2025 (4) TMI 373 - AT - Service Tax

Levy of service tax - franchise services or not - agreement between the respondent and Microsoft constitutes a franchise under Section 65(47) of the Finance Act 1994 - reverse charge mechanism - HELD THAT - After perusal of various clauses of the agreement which clearly state that the agreement is non-exclusive between the parties and Microsoft makes software and hardware available to the respondent on a non-exclusive basis. Further it is found that the there is not a single word of franchises/franchisor/franchisee used in the agreement between the respondent and Microsoft and Microsoft has not given any representational rights to the respondent s company and the respondent have only right to sell the goods which does not fall within the ambit of a franchise. In this regard it is pertinent to refer the decision of the Tribunal in the case of Tata Consultancy Services Ltd 2019 (6) TMI 109 - CESTAT MUMBAI wherein it has been held that In this case the so called Sub Certifying authorities and Sub CA Administrators (Sub CAA) Registering Authorities and RA-Administration appointed by appellants have any authority to issue DSC certificates representing them to be issued by appellant. Such transfer of right granted to appellant by the certifying authority in terms of IT Act 2000 is also not permissible. It is only the Appellants who could have issued the Digital Signature Certificate and this could not have been done by any other person or agency appointed by appellant. Hence mere act of collecting the applications and verification of the same for onward submission to the appellant cannot be termed as grant of representational rights . Further in terms of the agreement the purchase price of Microsoft OEM pack was bifurcated into two components i.e. hardware price and software price. The cost of hardware purchase was paid as per the prevailing royalty and price list and was to be paid to the authorized replicators - The agreement between the respondent and Microsoft was on principal to principal basis and the said agreement was executed purely on commercial and as trading transaction and it does not grant any representational right to the respondent so as to fall under the ambit of franchise service. In fact the relationship between the respondent and Microsoft was that of a buyer and a seller and not of a franchisee and a franchisor. The learned Commissioner has analyzed the terms conditions of the agreement and has rightly come to the conclusion that the agreement between the respondent and Microsoft does not create franchise service. Conclusion - The respondent is not liable for service tax on the payments made to Microsoft under the reverse charge mechanism. There are no infirmity in the impugned order - appeal of Revenue dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the agreement between the respondent and Microsoft constitutes a "franchise" under Section 65(47) of the Finance Act, 1994.
• Whether the payments made by the respondent to Microsoft are considered "franchise fees" and thus liable for service tax under the reverse charge mechanism as per Section 66A of the Finance Act, 1994.
• Whether the respondent suppressed facts to evade service tax, justifying the invocation of the extended period of limitation under Section 73(1) of the Finance Act, 1994.

ISSUE-WISE DETAILED ANALYSIS

1. Definition and Applicability of "Franchise" under Section 65(47) of the Finance Act, 1994

• Relevant Legal Framework and Precedents: The term "franchise" is defined under Section 65(47) as an agreement granting representational rights to sell or manufacture goods or provide services identified with the franchisor. The Tribunal referenced past decisions, including Tata Consultancy Services Ltd and Global Transgene Ltd, to interpret this definition.
• Court's Interpretation and Reasoning: The Tribunal concluded that the agreement between the respondent and Microsoft did not grant any representational rights. The respondent was merely authorized to sell software packs, which does not constitute a franchise relationship.
• Key Evidence and Findings: The agreement was non-exclusive and did not use the terms franchise/franchisor/franchisee. The respondent was identified as a distributor, not a franchisee.
• Application of Law to Facts: The Tribunal found that the respondent's role was limited to distributing software packs without any representational rights, thus not meeting the criteria for a franchise under the Act.
• Treatment of Competing Arguments: The Revenue argued that the use of Microsoft's trademarks implied a franchise relationship. This was refuted by the Tribunal, which emphasized the absence of representational rights.
• Conclusions: The Tribunal concluded that the agreement did not constitute a franchise, and the payments were not franchise fees.

2. Liability for Service Tax under the Reverse Charge Mechanism

• Relevant Legal Framework and Precedents: Section 66A of the Finance Act, 1994, and related rules impose service tax on services received from abroad under the reverse charge mechanism.
• Court's Interpretation and Reasoning: The Tribunal held that the payments labeled as royalties were for software purchases, not franchise fees, and thus not subject to service tax as franchise services.
• Key Evidence and Findings: The Tribunal noted that the payments were bifurcated into hardware and software costs, with royalties being a common nomenclature for software payments.
• Application of Law to Facts: The Tribunal applied the law by distinguishing between royalties for software purchases and franchise fees, finding the former not taxable as franchise services.
• Treatment of Competing Arguments: The Revenue's assertion of representational rights was countered by the Tribunal's analysis of the agreement's terms, which lacked franchise characteristics.
• Conclusions: The Tribunal concluded that the respondent was not liable for service tax on the payments made to Microsoft under the reverse charge mechanism.

3. Allegation of Suppression of Facts and Invocation of Extended Limitation Period

• Relevant Legal Framework and Precedents: The extended period of limitation under Section 73(1) is applicable in cases of willful suppression of facts.
• Court's Interpretation and Reasoning: The Tribunal found no evidence of suppression or intent to evade tax, as the respondent's transactions were transparent and documented.
• Key Evidence and Findings: The respondent's role as a distributor was clear, and there was no concealment of the nature of payments made to Microsoft.
• Application of Law to Facts: The Tribunal determined that the conditions for invoking the extended period were not met, as there was no suppression of facts.
• Treatment of Competing Arguments: The Revenue's claim of suppression was unsupported by evidence, leading to the Tribunal's rejection of the extended limitation period.
• Conclusions: The Tribunal concluded that the extended period of limitation was not applicable.

SIGNIFICANT HOLDINGS

• The Tribunal upheld the Commissioner's decision to drop the proceedings, finding no franchise relationship or liability for service tax under the reverse charge mechanism.
• Core Principles Established: The distinction between a distributor and a franchisee was clarified, emphasizing the requirement of representational rights for a franchise relationship.
• Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeal, affirming that the respondent was not liable for service tax on the payments to Microsoft and that the extended period of limitation was inapplicable.