the latter entry.
5. The essential character of their service is imparting computer education, not mere data access or retrieval.

Arguments by Revenue:
1. The service provided is taxable under Section 65(105)(Zh) as it involves online information and database access or retrieval.
2. The interactive nature of the website does not exclude it from this entry.
3. The acceptance by the appellant's M.D. that the service is taxable and the collection of service tax from customers supports this classification.

Tribunal's Findings:
1. The service provided by the appellants is primarily online training or coaching, which is interactive and involves more than mere data access.
2. The Board's Circular includes correspondence courses under commercial training or coaching, implying that online courses should also be covered.
3. The essential character of the service is online education, not mere data retrieval, thus falling under "commercial training or coaching."
4. The appellants, being a computer training institute, are eligible for service tax exemption under Notification No. 9/03-ST dated 20/06/03.

Issue 2: Taxability of Franchise Fees

Nature of Franchise Agreement:
The appellants operate traditional computer coaching centers, some of which are managed through franchisees. These franchisees operate based on the business concepts and know-how provided by the appellants.

Definition and Conditions (Section 65(47)):
1. Franchisee is granted representational rights.
2. Franchisor provides business operation concepts, including know-how and managerial expertise.
3. Franchisee pays a fee to the franchisor.
4. Franchisee is obligated not to engage in similar services identified with other persons.

Arguments by Appellants:
1. No evidence was produced by the Revenue to show that the franchisees were not providing similar services for other franchisors.
2. The burden of proving the fourth condition lies with the Revenue.

Arguments by Revenue:
1. All conditions for a franchise agreement are satisfied except for the fourth, which the appellants have not disproved.
2. The appellants did not provide information regarding the fourth condition, leading to an adverse inference.

Tribunal's Findings:
1. The burden of proving that an agreement meets all conditions of a franchise agreement lies with the Revenue.
2. The Revenue did not conduct any enquiry with the franchisees to ascertain compliance with the fourth condition.
3. In the absence of such evidence, the activity does not fall under "Franchise Service" and is not liable to service tax.

Conclusion:
The tribunal set aside the impugned order, holding that:
1. The online computer training provided by the appellants is classifiable as "commercial training or coaching" and is exempt from service tax.
2. The franchise fees received by the appellants do not attract service tax under "Franchise Service" due to the lack of evidence on the fourth condition of the franchise agreement.

The appeal was allowed, and the impugned order was deemed unsustainable.