2008 (12) TMI 57 - AT - Service Tax

Agreement with M/s Sagar allowing them to run restaurants in the name of Nirulas - agreement covers plan for the restaurant area, location of various facilities, the specification for the furniture etc. - held that where the agreement conferred operational autonomy & responsibility on the contracted party, the relationship is not one of consultancy - there is no management consultancy - Nirulas are paying service tax as franchise services, which appears to be more appropriate classification

Summary

Issues Involved:
1. Classification of services provided by the appellant.
2. Determination of whether the appellant's role falls under "management consultant" or "franchise service."
3. Implications of the agreement terms on the nature of services rendered.
4. Applicability of service tax and penalties.

Detailed Analysis:

1. Classification of Services Provided by the Appellant:
The primary issue revolves around whether the services rendered by the appellant, M/s. Nirulas Corner House Ltd. (Nirulas), to M/s. Sagar, should be classified as "management consultancy services" or "franchise services." The Commissioner had classified these services as management consultancy, leading to a demand for service tax and penalties.

2. Determination of Whether the Appellant's Role Falls Under "Management Consultant" or "Franchise Service":
The appellant argued that their role extended beyond mere consultancy, involving substantial control over the day-to-day operations of Sagar's restaurant. They cited the comprehensive nature of their agreement, which included stipulations on restaurant layout, menu items, pricing, and quality control, enforced by deploying their own staff in Sagar's premises. The appellant contended that such extensive involvement aligns more with a franchise arrangement rather than a management consultancy.

The Tribunal referred to the definitions under the Finance Act:
- Management Consultant (Section 65(65)): Involves providing services related to the management of any organization, including advice, consultancy, or technical assistance.
- Franchise Service (Section 65(47)): Involves granting representational rights to sell or provide services identified with the franchisor, including business operation concepts, managerial expertise, and quality control standards.

3. Implications of the Agreement Terms on the Nature of Services Rendered:
The Tribunal examined specific clauses of the agreement, highlighting the appellant's role in managing, supervising, and operating Sagar's restaurant, including appointing and controlling staff, designing interiors, and setting operational standards. These responsibilities indicated a level of control and involvement that surpassed typical management consultancy roles, which are generally advisory in nature.

The Tribunal noted that the agreement allowed Nirulas to unilaterally revoke the contract for non-compliance, further emphasizing their operational control. This level of authority and direct involvement in the restaurant's operations was deemed inconsistent with the role of a management consultant.

4. Applicability of Service Tax and Penalties:
The Tribunal referenced a similar case, Basti Sugar Mills Co. Ltd. vs. CCE Allahabad, where it was held that performing management functions rather than providing advisory services does not constitute management consultancy. The Tribunal concluded that the appellant's activities were more appropriately classified as franchise services, for which they were already paying service tax since 1.7.2003.

Conclusion:
The Tribunal determined that the appellant was not rendering management consultancy services but rather franchise services. Consequently, the demand for service tax and penalties under the classification of management consultancy was deemed inappropriate. The appeals were allowed, providing consequential relief to the appellant.

Final Judgment:
The appeals were allowed, and the Tribunal directed that the appellant is not liable for service tax under the management consultancy category, affirming the classification of their activities as franchise services. The decision was pronounced in open court.