2023 (11) TMI 171 - AT - Service Tax

Classification of services - Intellectual Property Service or Franchise Service? - separate agreements with M/s Liberty Shoes Ltd. for transfer of their business of the respective manufacturing units - time limitation. The case of the Department is that various clauses of the agreement leave no doubt that the services received by the appellant are not IPR Services because in addition to the use of intangible property, the transaction under the agreement involves right to sell or manufacture the goods are undertake a process identified with franchisor. HELD THAT - The agreement itself is settled agreement for transfer of business on franchise basis. We find on going through the various clauses of the agreement are in the nature of Franchise Agreement. The agreement includes conditions for following the concept of business operation, manufacture or technical specifications, marketing etc. in addition to the restriction on selling, producing or providing similar goods or services identified with any other person. The appellants argue that the condition put forth under Clause 7(j) is not absolute as envisaged under condition No.(iv) and it is subject to the written consent of the franchisor. Be it so, the appellants did not submit any proof, whatsoever, to indicate that such permission was sought and given permitting the franchisee to engage him in the business of others or in other goods from the same premises. In the absence of example to the contrary, Clause No.7(j) is akin to the condition laid down under No.(iv). Therefore, there are no hesitation in concluding that the impugned agreement is in the nature of Franchise Agreement wherein the appellants have total control of the business, the process, the product and the premises. Time Limitation - HELD THAT - It is on record that the appellants have submitted the copies of the agreements to the jurisdictional Central Excise authorities as early as in 2003. They have surrendered their Central Excise registrations and have obtained Service Tax registrations and have discharged the duty under Intellectual Property Rights ; they have regularly submitted the ST-3 Returns. Therefore, it cannot be alleged that the appellants have suppressed any material fact from the Department with intent to evade payment of duty - there are reasons to believe that the appellants, who have been paying service tax under the Head Intellectual Property Service , had a bona fide doubt on the classification of the service. Therefore, the appellants succeed on limitation. The appeals are allowed on limitation.

Summary

Issues:
The issues involved in the judgment are the classification of services under the categories of "Intellectual Property Service" and "Franchise Service" for the appellants, as well as the issue of limitation regarding the initiation of proceedings by the Department.

Classification of Services - "Franchise Service":
The appellants, engaged in manufacturing and distribution of footwear, entered into agreements with another company for the transfer of their business. The Department contended that the appellants should pay service tax under "Franchise Service" even before a certain date. The appellants argued that one of the conditions for a franchise agreement was not met. The Tribunal examined the clauses of the agreement and found that the agreement was indeed in the nature of a Franchise Agreement. The Tribunal referred to previous cases and held that the services received were correctly classifiable under "Franchise Service."

Classification of Services - "Intellectual Property Service":
The appellants initially paid service tax under "Intellectual Property Service" and later under "Franchise Service." The Department argued that the services received were not Intellectual Property Services due to various clauses in the agreement. The Tribunal found that the services received were more akin to franchise services rather than intellectual property rights services. Referring to relevant case law, the Tribunal upheld the classification under "Franchise Service."

Limitation Issue:
Regarding the issue of limitation, the appellants had informed the authorities about the agreements in 2003, and had been paying service tax under "Intellectual Property Service." The Department issued a show-cause notice in 2010 for a period starting from 2004-05. The Tribunal noted that the appellants had not suppressed any material fact and had a bona fide doubt on the classification of the service. Considering the circumstances and ambiguities in the Service Tax Law, the Tribunal held that the appellants succeeded on the issue of limitation.

Conclusion:
The Tribunal allowed the appeals on the issue of limitation, finding that the appellants had not suppressed any material fact and had a genuine doubt on the classification of services. The judgment was pronounced on 03/11/2023.