2012 (5) TMI 62 - AT - Service Tax

Waiver of pre-deposit - Business Auxiliary Services - Franchisee Service - Revenue was of the view that the appellants should have paid service tax on the opportunity cost charged by the Appellants in the first type of sales and on the price differential charged in the second type of sale of goods under the head for Franchisee Service under clause 65 (105) ( zze ) of Finance Act, 1994 - Held that the manufacturers are not acting as representatives of the appellant in such transactions. They submit that the appellants have not given representational rights to the manufacturers for such sales - the relationship between the manufacturers and the appellants as per the contract would give the activities and nature of franchisee services as defined by the above provisions and there is a relationship as franchisor and franchisee between the two - One difference that we see is that the excise duty is being paid on the value at which goods are sold by the appellants to the customers. In fact this factor is in favour of the case made out by the Appellants - pre deposit waived.

Summary

Issues involved:
Classification of transactions for service tax liability - Direct sales vs. sales against orders; Demand of service tax under "Franchisee Service"; Imposition of penalties under section 78 of the Finance Act, 1994; Nature of transactions with manufacturers - sale and purchase of goods vs. franchise arrangement; Applicability of service tax on opportunity cost and price differentials; Time-barred demand; Revenue neutrality; Interpretation of legal provisions under Finance Act, 1994 for Franchisee Services.

Classification of transactions for service tax liability:
The case involved two types of transactions: direct sales by franchisees and sales against orders obtained by the appellants. The Revenue contended that service tax should be paid on the opportunity cost in direct sales and on the price differentials in the second type of sale under "Franchisee Service." A Show Cause Notice was issued demanding service tax amounting to Rs. 4,65,42,505 for a specific period, which was confirmed in the impugned order along with penalties. The appellants argued that the direct dispatch sales were different from the transactions in question and had already paid service tax under "Business Auxiliary Service." The nature of the second type of transaction was explained as a straightforward sale and purchase of goods, with excise duty paid on the value at which goods were sold to customers.

Imposition of penalties under section 78 of the Finance Act, 1994:
Penalties equal to the tax amount were imposed under section 78 of the Finance Act 1994, along with additional penalties for non-filing of returns. The appellants challenged these penalties in their appeal, emphasizing the nature of their transactions as sales of goods and disputing the applicability of service tax on opportunity costs and price differentials.

Nature of transactions with manufacturers - sale and purchase of goods vs. franchise arrangement:
The appellants argued that the transactions with manufacturers were purely sales and purchases of goods, not franchise arrangements. They highlighted that the manufacturers were not acting as representatives of the appellants and were not paying any predetermined amount as franchise fees. The agreements with manufacturers did not grant representational rights or permission to sell goods to anyone else. The appellants paid excise duty on the full value of goods sold to customers, and they contended that no service tax should be demanded in such cases.

Interpretation of legal provisions under Finance Act, 1994 for Franchisee Services:
The Ld. AR for Revenue relied on legal provisions in the Finance Act, 1994 regarding Franchisee Services. The definition of "Franchise" and "Franchisee" was discussed, with changes in the definition effective from a specific date. The argument was made that the relationship between the manufacturers and the appellants constituted a franchisor-franchisee relationship, with the appellants receiving consideration for services rendered through price differentials.

Conclusion:
The Tribunal considered the arguments from both sides and found a prima facie strong case in favor of the appellants. It was noted that the transactions resembled cases where brand name owners had goods manufactured by job-workers and sold them to consumers without service tax implications. The excise duty paid by the appellants on the value of goods sold to customers favored their case. Ultimately, the Tribunal waived the requirement of pre-deposit for admission of the appeal and ordered a stay on the collection of dues during the appeal's pendency, pronouncing the decision on 16.1.2012.