2021 (10) TMI 640 - AT - Service Tax

Classification of service - Franchise Service or not - one stop painting solution to the customers - respondent recovered certain income under the head Home Solutions Operations - Revenue was of the view that these services will fall under a category of franchisee service as defined under Section 65(105)(zze) of the Finance Act 1994 - HELD THAT - It is not settled law that unless and until representational rights have been actually transferred to the franchisee the service tax could not have been levied under the category of franchisee services. The terms of the agreement clearly provide that home solution service provider is barred from making any statement on behalf of the company or in any manner how to represent the respondent. When there is a specific clause in the agreement which bars the home solution service provider from representing the respondent then how it has been claimed that such representational rights have been granted to the home solution service provider. Nothing has been brought on record by which it can be stated that such representational rights were granted to the home solution service provider. The reliance placed by Revenue in the case of Australian Foods India Ltd. COMMISSIONER OF CENTRAL EXCISE CHENNAI-II VERSUS M/S AUSTRALIAN FOODS INDIA LTD. 2013 (1) TMI 330 - SUPREME COURT is totally misplaced - this decision also does not help the case of Revenue as this decision has not been rendered in the case where the issue was in respect of franchisee services but was in case of trade and brand name. The appeal filed by Revenue is dismissed.

Issues Involved:
1. Classification of services provided by the respondent as 'Franchisee Services'.
2. Demand and recovery of service tax amounting to Rs. 5,98,66,424/-.
3. Demand and recovery of interest under Section 75 of the Finance Act, 1994.
4. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Classification of Services Provided by the Respondent as 'Franchisee Services':

The primary issue was whether the services provided by the respondent under the "Home Solutions Operations" should be classified as 'Franchisee Services' under Section 65(105)(zze) of the Finance Act, 1994. The Revenue argued that the home solution service providers were franchisees of the respondent, bound by an exclusive contract and carrying out processes defined by the respondent. The Commissioner, however, held that the home solution service providers were not franchisees because the invoices provided to consumers did not have the respondent's brand seal, and the service providers retained their identity. The Tribunal upheld the Commissioner's view, stating that for a service to qualify as a franchise, the franchisee must be granted representational rights, which was not the case here.

2. Demand and Recovery of Service Tax Amounting to Rs. 5,98,66,424/-:

The Revenue issued a show cause notice demanding service tax for the period 01.10.2005 to 31.12.2010. The Commissioner, however, found that the home solution service providers acted as sub-contractors and not franchisees. The Tribunal agreed, noting that the service providers executed contracts as sub-contractors and the money received from customers remained the property of the respondent. Therefore, the demand for service tax under the category of franchisee services was not justified.

3. Demand and Recovery of Interest under Section 75 of the Finance Act, 1994:

The show cause notice also demanded interest on the alleged service tax dues under Section 75 of the Finance Act, 1994. Since the Tribunal upheld the Commissioner's finding that the services did not fall under the category of franchisee services, the demand for interest was also not justified.

4. Imposition of Penalties under Sections 76, 77, and 78 of the Finance Act, 1994:

The show cause notice proposed penalties for contravention of various provisions of the Finance Act, 1994 and the Service Tax Rules, 1994. The Commissioner did not impose these penalties, and the Tribunal upheld this decision. The Tribunal noted that the home solution service providers did not have representational rights and acted as sub-contractors, thus penalties under the specified sections were not applicable.

Conclusion:

The Tribunal dismissed the appeal filed by Revenue and upheld the order of the Commissioner. The Tribunal found that the home solution service providers were not franchisees as they did not have representational rights granted by the respondent. Consequently, the demand for service tax, interest, and penalties was not justified. The cross objections filed by the respondent were also disposed of.

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