2017 (9) TMI 893 - AT - Service Tax

Management Consultancy Services - It was alleged that the appellants have received Franchisee Service from PG and service tax on the same was payable under reverse charge as import of services in terms of Section 66A of the Finance Act, 1994 - Held that - the so called service of Franchise was provided by PG, USA to the appellant for which the appellant has paid the fees in convertible foreign exchange, this amount was paid out of the total receipt by the appellant from the ultimate service recipient i.e. Indian Hotels therefore the service received from PG, USA got subsumed in the service provided by the appellant to Indian Hotels - As regard the service tax liability on the appellant, even if they are liable to pay the said service tax, they are legally entitled for the Cenvat credit on the entire amount which will reduce the liability of service tax on the appellant. Accordingly, the appellants net payment of service tax to the Government exchequer will reduce to the extent of service tax payable in respect of Franchise service, therefore the entire issue is revenue neutral - this is a clear case of revenue neutrality. The demand of service tax in the present case amounts to double taxation on the part of the same service charges - appeal allowed - decided in favor of appellant.

Issues:
1. Taxability of franchise service under reverse charge mechanism.
2. Availability of Cenvat credit on franchise service.
3. Taxability of advertisement fees under service tax.
4. Time-barred demand by the department.
5. Imposition of penalties under Section 76 and 78.
6. Interpretation of franchise service under Section 65(47).

Issue 1: Taxability of franchise service under reverse charge mechanism:
The case involved the appellant providing Management Consultancy Services under a Territory License Agreement with a foreign entity. The dispute arose regarding the payment made in foreign currency to the foreign entity, which was not subjected to service tax under reverse charge. The department alleged that the appellant received Franchisee Service and was liable to pay service tax under reverse charge. However, the appellant argued that the service received from the foreign entity was subsumed in the overall services provided to Indian hotels, making the issue revenue neutral. The tribunal agreed with the appellant, stating that the entire issue was revenue neutral as the appellant had already paid substantial service tax on services provided to Indian hotels, rendering the demand for service tax on franchise service cenvatable and hence, unsustainable.

Issue 2: Availability of Cenvat credit on franchise service:
The appellant contended that the service tax paid on the so-called franchise service was admissible as Cenvat credit, reducing their overall service tax liability. They argued that the demand was not sustainable due to revenue neutrality, as they had already paid a significant amount in service tax. The tribunal concurred with the appellant, emphasizing that the service tax liability was cenvatable, and the appellant was entitled to Cenvat credit on the entire amount, resulting in a clear case of revenue neutrality.

Issue 3: Taxability of advertisement fees under service tax:
The appellant challenged the demand on the advertisement fees, asserting that it was not an amount under the contract with the foreign entity and was not remitted, thus not liable to service tax. They further argued that the confusion regarding the advertisement fees was unwarranted, as the amount was a normal business expenditure not subject to service tax. The tribunal agreed with the appellant, stating that the service tax on advertisement fees could not be demanded as the amount was not received separately and was already charged to service tax when recovered from hotels.

Issue 4: Time-barred demand by the department:
The appellant contended that the demand for an extended period was time-barred, as the department was aware of the transactions and payments made by the appellant. They argued that there was no suppression of facts, as evidenced by their disclosure of transactions with the foreign entity. The tribunal agreed with the appellant, holding that the demand for the extended period was not sustainable due to the department's awareness of the transactions.

Issue 5: Imposition of penalties under Section 76 and 78:
The appellant argued against the imposition of penalties under Section 76 and 78, citing the absence of malafide intention. They contended that penalties should not be imposed as there was no deliberate wrongdoing on their part. The tribunal agreed with the appellant, emphasizing the lack of malafide intention and citing relevant judgments to support their decision.

Issue 6: Interpretation of franchise service under Section 65(47):
The dispute revolved around the interpretation of franchise service under Section 65(47). The department argued that the appellant had been granted representational rights by the foreign entity, making the services taxable under franchise service. However, the appellant contended that no representational rights were granted, and the services did not fall under the definition of franchise services. The tribunal sided with the appellant, stating that the foreign entity had only permitted the use of their brand name and system, without granting representational rights, thus excluding the services from being taxable under franchise service.

In conclusion, the tribunal set aside the impugned order and allowed the appeal of the appellant, emphasizing the revenue neutrality of the case and the inadmissibility of the demand for service tax on the franchise service.

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