2018 (9) TMI 1657 - AT - Service Tax

Classification of services - appellant had outsourced their matrimony activity to other associate centers and had entered into franchise agreement with these associate centers - whether classified under Franchise service or under transfer of intellectual property service? Held that - The recital of the agreement in the first paragraph itself states that the appellant (formerly Bharatmatrimony.com) is referred as a franchisor and the associate member with whom the agreement is entered is referred to as the franchisee - it is not an agreement for mere transfer of intellectual property. In fact, the franchise agreement stipulates for payment of franchise fee charged by the franchisor upon the franchisee. The argument of the ld. counsel that it involves only transfer of intellectual property cannot be accepted for the reason that the agreement involves conditions wherein the manner of functioning and operation of the associate center is laid down. Thus the franchisor has a right to dictate or direct how the franchisee has to carry on the business. There is also a condition for the franchisee to attend the training conducted by them - demand with interest upheld. Time limitation - Held that - The mere fact that audit was conducted cannot be a ground to contend that the extended period cannot be invoked. Further, in the present case, show cause notice is issued on 14.3.2008 for the period January 2006 to March 2007. The appellants have not disclosed in the ST-3 returns that they were engaged in franchise service - time limitation not applicable. Penalty - Held that - Taking note of the fact that the audit had occasion to see the agreement in 2006, the penalties are unwarranted and requires to be set aside. Demand with interest upheld - penalty set aside - appeal allowed in part.

Summary

Issues: Classification of services under franchise service or transfer of intellectual property service; Invocation of extended period for demand; Imposition of penalties

Classification of services under franchise service or transfer of intellectual property service:
The appellant, a private limited company providing matrimonial services, job exchange, and property transactions, was under scrutiny for outsourcing matrimonial activities to associate centers under a franchise agreement. The department alleged that the activity fell under "franchise service," attracting service tax. The appellant argued that the agreement was for the transfer of intellectual property rights, not franchise service. The appellant contended that the agreement did not meet the essential criteria of a franchise agreement, as it involved intellectual property rights transfer. However, the Tribunal analyzed the agreement and concluded that it was indeed a franchise agreement, as it included guidelines for business operations, staff recruitment, and training, indicating control by the franchisor. Therefore, the demand was upheld on merits under the category of franchise service.

Invocation of extended period for demand:
The appellant challenged the invocation of the extended period for demanding service tax, claiming that no facts were suppressed, as the agreement was audited in 2006 without objections raised. The Tribunal noted that the show cause notice was issued in 2008 for the period January 2006 to March 2007, during which the appellant did not disclose engaging in franchise services in their returns. Despite the audit in 2006, the Tribunal found the extended period invocation justified due to the lack of disclosure. However, considering the audit history, the Tribunal set aside the penalties imposed, deeming them unwarranted.

Imposition of penalties:
Regarding penalties, the Tribunal modified the impugned order by setting aside the penalties while upholding the demand and interest. The decision partially allowed the appeal, emphasizing that penalties were not justified despite sustaining the demand. The Tribunal concluded that penalties should be waived due to the appellant's genuine belief and the audit history, ultimately providing relief by setting aside the penalties without affecting the demand or interest.