2017 (12) TMI 1197 - AT - Service Tax

Nature of transaction - Sale or service - Franchise service - case of appellant is that they are not covered under the said service as they have not granted any representational rights to their client. They argued that they are involved in supply of beverage vending machine bearing name BEVERAGE EXPRESS to various clients - time limitation - interpretation of the term Franchise . Held that - In the instant case the appellant are giving machine containing their company logo, which may be illuminated, affixed on the said machine. The said machine in terms of agreement is required to be placed in such manner that the logo/illuminated logo is clearly visible - significant importance has been given to the display of logo/advertisement and other indication/mark affixed on the machine. There are clauses that prohibit appellant from the obstructing/defacing or removing the same from the said machine. The agreement also prohibits adding any other logo, mark (other than agreed and approved by the appellant. Agreement also prohibits the appellant s clients from moving or removing machine from its original place of installation without prior approval of the appellant. Clause in agreement show that clients are required to keep illuminated sings on the machine, if any, illuminated all the times. The article 6 of the said agreement prescribed that franchisee shall not have any right, title or interest in the appellant s trade mark/trade name/logo. Aforesaid agreement also prohibits franchisee from selling any other beverages from the vending machines in terms of clause (b) of Article 3 of agreement. In fact as per clause (e) of Article 3, the appellant or its nominee only have right to refill, reload the raw material in the vending machine. In terms of above condition of the agreement itself apparent that the appellant have granted representational right to the franchisee. To any person wishing to have beverages, it would appear that he is buying beverages from the appellant and not from the franchisee as it is the appellant s name that appears on the machine and same is prominently displayed on the machine. The raw material used also appearing the brand name of the appellant. To a person purchasing the beverage from the said vending machine it would appear that he has buying the same from the appellant through franchisee. In this circumstances, it cannot be denied representational rights have been granted to the franchise by the appellant - demand upheld under franchise service. The next issue raised by the appellant related to fact that they are paying sales tax/VAT on the said transaction under the category of transfer of rights to use as deemed sale and therefore no service tax can be demanded on the said transaction - Held that - It is not for this Tribunal to decided if the liability under sales tax arises or not. This tribunal can only adjudicate if the liability under service tax arises or not. In this regard appellant argument that they have paid sales tax is of no avail. Time limitation - appellant claim is that that they have paid sales tax on the same transaction therefore there was no intention to evade duty - Held that - mere fact of payment of sales tax is not sufficient to hold that they are not liable to service tax - extended period to be invoked. Penalty - appellant claims that there was no intention to evade payment of duty therefore penalty should not have been imposed - Held that - it is apparent that when the agreement was drafted appellant themselves believed that they are granting franchisee rights. In this circumstances failure to take responsibility and pay duty can only be attracted intention to evade - penalty upheld. Simultaneous penalty u/s 76 and 78 - Held that - It is seen that entire period of dispute is prior to 16-5-2008, when Section 78 was amended - matter placed for de novo examination. Valuation - Held that - cum tax benefit needs to be extended to the appellant. Appeal is dismissed except on the ground of granting cum duty benefit. Matter is remanded to the Adjudicating authority to calculate cum duty benefit and rework the penalties accordingly - part matter on remand.

Issues Involved:
1. Classification of the service under 'Franchise Service'.
2. Applicability of service tax on the transaction.
3. Consideration of sales tax payment as a defense against service tax.
4. Limitation period and intention to evade duty.
5. Calculation of tax and penalties, including cum tax benefit.

Detailed Analysis:

1. Classification of the Service under 'Franchise Service':
The primary issue was whether the appellant's activities fell under 'Franchise Service'. The appellant argued that they did not grant any representational rights to their clients, a key component of 'Franchise Service'. The agreement involved the supply of beverage vending machines and the sale of beverage ingredients, with specific conditions on the use and display of the appellant's trademarks and logos. The Tribunal examined the definition of 'franchise' both before and after the amendment on 16-6-2005. It was determined that the appellant's agreement satisfied the conditions of the franchise definition, including the grant of representational rights, as the clients were required to prominently display the appellant's logos and could only sell beverages specified by the appellant.

2. Applicability of Service Tax on the Transaction:
The Tribunal found that the appellant's activities constituted a franchise service, as the clients were representing the appellant by using the machines and selling beverages under the appellant's brand. The agreement's terms showed that the clients' identity was subsumed under the appellant's identity, fulfilling the requirement of representational rights. The Tribunal referenced the Delhi High Court's decision in the case of Delhi International Airport P. Ltd. Vs. Union of India, distinguishing it based on the facts and the nature of the agreements involved.

3. Consideration of Sales Tax Payment as a Defense Against Service Tax:
The appellant argued that since they paid sales tax on the transaction, it should be considered a transfer of property, not a service. The Tribunal rejected this argument, stating that the payment of sales tax does not preclude the applicability of service tax. The Tribunal emphasized that it is not within its jurisdiction to decide on sales tax liability but only on service tax liability.

4. Limitation Period and Intention to Evade Duty:
The appellant contended that there was no intention to evade service tax as they were paying sales tax. The Tribunal found this argument insufficient to prove the absence of intent to evade service tax. The Tribunal noted that the appellant's own agreement referred to their clients as 'franchisees', indicating an acknowledgment of the franchise relationship. Therefore, the Tribunal upheld the imposition of penalties, citing the appellant's failure to fulfill their duty obligations.

5. Calculation of Tax and Penalties, Including Cum Tax Benefit:
The Tribunal agreed with the appellant's argument regarding the cum tax benefit, referencing the decision in CCE Vs. Advantage Media Consultant. The Tribunal instructed the adjudicating authority to calculate the cum tax benefit and rework the penalties accordingly. The Tribunal also addressed the issue of simultaneous penalties under Sections 76 and 78, affirming that such penalties could be imposed for the period prior to the amendment on 16-5-2008, as supported by the Delhi High Court's decision in Bajaj Travels Ltd. Vs. Commissioner of Service Tax.

Conclusion:
The appeal was dismissed except for the ground of granting cum duty benefit. The matter was remanded to the adjudicating authority to calculate the cum duty benefit and adjust the penalties accordingly. The decision emphasized the importance of the representational rights and the specific terms of the agreement in determining the applicability of franchise service tax.

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