2024 (8) TMI 19 - AT - Service Tax

Valuation for the purpose of gross value of franchise service - inclusion of cost of advertisement charges which is collected by the appellant as reimbursement expense in the gross value of the franchise fees - HELD THAT - The show cause notice is based on the provision of Rule 5 (1) of Service Tax (Determination of Value) Rules, 2006 - the revenue sought to include the advertisement expense in the gross value of franchise service. Further, the adjudicating authority considering the Rule 5 of valuation Rules held that the advertisement expenses has to be borne by the franchisees on their own but as per the arrangement, the appellant are making payment of advertisement charges to the advertisement agencies and taking reimbursement from the service recipient, therefore, advertisement charges is not a part and parcel of the value of franchise service. It is found that right from show cause notice upto the Commissioner (Appeals) order, the entire case of the Revenue is based on Rule 5 (1) 5(2) of Service Tax (Determination of Value) Rules, 2006, it is found that this Rule 5 (1) has been held unconstitutional as the same ultra vires the provision of section 66 and 67of the Finance Act, 1994, therefore, on this change of legal position the entire action of the revenue is vitiated. Consequently, the order of the Commissioner (Appeals) is also not sustainable on this ground alone. In the present case, the advertisement is in the business interest of the franchisee but the arrangement of advertisement is such that the advertisement agencies are providing advertisement for the franchisee and the payment therefore is made by the appellant and the same is collecting as reimbursement from the franchisee - The advertising expenses is ultimately borne by the franchisee because the same is part of their business expenses, the same cannot be included in the gross value of franchise service. The impugned order allowing the revenue s appeal is not sustainable in law and in the fact. Hence, the same is set aside - Appeal allowed.

Summary

Issues Involved:
1. Inclusion of advertisement charges in the gross value of franchise service.
2. Applicability and constitutionality of Rule 5(1) of Service Tax (Determination of Value) Rules, 2006.
3. Determination of whether the appellant acted as a "pure agent."

Detailed Analysis:

1. Inclusion of Advertisement Charges in the Gross Value of Franchise Service:
The core issue revolves around whether the advertisement charges collected by the appellant from their franchisees should be included in the gross value of the franchise service. The appellant argued that these charges were merely reimbursements for expenses paid to advertising agencies and should not be included in the taxable value of the franchise service. The adjudicating authority initially ruled in favor of the appellant, stating that the advertisement charges were not part of the gross value of the franchise service. However, the Commissioner (Appeals) reversed this decision, interpreting Rule 5(1) to include these charges in the gross value.

2. Applicability and Constitutionality of Rule 5(1) of Service Tax (Determination of Value) Rules, 2006:
The appellant's primary argument against the inclusion of advertisement charges was based on the unconstitutionality of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. The appellant cited the Supreme Court's ruling in the case of Intercontinental Consultants & Technocrats Pvt Ltd, which declared Rule 5(1) as ultra vires to Sections 66 and 67 of the Finance Act, 1994. The Tribunal agreed with this argument, stating that since Rule 5(1) was deemed unconstitutional, the entire basis for the Revenue's demand was invalid. Consequently, the order of the Commissioner (Appeals) relying on Rule 5(1) was not sustainable.

3. Determination of Whether the Appellant Acted as a "Pure Agent":
The appellant contended that they acted as a "pure agent" in collecting advertisement charges from the franchisees and paying them to the advertising agencies. According to the appellant, this arrangement was a cost-sharing model beneficial to both parties. The Commissioner (Appeals) rejected this argument, stating that the appellant's actions violated Clauses (c) and (d) of Rule 5(1) and that the appellant did not meet the criteria for being a "pure agent." However, the Tribunal found that the advertisement expenses were ultimately borne by the franchisees and were part of their business expenses. Therefore, these expenses should not be included in the gross value of the franchise service.

Conclusion:
The Tribunal concluded that the entire case of the Revenue was based on the now-unconstitutional Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006. Even without considering Rule 5, the Tribunal held that the advertisement expenses, being ultimately borne by the franchisees, should not be included in the gross value of the franchise service. The Tribunal upheld the adjudicating authority's original decision and set aside the order of the Commissioner (Appeals), allowing the appellant's appeal with consequential relief.