2020 (7) TMI 356 - AT - Service Tax

Franchise Service - agreement with the Government of Andhra Pradesh according to which they had to construct a bridge across Gowtami branch of river Godavari between Yanam Yedurulanka (Y-Y Bridge) on Build-Operate-Transfer (BOT) basis - whether exempt from service tax under works contract? - Time Limitation - HELD THAT - The appellant was to provide services to the consumers in the form of maintaining the bridge and allowing its use for which they were entitled to collect remuneration in the form of toll fee. The toll fee, evidently was to be collected in the name of the appellant because they were entitled to collect it as per the agreement with the Government of Andhra Pradesh. This was the business model of the appellant as far as this project is concerned. The appellant had given this right to GTBPL who was rendering all the services which the appellant was required to render and was collecting fees which the appellant was entitled to collect. The receipts were also issued in the name of the appellant themselves. This changed only when the investigations had begun. Until these investigations had begun, every user of that bridge was given the impression that the appellant was rendering service and he was paying a fee for it - as far as both the Government of Andhra Pradesh and the users are concerned, the service which GTBPL was rendering was being rendered by the appellant and the fee which they were collecting was being collected by the appellant. This is akin to McDonald s restaurant being run in a town by a franchisee. The consumer sees it as McDonald s restaurant although it is actually being operated by the franchisee - the appellant has provided franchisee service to GTBPL and had collected an amount towards it. What is important is that the amount must be paid and that amount must be a consideration for the service rendered. In this case both the franchisee taking over the liability of debt of the franchisor and paying an amount by way of shares has been quantified in terms of money and that is how the SCN has computed the demand. There is no doubt that the entire amount has been paid only for consideration of this service. There is no other arrangement in this case. Therefore, the case is against the appellant on merits. Time Limitation - penalty - HELD THAT - Linitation can be invoked if there is fraud or collusion or wilful misstatement or suppression of facts or violation of Act or Rules with intent to evade payment of service tax - In this case, nothing was disclosed to the Revenue by the appellant either in their ST3 returns or by way of letters or intimation to the department. In fact, the agreement was entered into privately between the appellant and the franchisee GTBPL through Board resolutions - there are sufficient grounds to invoke extended period of limitation in this case - penalty u/s 78 is also invoked. The appeal is remanded to the original authority for the limited purpose of computation of the service tax taking the amounts received as cum-tax values and corresponding changes in the interest and amount of penalty - appeal allowed by way of remand.

Issues Involved:
1. Classification of service provided by the appellant to GTBPL as franchise service under section 65(105)(zze) of the Finance Act, 1994.
2. Demand for service tax and Education Cess along with interest and penalties.
3. Validity of invoking the extended period of limitation.
4. Determination of cum-tax value for the computation of service tax.

Detailed Analysis:

Issue 1: Classification of Service as Franchise Service
The appellant, a Multi-disciplinary Engineering & Construction firm, entered into an agreement with the Government of Andhra Pradesh to construct and maintain a bridge on a Build-Operate-Transfer (BOT) basis. The appellant was prohibited from assigning their rights under the agreement to any party other than financial institutions. Despite this, the appellant formed a 100% subsidiary, GTBPL, and transferred the rights to collect toll and maintain the bridge to GTBPL for a consideration. The Revenue contended that this arrangement fell under the definition of "franchise service" as per section 65(105)(zze) of the Finance Act, 1994. The appellant argued that there was no franchisor-franchisee relationship and that GTBPL was their associate, not a franchisee. However, the tribunal found that the appellant had provided franchise service to GTBPL as GTBPL was rendering services in the name of the appellant and collecting toll fees, which falls under the definition of franchise service.

Issue 2: Demand for Service Tax and Education Cess
The Commissioner confirmed the demand of service tax amounting to ?12,50,00,000/- and Education Cess of ?25,00,000/- along with interest under section 75 of the Finance Act, 1994. The appellant argued that the consideration received for the construction of bridges is exempted from service tax under the taxable category of works contract and that the right to collect toll is not a representational right. The tribunal, however, upheld the demand, stating that the appellant had indeed received consideration for providing franchise service.

Issue 3: Validity of Invoking the Extended Period of Limitation
The appellant contended that the demand was time-barred and that there was no evidence of fraud, collusion, wilful misstatement, or suppression of facts. The tribunal found that the arrangement between the appellant and GTBPL was not disclosed to the Revenue and was done through internal Board resolutions. The tribunal held that the extended period of limitation was rightly invoked due to the suppression of facts and intent to evade payment of service tax.

Issue 4: Determination of Cum-Tax Value
The appellant argued that if the case is decided against them on merits, the value of the service should be taken as cum-tax value. The tribunal agreed with this argument and remanded the matter back to the original authority for the limited purpose of computing the service tax, taking the amounts received as cum-tax value and making corresponding changes in the interest and penalty amounts.

Conclusion:
The appeal was disposed of with the following directions:
a) The demand of service tax invoking the extended period of limitation along with interest was upheld.
b) The service tax must be computed taking the amounts received as cum-tax value.
c) The imposition of penalty under section 78 was upheld.
d) The matter was remanded to the original authority for the limited purpose of computation of the service tax, taking the amounts received as cum-tax values and corresponding changes in the interest and penalty amounts.

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