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2016 (1) TMI 162 - AT - Service TaxFranchisee Service - Amount received from affiliates being RCs and LCs - Scope of the MOU - appellant designed its distance education programme and created a 3-tier architecture for running the same (i.e. distance education programme) through LCs (3rd tier) which were to be supervised by Regional Centres (RCs) (2nd tier) - Held that - From the foregoing there remains no doubt that LCs were authorised to take students by claiming and making it clear that the education they were providing was on behalf of the appellant. They were allowed even to advertise to that effect. It was because LCs were representing the appellant with regard to providing education, that the MOU cast strict obligations on LCs to ensure that the quality of education remained as per the standards of the appellant. It also comes out from the MOU that RCs framed marketing strategies to be implemented by LCs in consultation with the appellant. As per the MOU, the format and style of any advertisement or hoarding to be placed by RCs/LCs had to be done with the prior written approval of the appellant lest these bring down or cast aspersions on or discredit the appellant. Owing to the fact that LCs represented the appellant with regard to providing education, MOU laid down strict requirements of infrastructure, processes, qualifications of staff, etc. as elaborated in the MOU. Though the MOU states that it is not a franchise arrangement and is a model of public-private partnership for deciding classification of the service rendered thereunder, we have to see the nature, terms and conditions thereof; it is immaterial as to what nomenclature is assigned to it. Indeed, the MOU in question is so clear an example of franchise as defined in Section 65 (47) ibid that any further elaboration on this point will be an exercise in over-kill. Valuation of services - Held that - the entire fee collected by LCs in the name of the appellant cannot be treated as assessable value of franchise service. - the total fee collected by the appellant through LCs, a part was given back to LCs. Obviously, the part of the collection which was given back by the appellant to LCs cannot form part of the assessable value for the purpose of taxability. As per Section 67 ibid, the value of taxable service is the gross amount charged by the service provider for such service and gross amount will be only the amount, which remained with the appellant after payments to LCs. However, the contention of the ld. advocate that only authorisation fee and additional authorisation fee should be taken as a consideration for the service rendered is untenable, because the valuation for the impugned service is to be done in accordance with the provisions of Section 67 ibid, which, to repeal, in effect, states that the value of the taxable service will be the gross amount charged for the service and the gross amount charged by the appellant for the service rendered has to be equal to the amount collected by the appellant from LCs minus the amount paid by it to LCs. Thus, the amount paid to RCs by the appellant was an expense at the hands of the appellant in connection of provision of franchise service. For the sake of elucidation, for example, the appellant could as well have employed its own persons for doing what RCs did in which case the expenses incurred in doing so would not be deductible from the assessable value. Thus, the amount paid by the appellant to RCs is not excludible from the assessable value. Extended period of limitation - Held that - While there are bland statements made in the Show Cause Notice alleging wilful mis-statement/suppression of facts, there is no evidence adduced in support thereof. Non-payment of service tax/non-obtaining of registration by themselves can hardly ever sustain charge of wilful mis-statement or suppression of facts in-as-much-as in case of a bona fide belief regarding non-taxability, no assessee would file returns or obtain registration. - the allegation of suppression of facts cannot be sustained in the given circumstances. Consequently, penalty under Section 78 ibid is not imposable. The impugned demand has to be re-computed only for the normal period and taking the assessable value as equal to the aggregate amount collected by the appellant through LCs minus the amount paid to LCs. Needless to say that the amount of penalty under Section 76 ibid has also to be re-computed. - Decided partly in favor of assessee.
Issues Involved:
1. Classification of service under the Finance Act, 1994. 2. Valuation of service for levy of service tax. 3. Invocability of the extended period of limitation. 4. Levy of penalty on the appellant. Issue-wise Analysis: 1. Classification of Service: The primary issue was whether the services provided by the appellant, Punjab Technical University (PTU), to its Learning Centres (LCs) and Regional Centres (RCs) constituted "Franchise Service" under Section 65 (47) of the Finance Act, 1994. The Memorandum of Understanding (MOU) between PTU and LCs/RCs was scrutinized. The MOU detailed the obligations of PTU, RCs, and LCs, emphasizing that LCs were authorized to provide education on behalf of PTU, adhering to its standards and norms. Despite the MOU stating it was not a franchise arrangement, the tribunal found that the nature, terms, and conditions of the MOU satisfied the definition of "franchise" as LCs were granted representational rights to provide services identified with PTU. Thus, the service was classified as "Franchise Service." 2. Valuation of Service: The tribunal agreed with the appellant that the entire fee collected by LCs in the name of PTU could not be treated as the assessable value of the franchise service. It was noted that a part of the fee collected was given back to the LCs. Therefore, the assessable value should be the gross amount collected by PTU minus the amount paid to LCs. However, the amount paid to RCs was not excludible from the assessable value as RCs were created by PTU to ensure that LCs acted as per the MOU and for other purposes. Thus, the assessable value was determined to be the amount collected by PTU from LCs minus the amount paid to LCs. 3. Invocability of the Extended Period of Limitation: The tribunal found that the extended period of limitation was not invocable. The appellant had not suppressed facts or indulged in wilful mis-statement. The activities of PTU were public, advertised, and displayed on its website. The Supreme Court's observations in Continental Foundation Jt. Venture Vs. CCE and Nestle India Ltd. Vs. CCE were cited, emphasizing that mere non-payment of service tax or non-obtaining of registration could not sustain the charge of wilful mis-statement or suppression of facts. Therefore, the extended period of limitation was not applicable. 4. Levy of Penalty: Given that the extended period of limitation was not invocable, the penalty under Section 78 of the Finance Act, 1994, could not be imposed. The tribunal held that the allegation of suppression of facts could not be sustained, and consequently, the penalty under Section 78 was not imposable. Conclusion: The appeal was allowed by way of remand to the adjudicating authority with the following directions: 1. The appellant provided franchise service. 2. The extended period of limitation was not invocable. 3. Penalty under Section 78 could not be imposed. 4. The demand was to be re-computed for the normal period, taking the assessable value as the amount collected by PTU minus the amount paid to LCs, and the penalty under Section 76 was to be re-computed accordingly. Pronouncement: The judgment was pronounced in the Open Court on 23.12.2015.
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