2020 (1) TMI 274 - AT - Service Tax

Franchise Service - principal-agent relationship - relationship between the Appellant and the agents who are collecting money as against a bill of Bill issuer (public utility services) from the customers on behalf of Appellants, who is actually engaged in providing such Bill collection services to such customers - taxability of Franchisee fees - onetime fee/security deposit collected by the Appellant from the said agents. HELD THAT - Perusal of the agreement shows that the agreement is titled as Retail Agent Agreement which has been executed by the Appellant with an intention to provide an efficient and easily assessable payment collection services for the bill issuers (as defined in the agreement itself) for the collection of the payments from the customers ( who are also defined in the agreement itself), who wish to settle their Bills from the Bill issuer over the country. All such persons who wish to become the part of the company's network of retail agents through which the company shall provide such payment collection services may be appointed as the agent of the company. This objective in itself is sufficient for us, when looked into in relation to the definition of franchise service and the meaning of representational right as discussed above, to hold that the agreement is to appoint someone who may undertake to collect the impugned bills payment not absolutely on his own but who undertake to collect the same on behalf of the Appellant. Mere use of word principle to principle basis cannot be read for the impugned arrangement between appellant and his agents to be called as franchise service - Perusal of the terms of the agreement give us a clarity to hold that the payment of ₹ 15000/- is not at all the consideration towards the purchase of Representational Rights by the agent from the Appellant. Contrary thereto the arrangement herein is that payment to be made by the Appellant to the agent per Bill basis. This particular term of agreement is absolutely against the intent of what can be called as franchise service. The adjudicating authority below have committed an error while giving interpretation to the word 'franchise service'. The authorities have failed to observe the actual intent of the agreement involved - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the relationship between the appellant and the agents amounts to providing Franchise Service.
2. Whether the onetime fee/security deposit collected by the appellant from the agents is taxable under Section 65(105)(zze) of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Relationship Between Appellant and Agents:

The primary issue revolves around whether the relationship between the appellant and the agents, who collect money on behalf of the bill issuer, qualifies as a Franchise Service under the Finance Act, 1994. The appellant argued that the Retail Agent Agreement appoints agents, not franchisees, as no representational right is granted to the agents. Section 9.2 of Article 9 explicitly restricts agents from making representations or incurring liabilities on behalf of the company. The defense emphasized that without representational rights, the activity does not constitute a Franchise Service.

The Department rebutted by stating that the agreement fulfills the four essential features of a franchise: representational right, business operation concepts, fee payment, and exclusivity. They argued that the appellant’s documents indicate the presence of these elements, thus supporting the adjudicating authority's decision.

Upon examination, the Tribunal referred to the definition of Franchise Service as per Section 65(47) of the Finance Act: "an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service identified with the franchisor." The Tribunal noted that the franchisee must represent the franchisor in a way that the franchisee loses its individual identity.

The Tribunal concluded that the agreement titled "Retail Agent Agreement" aims to appoint agents for bill collection on behalf of the appellant, not to grant representational rights. The agreement’s objective and specific terms, such as the payment of service fees per transaction and the returnable security deposit, indicate an agency relationship rather than a franchise. Thus, the relationship does not amount to providing Franchise Service.

2. Onetime Fee/Security Deposit:

The second issue concerns whether the onetime fee/security deposit collected by the appellant from agents is taxable as a Franchisee fee under Section 65(105)(zze). The appellant contended that the fee is an indemnity amount, not a franchise fee, and is refundable upon termination of the agreement.

The Department argued that the fee constitutes a franchise fee as per the agreement’s terms, which include training provisions and intellectual property protection.

The Tribunal analyzed the agreement’s terms, particularly Sections 4.1, 4.2, and 9.1, and found that the payment structure and the refundable nature of the security deposit do not align with the concept of a franchise fee. The agreement’s terms indicate that the fee is not for representational rights but for indemnity purposes.

Conclusion:

The Tribunal held that the adjudicating authority erred in interpreting the agreement as a Franchise Service. The agreement’s objective and terms do not support the conclusion that the relationship between the appellant and the agents constitutes a Franchise Service. Consequently, the orders under challenge were set aside, and the appeals were allowed.

Pronouncement:

The judgment was pronounced in the Open Court on 07.01.2020.