2018 (3) TMI 709 - AT - Service Tax

Franchise service - Appellants had entered into Franchisee Agreement with IMA Mental Arithmetic Academy, Malaysia. They had also entered into Franchisee Agreement with various franchisees appointed by them in India - Department took the view that the gross amounts collected by the appellant including admission fee, course instructor fee, tuition fee etc. would be eligible for service tax under the category of Franchisee Service under section 65(47) of the Finance Act, 1994. Held that - As per the definition, the payment to be made by the franchisee to the franchisor is only for the right to sell or manufacture goods or to provide service or undertake any process identified by the franchisor etc. The payment required to be paid for use of the IMA Mental Arithmetic course have been indicated as 25% of the gross fees collected. As per section 65(105)(zze), the taxable service is that given to a franchisee by the franchisor in relation to franchise . This being so, only those amounts directly relatable to the representational right granted by the franchisor to the franchisee and the royalty/franchisee fee towards that right would alone be part of taxable for the purpose of levy under this category. The tax liability for the appellant in respect of franchisee appointed by them within India will not include the amounts relatable to admission fee, tuition fee, competition fee and course instructor fee - appeal allowed in part.

Summary

Issues: Tax liability on amounts collected by appellants including admission fee, course instructor fee, tuition fee, etc. under Franchisee Service category.

Analysis:

1. Background: The appellants provided training/coaching in mental arithmetic under Franchisee Agreements with IMA Mental Arithmetic Academy, Malaysia, and Indian franchisees. The Department viewed the amounts collected by the appellants as eligible for service tax under the Franchisee Service category.

2. Appellant's Arguments: The appellants accepted the service tax demand on franchisee fee paid to the Malaysian principal but contested amounts like admission fee, tuition fee, and competition fee received from students. They argued that only franchisee fee and royalty fee from Indian franchisees were relevant to the franchisee service, not amounts like course instructor fee.

3. Revenue's Position: The Revenue supported the tax on admission fee, tuition fee, and competition fee, citing a Tribunal decision related to franchisee services. They argued that these fees were integral to the franchisee service and should be taxable.

4. Decision: The Tribunal analyzed the definitions of Franchise and Franchisor under the Finance Act, 1994. It noted that payments to the franchisor were for the right to sell goods or provide services identified by the franchisor. The Tribunal found that only amounts directly related to the representational right granted by the franchisor, like royalty and franchisee fees, should be taxable under the Franchisee Service category.

5. Legal Interpretation: The Tribunal distinguished the case law cited by the Revenue, emphasizing that the nature of the service provided was not in dispute in this appeal. It clarified that only amounts linked to the representational right granted by the franchisor should be considered for taxation under the Franchisee Service category.

6. Judgment: The Tribunal partially allowed the appeal, ruling that tax liability for the appellants in India would not include admission fee, tuition fee, competition fee, and course instructor fee. The impugned order was modified accordingly, with the appeal partly allowed in favor of the appellants.

7. Conclusion: The Tribunal's decision clarified the scope of taxable amounts under the Franchisee Service category, emphasizing the direct relation to the representational right granted by the franchisor. The judgment provided clarity on the taxation of specific fees collected by the appellants, ensuring compliance with the relevant provisions of the Finance Act, 1994.