2017 (9) TMI 1561 - AT - Service Tax

Franchisee Service - Levy of service tax - Revenue has issued a show cause notice it was culminated into adjudication order wherein it was held that the arrangement between the appellant and educational institute is of franchise agreement accordingly the franchise fee is liable for service tax - interpretation of statute - Penalty - Held that - as per the agreement the appellant is providing the technical school of education as well as their brand name Podar Jumbo Kids to the franchisee against which the appellant is collecting the franchise fee - Tribunal correctly held that as per the agreement all the four ingredients of the definition of Franchise are fulfilled accordingly the service was classified as franchise service. There was no doubt regarding the classification of service as franchise service therefore there was no reason to interpret differently by the appellant - penalty upheld - appeal dismissed - decided against appellant.

Summary

Issues involved:
1. Classification of service as franchise service under Section 65(47) of the Finance Act, 1994.
2. Applicability of penalties under Section 76, 77, and 78 of the Finance Act.

Issue 1: Classification of service as franchise service under Section 65(47) of the Finance Act, 1994:
The case involved an appellant engaged in providing franchise services, which became taxable from 1.7.2003. The appellant was not registered with the service tax authorities and had not paid the service tax for the period 1.7.2003 to 30.6.2005. The dispute arose from the Revenue's contention that the arrangement between the appellant and educational institutes constituted a franchise agreement, making the franchise fee liable for service tax. The appellant challenged this classification, arguing that certain components of the definition of franchise service under Section 65(47) were not fulfilled. The tribunal analyzed the agreement and determined that the appellant's service qualified as a franchise service as per the definition provided in the Finance Act. The tribunal found that all four components of the definition were met, including the grant of representational rights, provision of business operation concepts, payment of fees, and an obligation not to engage in providing similar services. The tribunal rejected the appellant's reliance on certain judgments related to income tax law, emphasizing that service tax law did not provide exemptions for franchise services related to educational activities. The tribunal upheld the demand for service tax, concluding that the penalties imposed were justified due to the nature of the service and the lack of ambiguity regarding its classification.

Issue 2: Applicability of penalties under Section 76, 77, and 78 of the Finance Act:
The appellant contested the penalties imposed under Section 76, 77, and 78, arguing that there was no malicious intent on their part. However, the tribunal upheld the penalties, stating that given the clear classification of the service as franchise service and the absence of ambiguity, the penalties were justified. The tribunal emphasized that the appellant had no reason to interpret the nature of the service differently, leading to the affirmation of the penalties imposed by the lower authority. Consequently, the tribunal dismissed the appeal and upheld the impugned order, including the demand for service tax and the penalties under Section 76, 77, and 78 of the Finance Act.

This comprehensive analysis of the judgment highlights the key issues, arguments presented by both parties, the tribunal's evaluation of the agreement, and the ultimate decision regarding the classification of the service as franchise service and the imposition of penalties under the Finance Act.