2016 (10) TMI 831 - AT - Service Tax

Royalty against grant of franchisee rights - revenue neutrality - CENVAT credit - procedural fault - Held that - the appellant indeed have transferred 20% of their Franchisee/ Royalty fees along with service tax liability discharged thereon to M/s Aptech. This has also been certified by the Franchisor. This being so, while procedurally the appellant may have been at fault, it cannot may be alleged that the tax liability on the entire amount of fees received by them have not been discharged, notwithstanding, the fact that the part of the fees has been transferred in the above manner to M/s Aptech. To confirm whether service tax liability has been discharged by the appellant in respect of all such amounts transferred by them to M/s Aptech, to establish the fact or otherwise of revenue neutrality, we are of the considered opinion that the matter will require de novo consideration by adjudicating authority. Appeal allowed - matter remanded.

Summary

Issues:
1. Incorrect procedure for availing CENVAT credit.
2. Discrepancy in taxable value in ST-3 and income tax returns.
3. Service tax liability on franchisee/royalty fees transferred to M/s Aptech.
4. Revenue neutrality and tax liability discharge verification.
5. Appeal for CENVAT credit allowance.

Analysis:
1. The appellant operated as a franchise for a company, remitting 20% of student fees as royalty to the company. The appellant was liable to pay service tax on the collected fees. However, due to ignorance of CENVAT credit procedures, the appellant incorrectly deducted royalty paid to the company and paid service tax on the remaining amount. The appellant sought to avail CENVAT credit for the service tax paid by the company, which would have resulted in a legal method of payment. The appellant did not dispute the service tax liability but requested the allowance of CENVAT credit.

2. The appellant's counsel argued that the issue was the adoption of the wrong procedure for availing CENVAT credit. The discrepancy in taxable value arose from deducting the royalty amount paid to the company from the fees, which were then transferred to the company inclusive of service tax. The company had paid service tax on the royalty amount received. The counsel presented certificates confirming the payment of service tax by the company on the franchise fees received from the appellant. The counsel relied on case laws supporting revenue neutrality in similar situations.

3. The Department's representative reiterated the findings of the impugned order, leading to the appeal being taken for disposal with the consent of both sides. The Tribunal found merit in the appellant's contentions. While acknowledging procedural faults, the Tribunal noted that the appellant had transferred the franchise/royalty fees along with the service tax liability to the company, as certified by the franchisor. Despite the procedural error, the appellant had discharged the tax liability on the received fees. To verify revenue neutrality and tax liability discharge, the matter was remanded for de novo consideration by the adjudicating authority.

4. Ultimately, the appeal was allowed by way of remand for further verification of the service tax liability discharge. The Tribunal emphasized the need for a comprehensive review to confirm the payment of service tax by the appellant on the amounts transferred to the company. The decision was made to ensure a fair assessment of revenue neutrality in the case.