2014 (11) TMI 709 - AT - Service Tax

Franchisee service - Whether it can be said that appellants have been granted representational right to the franchisor or not - Held that - If prior to 16.05.2008, the service was correctly classifiable under franchise service and broader category was brought into the statute subsequently it does not mean that for the earlier period it could not have been classified under franchise service. Hence in our opinion appellants have to be put to some terms because we find that appellants do not have prima facie case on consideration of the agreements, the definition in the statute and the consideration of submissions made by both the sides. We have not considered it necessary to go into the technical literature regarding franchise and licensing which was also presented by both the sides and both the sides claimed support from such literature. Basically the source was USA where the matter has a long history whereas in India this concepts have been coming up in recent times only especially after service tax was introduced. Therefore without considering these aspects also in our opinion if we consider the statute and the agreements, at this stage it would be sufficient and the conclusion is that appellants do not have a strong prima facie case. Business Auxiliary service - Appellants are not providing any services on behalf of Oracle. Appellants have paid VAT on consideration received towards product/software updates as it amounts to sale of software and after 16.05.2008 they have been paying the tax. Information Technology Services were excluded from the scope of Business Auxiliary Service right from the date of introduction of Business Auxiliary Service as taxable on 01.07.2003. This exclusion lasted till 16.05.2008 when the new taxable service ITSS was introduced. It was also submitted that the scope of Information Technology Service excluded from the levy of service tax under Business Auxiliary Service was very wide and covered all services relating to design or development of computer software, computerized data processing or system networking or any other service preliminarily in relation to operation of computer system. Prima facie we find force in this argument. Therefore in respect of this service, we consider that appellant has made out a prima facie case for waiver. Management Consultancy services - reverse charge - in the impugned order that professional consultancy charges are liable to tax under Management Consultancy Services. It was submitted by the appellant that the appellants have not made any payments towards shared support charges payable to Oracle. On this count the demand for ₹ 60,99,236/- has been submitted as not payable. It was also submitted that the centres are engaged in the actual execution of the work and are not providing advice or consultancy to the appellant. The appellants relied upon Hewlett Packard India Sales Pvt. Ltd. V. CCE & ST, Bangalore LTU 2014 (11) TMI 658 - CESTAT BANGALORE . It was also submitted that such services even though they are liable would be covered under Business Auxiliary Service or Business Support Service. It was also submitted that computation of demand is erroneous. Further submission was also made that no reason has been given to justify classification of the services under this heading. We find that these submissions would result in conclusion that appellants have made out a prima facie case in their favour. If the appellants deposit 50% of the demand within the normal period in respect of Franchise Service along with proportionate interest payable till the date of payment, the same would be sufficient for the purpose of hearing the appeal. The total demand within the normal period in respect of Franchise Service as quantified by the appellants to be ₹ 34,87,23,385/- is accepted and the demand of 50% has to be calculated on this basis and proportionate interest also has to be paid on the said amount. - Decided partly in favour of assessee.

Issues Involved:
1. Demand under Franchise Service
2. Demand under Business Auxiliary Service
3. Demand under Management Consultancy Service
4. Demand under Maintenance or Repair Service
5. Denial of CENVAT credit on STPI invoices

Issue-wise Detailed Analysis:

1. Demand under Franchise Service:
The appellant, a subsidiary of Oracle Corporation USA, was issued show-cause notices demanding service tax under Franchise Service for the period from April 2006 to 15.05.2008. The definition of 'Franchise' under Section 65(47) was examined, which involves an agreement granting representational rights to sell or provide services identified with the franchisor. The impugned order concluded that the appellant had representational rights due to the use of Oracle's logo/trade mark. The Department contended that the service could be classified under Franchise Service before 16.05.2008 and under ITSS after that date. The appellant argued that the agreement was for software duplication and distribution, not a franchise, and that they did not have representational rights. The Tribunal found that the agreements and the appellant's role indicated representational rights, thereby supporting the classification under Franchise Service. However, the Tribunal noted that a detailed consideration of technical literature and agreements was required, which would be addressed during the final hearing. The Tribunal concluded that the appellant did not have a strong prima facie case and required them to deposit 50% of the demand within the normal period.

2. Demand under Business Auxiliary Service:
The appellant's activities of sublicensing Oracle products and providing related services were classified under Business Auxiliary Service by the Department. The appellant argued that these activities were excluded from the scope of Business Auxiliary Service as they related to Information Technology Services, which were not taxable until the introduction of ITSS on 16.05.2008. The Tribunal found merit in the appellant's argument and concluded that the appellant had made a prima facie case for waiver regarding this demand.

3. Demand under Management Consultancy Service:
The demand under this category included shared support charges, training service, and manpower supply. The appellant contended that they did not make payments towards shared support charges and that the services provided were not advisory or consultancy in nature. They also argued that the services could be classified under Business Auxiliary Service or Business Support Service. The Tribunal found that the appellant had made a prima facie case for waiver concerning this demand.

4. Demand under Maintenance or Repair Service:
The Department's stand was that maintenance or repair of software became taxable from 09.07.2004, following the rescission of an exemption notification and a Board Circular. The appellant argued that maintenance of software was not taxable during the period in question, based on earlier clarifications and the fact that they started paying tax from October 2005. The Tribunal found that the appellant had a prima facie case on the ground of limitation.

5. Denial of CENVAT credit on STPI invoices:
The Revenue denied CENVAT credit on the grounds that the appellant did not have centralized registration and availed credit on inputs and input services used for providing exempted services from STPI units. The appellant argued that the STPI units were exporting services and that Rule 6 of the CENVAT Credit Rules was not applicable. They also contended that the credit availed was not exclusively used for exempted services and that the computation of demand was erroneous. The Tribunal concluded that the appellant had made a prima facie case for waiver regarding this demand.

Conclusion:
The Tribunal directed the appellant to deposit 50% of the demand within the normal period for Franchise Service, amounting to Rs. 34,87,23,385/-, along with proportionate interest. The appellant was given eight weeks to comply and report back on 26.11.2014. The Tribunal pronounced the order in the open court on 08.09.2014.

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