2019 (4) TMI 25 - AT - Service Tax

Valuation - Franchise services - Whether bifurcating the amount of weekly gross sales into the payment of royalty (@ 8% thereof) and the payment towards Franchise Advertisement Fund (@ 4.5% thereof) takes the later value out of the ambit what is called as transaction value/the gross value? - Held that - Both prior and after the amendment the value on which service tax is payable has to satisfy that (i) the value is the gross amount charged i.e. the entire contract value between the service provider and the service recipient without deduction of any expenses ; (ii) the amount charged should be for for such service provided that the gross amount charged by the service provider has to pay for the service provided. By using the word for such service provided , the Act has provided a nexus between the amount charged and the service provided. By merely mentioning that for master licensee 33% of all the fees collected shall exclude advertising fee does not takes that amount out of the tax net of the amount received from franchisees for providing them the Franchise Service . Thus the sole reason of this advertisement fee is also the part of the contract value. More so, this value is not at all the expense incurred by the franchise for advertising his own outlet but this is the amount out of his income from the sales passed on to the service provider SSIPL in lieu of the franchise agreement between the two. Hence, this Franchise Advertisement Fund is despite a different nomenclature of being a different fund but actually is the value received by the appellant for providing franchise service to its franchisees. The amount of weekly gross sales @ 4.5% but for franchise advertisement fund is nothing but the part of gross value of the contract for providing the franchise service and, hence, was equally taxable as 8.5% of the said weekly gross sales is taxable. Time limitation - Held that - The bifurcation of weekly gross sales by the appellant is a mere strategy to cut short its tax liability. Thus, the element of mis- representation is very much apparent on part of the appellant that too with an intent to evade payment of tax - Show cause notice dated 13/02/2009 proposing the demand for the period w.e.f. April 2007 to March 2008 is therefore denied to be barred by time. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Service tax liability on the amount received as Franchise Advertisement Fund.
2. Service tax liability on the unaccounted amount shown as liability in the balance sheet.
3. Applicability of extended period for issuing the show cause notice.

Detailed Analysis:

1. Service Tax Liability on Franchise Advertisement Fund:
The primary issue revolves around whether the amount collected as Franchise Advertisement Fund (4.5% of weekly gross sales) should be included in the taxable value of the franchise service. The appellant argued that this amount does not qualify as a franchise service under Section 65(47) of the Finance Act, 1944, and should be excluded from the taxable value as it was collected as a pure agent without providing any service.

The Tribunal, however, held that the Franchise Advertisement Fund is an integral part of the gross value received for providing franchise services. The Tribunal emphasized that Section 67 of the Finance Act mandates that the value of taxable services includes the gross amount charged by the service provider. The Tribunal concluded that the bifurcation of the weekly gross sales into royalty (8%) and Franchise Advertisement Fund (4.5%) does not exclude the latter from the taxable value. The Tribunal supported this conclusion by referring to the master license agreement and the definition of franchise service, which includes any process identified with the franchiser, including advertising.

2. Service Tax Liability on Unaccounted Amount in Balance Sheet:
The appellant conceded the liability regarding the unaccounted amount shown as a liability in the balance sheet and confirmed that the tax along with interest and proportionate penalties had been paid. Therefore, this issue was not contested further.

3. Applicability of Extended Period for Issuing the Show Cause Notice:
The appellant contended that the show cause notice was barred by time. The Tribunal rejected this argument, stating that the bifurcation of weekly gross sales was a strategy to evade tax liability, constituting misrepresentation. Consequently, the Department was justified in invoking the extended period under proviso to Section 73(3) of the Finance Act. The show cause notice dated 13 February 2009 for the period April 2007 to March 2008 was deemed timely.

Conclusion:
The Tribunal upheld the original adjudication confirming the service tax demands on the Franchise Advertisement Fund and the unaccounted amount in the balance sheet. The Tribunal dismissed the appeals, affirming that the Franchise Advertisement Fund forms part of the gross value of the franchise service and is taxable. The invocation of the extended period for the show cause notice was also upheld. The Tribunal found no merit in the appellant's arguments and maintained the order under challenge.