2020 (8) TMI 79 - AT - Service Tax

Levy of service tax - Franchisee Service - Representational right - receiving and distribution of communication signals. - Sharing of 20% revenue to Siti Cable - amendment made in the definition of franchise under section 65(47) of the Finance Act with effect from June 16, 2005 - amendment is for the reason that has persuaded the Principal Commissioner to drop the demand of service tax for the period from July 1, 2003 up to June 16, 2005 - extended period of limitation. Whether the service contemplated under the agreements is a franchise service as contended by the Department or a service in the nature of supply of tangible goods for use w.e.f. May 16, 2008, as contended by Siti Cable? HELD THAT - Franchise service has been defined under section 65(47) of the Finance Act to mean an agreement by which the franchisee is granted a representational right to provide service or undertake any process identified with the franchisor, whether or not a trademark, service mark, trade name or logo or such symbol, as the case may be, is involved - what is important to note is that the party should be granted a representational right to provide service or undertake any process identified with the franchisor. In other words, if the condition relating to representational right is not satisfied, there can be no franchise service. Representational right means a right that is available with the franchisee to represent the franchisor and in that case the franchisee loses its individual identity and is known only by the identity of the franchisor . It is not possible to hold that the service contemplated under the agreement is a franchise service. - Demand with interest and penalty set aside.

Issues Involved:
1. Classification of services provided by Siti Cable as "franchise" service.
2. Applicability of service tax under the amended definition of "franchise".
3. Imposition of interest under section 75 and penalties under sections 76 and 78 of the Finance Act.
4. Validity of invoking the extended period for issuing the show cause notice.

Detailed Analysis:

1. Classification of Services Provided by Siti Cable:
The core issue was whether the services provided by Siti Cable to cable operators fell under the "franchise" service category. The Appellate Tribunal analyzed the agreements between Siti Cable and the cable operators, noting that Siti Cable provided equipment and network access for a fee. The agreements did not explicitly or implicitly grant representational rights to the cable operators, which is a crucial element for a service to be classified as a "franchise". The Tribunal emphasized that representational rights mean the franchisee should represent the franchisor to the extent that the franchisee loses its individual identity and is known by the identity of the franchisor.

2. Applicability of Service Tax Under Amended Definition:
The definition of "franchise" was amended on June 16, 2005, removing several conditions that were previously required. The Principal Commissioner had dropped the demand for service tax for the period before the amendment, as the agreement did not satisfy all the conditions of the unamended definition. However, for the period after the amendment, the Principal Commissioner held that the services rendered by Siti Cable fell under the amended definition of "franchise" as the cable operators used Siti Cable's logo, giving the impression that the services were provided by Siti Cable.

3. Imposition of Interest and Penalties:
The Principal Commissioner confirmed the demand for service tax for the period from June 16, 2005, to March 31, 2008, along with interest under section 75 and penalty under section 76 of the Finance Act. However, the penalty under section 78 was not imposed due to the pre-amended definition and the fact that the department did not raise any demand under this category for the period post-March 31, 2008, when Siti Cable was discharging service tax liability under "supply of tangible goods".

4. Validity of Invoking Extended Period:
The Tribunal did not delve deeply into the validity of invoking the extended period for issuing the show cause notice, as the primary focus was on whether the services provided by Siti Cable could be classified as "franchise" services under the amended definition.

Conclusion:
The Tribunal concluded that the services provided by Siti Cable did not constitute "franchise" services as the agreements did not grant representational rights to the cable operators. Consequently, the confirmation of demand for service tax, interest, and penalty under sections 75 and 76 for the period from June 16, 2005, to March 31, 2008, was set aside. The appeal filed by Siti Cable was allowed, and the appeal filed by the Department for imposition of penalty under section 78 was dismissed. The cross-objections filed by Siti Cable were decided in terms of the decision rendered in their appeal.

← Previous Next →