9911796707
TMI Blog2013 (8) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... .2009, passed pursuant to the SCN served on 4-11-2008 on the assessee covering the period 01.04.2007 to 31.03.2008; and Appeal No. 1356 of 2010 is against the order dated 30.06.2010, passed on the basis of the SCN dated 05-10-2009 (and a corrigendum dated 21.01.2010, demanding the demand of service tax due), covering the period 01.04.2008 to 31.03.2009. Service Tax liability of Rs. 59,38,111/-; Rs. 1,19,27,736/-; Rs. 54,89,959/-; and Rs. 63,66,118/- apart from interest and penalties as specified in the respective orders of adjudication were assessed for the periods 1-7-2003 to 31-03-2005; 1-4-2005 to 31-3-2007; 1-4-2007 to 31-3-2008; and 1-4-2008 to 31-3-2009, which are the subject matter of the respective appeals. Shri P. K. Sahu, the learned counsel for the appellant contends that the impugned orders are unsustainable since the adjudicating authority erred in concluding that the assessee had received amounts under transactions (covered by several agreements with distinct institutions), constituting the taxable service of Franchise. According to the appellant the impugned orders are invalid and unsustainable on a plurality of grounds, summarized hereunder: (a) the transaction(s) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -9-2008 (in respect of the adjudication orders impugned in the three appeals referred to earlier herein). 3. Before we proceed to advert to the competing contentions addressed before us on behalf of the assessee and by the learned DR, Shri Amaresh Jain on behalf of Revenue; appraise the vitality of reasons recorded by the adjudicating authority; consider the terms and conditions of the agreements leading to the transactions in issue; and analyze the precedents cited at the Bar, we consider it appropriate to set out relevant provisions of the Act and of the agreements, which have a bearing on determination of the appeals. Relevant provisions of the Act: (a) Sec. 65(47) defined Franchise (upto 15-6-2005) as meaning an agreement by which: i) Franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with the Franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved; ii) The Franchisor provides concepts of business operation to the franchisee, including know-how, method of operation, managerial expertise, marketing technique or training and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Act, 2012) enacts interpretations of certain expressions occurring in Chapter V of the Act. Sub-section (44) enjoins that the expression service shall mean any activity carried out by a person for another for consideration, and includes a declared service. Activities which however do not constitute service as above defined are also enumerated in the provision; the exclusions are however not relevant for our analysis. Shri. Sahu, the learned counsel for the assessee has fairly stated that this interpretation of the expression service could fairly be adopted as indicative of the purport of the said expression, prior to 1-6-2012, as well. 4. Salient clauses of the agreement between the assessee and the Franchisee: The assessee entered into agreements with distinct entities which intended to establish schools in different areas (within India and overseas as well) in collaboration with the assessee. The assessee apparently has experience in establishing and managing schools that provide quality education and has a brand image in the said area. We are informed by learned counsel for the assessee; and this assertion is not disputed by Revenue, that the several agreements, insofar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrol and running of the school; all rights in relation to the school (save as excepted); the liabilities in relation to the BOM or the school shall however be to the account of the Society (not the assessee or the BOM); and the BOM is obligated to fulfill the assessee's (DPSS) policies. Apart from (specified) academic responsibility, the BOM is entrusted the duty to appoint the Principal, teachers and staff of the school, to be selected by a selection committee constituted by the assessee which shall comprise one member of the Society. The Clause sets out other powers and functions of the BOM which are of a house-keeping nature and incidental to management. vi) Clause 7. enumerates the obligations of the Society under the agreement. The Society (not the assessee) has extensive and exclusive obligations, in respect of providing land, buildings, all infrastructural amenities for the school including residential accommodation for the Principal, teachers and staff; and the entire financial responsibility towards these provisions. The Society is also responsible for meeting the deficit in the revenue budgeted expenditure, to raise loans for all establishment and running expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee; and on dissolution, the Society shall be exclusively liable for all claims against the school, its BoM or the assessee in respect of the management thereof; and the assessee will not in any manner be liable. Clause 13. stipulates that on termination of the agreement, the Society will not use the name/logo/motto of DPS or identical/similar or deceptively similar name/logo/motto, even if it desires to run a school in the same premises or elsewhere. Analyses of the impugned adjudication orders: As earlier noticed, there are four adjudication orders. The challenge in the appeals before us is to the normative bases, interpretation of the agreements and of the statutory provisions, leading to the assessments. It is the demonstrable position that the several adjudication orders have employed a substantially identical raft of reasons and process of interpretation of the relevant material to determine the liability of the assessee to service tax, interest and penalties. We therefore treat the adjudication order dated 30-03-2006 (assailed in Appeal No. 248 of 2006) as a representative order, for analyses. 5. Analyses of O-I-O No. 11/ RK/2006, dated 30.03.2006: Events precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bonafide belief that no service tax was payable; that its activities were within the knowledge of Revenue; and therefore there was no justification for invoking the extended period of limitation nor for levy of penalty. (iii) After considering the material on record including the written submissions and contentions urged on behalf of the assessee, the adjudication order was passed on 30.03.2006. 6. Analyses of the conclusions in the adjudication order:- (a) Para 4 dealt with the assessees claim that it did not provide the taxable franchise service, defined in Section 65 (47) of the Act. The order noticed that Section 65 (47) required fulfilment of four ingredients to constitute franchise service and proceeded to consider whether the four ingredients were fulfilled. In para 4.4.1, the order concluded that since the assessee permitted the franchisee trust to use its logo (DPS) to provide the educational service and undertake the educational process identified with it, the first ingredient is fulfilled. (b) Para 5 of the order considered whether the second ingredient is fulfilled and concluded that since the assessee provides managerial expertise, concept of business operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtended period. The adjudication authority held that the contravention by the assessee was deliberate and calculated to evade service tax; that Revenue was unaware of the existence of the agreements, information regarding other entities, terms and conditions; and particulars and duration of payments and services; and the relevant information was revealed only pursuant to constant correspondence with the assessee, including after issue of summons. The adjudicating authority also held that since the assessee had failed to disclose material facts to Revenue and to obtain registration and pay service tax, even after being informed of its liability, there is intent to evade payment of service tax. The adjudicating authority further observed that Revenue initially had no knowledge of the entire activities of the assessee and discovered the relevant and total nature of its operations only after responses received pursuant to several letters addressed and summons issued. (h) Part 'E' of the adjudication order records conclusions as regards computation of the gross amount charged under Section 67 of the Act i.e. inclusive of service tax component. This aspect is not in issue in any of thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided to any person by the holder of intellectual property right, in relation to intellectual property service was introduced vide Section 65(105)(zzr). Intellectual property service is defined in Section 65(55)(b) and intellectual property right in Section 65(55)(a). Since the brand name (DPS), its logo and motto apart from its concept of business operations, managerial expertise etc. are provided to the trusts/ societies to run educational institutions, the service provided by the assessee would appropriately be comprised within the newly introduced (w.e.f. 19.09.2004) taxable service in relation to intellectual property service. Whether, in the circumstances the activities of the assessee always constituted IPS and therefore outside the ambit of franchise service, even prior to 10.09.2004; and the assessments cannot also be justified as IPS after 10.09.2004 as well, since the assessee was never put on notice that Revenue proposes to assess under IPS; E) Whether the adjudication orders, invoking the extended period of limitation, to the extent the extended period was invoked, are unsustainable; F) Whether imposition of penalty is unsustainable since the failure of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the library; laboratories; facility in relation to sport activities; adequate transport and other infrastructure, including for expansion; residential accommodation for faculty and other staff or for payment of HRA in lieu of accommodation; medical allowances; and a general obligation to make available the entirety of the requisite funds for administration of the enterprise including capital and other expenses. Clause 7 (q) indemnifies the assessee from the consequences of any litigation arising from or out of the agreement and all expenditure in this behalf is the obligation of the other party. Clause 8 sets out the obligations of the assessee. These pertain to maintenance of standards of academic excellence; carrying out academic and other activities related or incidental to imparting of quality education; to provide expertise, knowhow and educational tools and material to ensure academic and other standards; to supervise evaluate and monitor academic and other activities of the school; periodically to depute visiting teams, though the travel and incidental expenditure is to be borne by the other party; to allow and promote use of the name (DPS), the motto/ logo, for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which had organised the festival, relating to Indo-German Relations. The festival committee entrusted organisation of the event to the appellant company. Upholding the claim of the assessee/ appellant, this Tribunal concluded that since the appellant was a member of the committee which organised the festival there was no client -service provider relationship warranting levy of service tax. These decisions would be relevant only if the agreements pursuant to which the assessee herein provided service to the other party under the agreements, are in truth and reality Joint Venture agreements. 11. Two other decisions, one of the Supreme court and the other of the Chancery Division were also cited on behalf of the assessee. In Sultan Bros. (P) Ltd. vs. CIT, Bombay City II AIR.1964.SC1389., the appellant company leased out a building owned by it duly fitted with furniture and fixtures. The lease agreement provided separately for a specified monthly rent for the building and for hire charges for furniture and fixtures. The question was how the income received as rent and hire are to be assessed i.e. under which Section of the Income Tax Act, 1922. According to the appellant the entire in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for use by ladies self-employed (masseuses) awaiting customers, a changing room for the ladies, a shower room and a sitting area for customers awaiting service, etc. On the first floor there were four rooms for masseuses to entertain their customs apart from a toilet and an additional room for use by the masseuses. The appellant entered into a written contract with the ladies to offer massage services; providing separately for rent of the room; including use of laundry facilities, during stipulated hours. Appellant was brought to tax under the relevant sales tax (VAT) provisions of U.K. The relevant provision of the Act of 1944 incorporated an exemption from VAT for leasing or letting of immovable properties. The issue before the Chancery Division was how these bundled services (including leasing and letting of immovable property) should be categorised in the context of the applicable legislation. Dismissing the appeal it was held that the resulting single supply must be categorised as a complex of elements comprising the provision of the license and various appurtenant services; that the overarching single supply is not to be treated as a supply of a license to occupy land; that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that since the agreement between himself and the land owner was designated as a collaboration agreement and was therefore in the nature of a Joint Venture, there could be no deficiency of service and the land owner could not prefer a consumer complaint in relation to any shortfall in the builder delivering upon its obligations under such an agreement. The Supreme Court reiterated the settled principle that the title, caption or the nomenclature of an instrument/ document is not determinative of the nature and the character of the instrument; though the name may usually provide some indication of the nature, the nature and true character of a document must be determined with reference to the terms of the document, which express the intention of the parties. The use of the words Joint Venture or collaboration in the title of an agreement or even in the body of the agreement will not make the transaction a joint venture, if there are no provisions for shared control of interest or enterprise or shared liability for losses, pointed out the Court. The agreement between the builder and the landlord was considered by the Supreme Court to be a hybrid agreement for construction for cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich contractual documents are presently considered, as under: (i) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (ii) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the documents would have been understood by a reasonable man. (iii) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent this rule is not implemented, the courts must incur the criticism of failing to give effect to the reasonable expectations of the parties. Surely the parties are reasonably entitled to expect that the courts will strive to ascertain their true intention or, certainly, not to arrive at a meaning of their contract which is at variance with their actual intention. They cannot expect that the judicial exercise of constructing their contract will be buried under a stockpile of excessive formalism. Lewison Kim Levison - The Interpretation of Contracts, Sweet and Maxwell, (1989)., refers to a lucid summary of the relevant principles set out in the judgment of Saville, J in Vitol B.V. v. Compagnie Europeene des Petroles (1988). 1.Lloyd's Rep.574 : The approach of the English law to questions of the true construction of contracts of this kind is to seek objectively to ascertain the intentions of the parties from the words which they have chosen to use. If those words are clear and admit of only one sensible meaning, then that is the meaning to be ascribed to them and that meaning is taken to represent what the parties intended. If the words are not so clear and admit of more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... New Horizons Limited, reiterated in Faqir Chand Gulati, we are required to conclude that an agreement such as one in the present case which places the entire financial burden of establishing and maintaining the school, including the liability to fund the entire capital and non capital expenditure; under writing the entire financial liability; liability arising out of any litigation; and obligating further that all available and remaining assets on determination of the agreement would revert to the other party alone, would not tantamount to a joint venture arrangement, regardless of the description of the arrangement as a joint venture or a collaborative arrangement. The fact that the other party is required to pay a specified amount to the assessee clearly and compellingly indicates that the assessee is remunerated for services provided to the other party to the agreement. Clearly therefore there is a service provided by the assessee to another, for consideration. There is no element of service to the assessee itself. Issue 'A' is accordingly answered against the assessee. We hold that the assessee provides service, not to itself but to the other parties to the agreements. Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l right to provide services by way of imparting of education through the school to be established, representing the name (DPS), the motto and the logo of the assessee, the holder of the brand associated therewith. Further the assessee provides its established concepts of imparting education; its managerial expertise and operational techniques and standards of imparting education to the other party to the agreements. On this view of the matter the first and second ingredients of 'franchise' are also fulfilled. The fourth ingredient enjoins that the franchisee should be under an obligation not to engage in providing services or processes, identified with any other person. This ingredient indicates that the other party to the agreements should be obligated not to establish or administer an English Medium School identified with any other person. In clause 8 (h) [of the representative agreement considered for analysis], we have noticed that rights in the name/ motto/ logo are stipulated to be the absolute property of the assessee and the use of these is prohibited to the other party for establishing branches or granting sub licenses. Clause 7 (p) and (r) clearly stipulate that amongst t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee argues that w.e.f. 10.09.2004 the agreements, on a true and fair construction of their terms, constitute the taxable service falling under Section 65(105)(zzr) and therefore subsequent to 10.09.2004 the assessee could not have been assessed to service tax for having provided franchise service. The assessee cannot also be assessed to service tax for having provided the taxable IPS, since even from the show cause notice stage and thereafter as well, the assessee was never put on notice that it would be assessed to tax as the provider of IPS. In this connection, Shri Sahu referred to a Board circular dated 27.10.2008 which is a clarification of service tax liability in relation to production of alcoholic beverages under a brand licensing arrangement. Para 2.1 of the circular clarifies that wherever licensee/ manufacturers alcoholic beverages under the authority to use a brand name granted by the owner of such brand name the brand owner; and even where the brand owner provides technical staff/ assistance to maintain the required quality, alcoholic beverages so manufactured on the user of such brand name and technical know-how would come within the taxable IPS, even where the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of ST Appeal No.248/20006), the adjudicating authority analysed the claim of the assessee that it was not expected to have a mere passive role, of receiving money for allowing the franchisee to exploit its goodwill and had in fact a dominant role in running the school's and anybody having a dominant role is the master of the situation and has a definitive role in managing the organisation by applying its know-how and expertise in running the schools and therefore the assessee cannot be said to have fulfilled the second ingredient of the definition of franchise (prior to 16.6.2005). In our analysis, the adjudicating authority in the abovementioned paragraphs while setting out the contentions of the assessee concluded nevertheless that the second ingredient of franchise is also fulfilled. The adjudicating authority concluded that in order to internalise the know-how expertise etc. of the assessee into the enterprise (the schools), a regular engagement of the assessee with the enterprise is essential and such engagement is not inconsistent with the provision of franchise service, in so far as the second ingredient thereof is concerned. In our considered view, the extent of eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell, in a more comprehensive sense, than in the case of IPS. It may also be noticed that in accordance with the interpretive principles for classification of services set out in Section 65A of the Act, where composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a) are in issue, these are required to be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable. Considered on the touchstone of this principle, the raft of services provided by the assessee under the several agreements, in their essential character fall within franchise service. On the aforesaid analysis we hold against the assessee on issue 'C'. Since the aspects for determination set out as Issue 'D' are dovetailed into our analysis on issue 'C', answered as above, issue 'D' is also answered against the assessee and in favour of Revenue. 21. Issues 'E' and 'F': These issues can conveniently be analysed together. Issue 'E' is whether the adjudication orders, invoking the extended period of limitation, to the extent extended period was invoked, are unsustainable. Issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Superintendent (ST) did not complain that information furnished by the assessee was incomplete; he only sought information regarding subsequent periods and copies of fresh agreements if any. According to the assessee it furnished all the relevant information from time to time and repeatedly. It did so on 15.01.2004, 12.07.2004 and 11.11.2004 and on 19.04.2005 as well. The assessee reiterated that since the department had full knowledge of its activities ever since January 2004, there was no justification for invocation of the extended period of limitation. It requires to be noticed that in response to the summons dated 30.12.2003, the assessee by its letter dated 15.01.2004 had furnished copies of the operational agreements; details of amounts received pursuant to the enclosed agreements, from 01.07.2003 till the date of the letter; names of its nominees on the Boards of Management of the Schools established; and stated that no consideration was received by any of the nominated members and therefore there was no question of any such amounts being passed on to it by its nominees. By a further letter dated 12.07.2004 the assessee, responding to the notice dated 02.07.2004 furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004 and 2.12.2004. It is also not clear why another summons dated 31.1.2005 was issued to submit the requisite documents regarding registration of the assessee and details of service tax paid by it. Shri Sahu has also referred to a letter dated 29.9.2004 addressed by the Additional Commissioner (CCU) to the Commissioner (ST), Delhi with a copy marked to the C.C.E., Rohtak and Panchkula to the effect that the agreement between the assessee and MP Singh Foundation (one of the agreements) does not constitute franchise and there is no service tax liability. While nothing significant pertaining to the assessees tax liability turns upon this letter, it may be indicative of the fact that a section of the department also entertained doubts about taxability of the transactions in issue as franchise service . Suffice it to observe that since the Department had sufficient information by 15.1.2004 and at any rate by 12.7.2004, to conclude that the assessee had provided the taxable franchise service, there appears no justification for having failed to proceed with the assessment. The Department had ample powers in particular under Section 72 and other relevant provisions of the Act and of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicated ): (a) The adjudication order dated 30.3.2006 (ST Appeal No.248/2006) is barred by limitation, in so far as the period 1.7.2003 to 30.9.2004 is concerned; (b) The adjudication order dated 23.2.2009 (ST Appeal No.415/2009) is unsustainable, for invocation of the extended period of the limitation, in respect of the period 1.4.2007 to 30.9.2007; (c ) As regards the adjudication order dated 30.06.2010 (pertaining to ST Appeal No.1356 of 2010) the show cause notice dated 05.10.2009, was issued on 09.10.2009 by Commissioner, demanding service tax for 01.04.2008 to 31.03.2009. Since the ST-3 return for the period 01.04.2008 to 30.09.2008 is to be filed by 25.10.2008, the show cause notice having been issued within one year from the relevant date [vide Section 73(6)], is within the normal period of limitation. As regards the contention, that the corrigendum to the show cause notice was issued on 16.12.2009 beyond the normal limitation period and is hence time barred, we notice that by the corrigendum only arithmetic recomputation of the alleged liability was conveyed and there was no fresh attribution of fact or law against the assessee. As such the corrigendum does not substan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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