2023 (9) TMI 134 - AT - Service Tax

Levy of service tax - franchisee service - exclusivity charges for granting rights of distribution and sale of its products - HELD THAT - From the explanation provided by the Circular No. B-1/6/2005-TRU dated 27.07.2005, it can be seen that merely because by an agreement a right is confirmed on the party to sale of goods or service undertaken was not ipso-facto bringing the agreement within the ambit of franchisee. What is essentially required is to establish that as per the agreement the rights has not conferred on franchisee which amount to representational rights - the representational right would mean that for all practical purposes the franchisee losses its own identity and acquire with that of the franchisor. The agreement is primarily for marketing, promotion and distribution of the products in India by the distributors appointed by the appellant for the various territories. The amount of Exclusivity Fee of Rs. 30 Lakh being charged by the appellant from its distributors in the five equal installments of Rs. 6lakh each is an amount of deposit with the appellant and if any distributorship get cancelled before the period of five years, the deposit which has been made by the appointed distributors under the category of Exclusivity Fee is being returned on the pro-rata basis by the appellant - The Exclusivity Fee which is being charged by the appellant from its distributors is a kind of guarantee amount rather than any franchisee fee. From the terms of agreement, appellant is not given any representational right to its distributors to sale or manufacture goods or provide service or undertake any process identify with the franchisor and the agreement is purely for marketing of product and therefore same cannot be termed as agreement between the franchisor and franchisee. This Tribunal in the case of M/S. SITI CABLE NETWORK LTD. (FORMERLY KNOWN AS WIRE WIRELESS (I) LTD.) VERSUS COMMISSIONER OF SERVICE TAX, DELHI-III (VICE-VERSA) 2020 (8) TMI 79 - CESTAT NEW DELHI where it was held that Representational right means a right that is available with the franchisee to represent the franchisor and in that case the franchisee loses its individual identity and is known only by the identity of the franchisor . The impugned order-in-appeal is devoid of any merits - Appeal allowed.

Summary

Issues Involved:
1. Whether the appellant provided franchisee service liable to service tax.
2. Validity of the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Issue 1: Whether the appellant provided franchisee service liable to service tax.

During the audit, the Revenue noticed that the appellant collected amounts termed as "royalty" and "exclusivity charges" from distributors. The Revenue contended that these transactions constituted franchisee services under sub-clause (zze) of Clause 105 of Section 65 of the Finance Act, 1994, and demanded service tax of Rs. 20,43,893/-.

The appellant argued that there was no "franchisee and franchisor" relationship and that the agreements with distributors did not grant representational rights. They contended that the agreements were for purchase and sale, with no transfer of representation rights. The "Exclusivity Fee" was refundable on a pro-rata basis upon early termination of the agreement.

The Tribunal examined the agreements, noting that the appellant did not grant representational rights to distributors, and the agreements were primarily for marketing, promotion, and distribution. The "Exclusivity Fee" was considered a deposit rather than a franchise fee. The Tribunal concluded that the appellant did not provide franchisee services as defined under the Finance Act, 1994.

Issue 2: Validity of the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

The Adjudicating Authority confirmed the charges and imposed a penalty of Rs. 10,000/- on Shri Hemal Zaveri under Section 77(2) of the Finance Act, 1994. The appellant challenged this, arguing that no franchisee service was provided, and thus penalties were unwarranted.

The Tribunal, relying on the definition and relevant case laws, found that the agreements did not constitute franchisee services. Consequently, the demand for service tax and associated penalties were set aside.

Conclusion:

The Tribunal set aside the impugned order-in-appeal, concluding that the appellant did not provide franchisee services and was not liable for the demanded service tax or penalties. The appeals were allowed.