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TMI Blog2015 (10) TMI 2412X X X X Extracts X X X X X X X X Extracts X X X X ..... e between the amount realised on account of sales of the products to its customers and the purchase price actually paid by the appellant to these manufacturing units which manufactured the goods. The adjudicating authority held that this difference reflected the value of the franchise service and confirmed the demand of Rs. 4,65,42,505/- under franchise service along with interest and penalties. 3. The appellant has contended that: (a) The agreements with various manufacturing units to manufacture the said products on its behalf as per the specifications, designs and quality as directed by it were entered into several years before franchise service became taxable and that while the word franchise or franchisee have been used in the agreement, in substance it is not a franchise agreement and there was no franchise fee prescribed therein, (b) As per the agreement it gave orders for manufacture (and supply) of firebricks to these manufacturing units which manufactured firebricks as per the specification, design, quality directed by it and consigned them to its customers as per its directions, (c) The firebricks were manufactured as ordered by it and were consigned to the custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and these manufacturers were not allowed to consign these goods to any other person except to those they were directed by it to consign them to. (j) The manufacturers were selling the manufactured goods to the appellant for which the manufacturers raised invoices on the appellant. In the said invoices, the appellant was shown as buyer and the customer of the appellant whom the goods were ultimately sold by it was shown as consignee. Thus it was sale of the goods by the manufacturers to the appellant for which payment of sale proceed was made by the appellant to the manufacturers. The appellant thereafter raised sale bills on its buyer-customers to whom the goods were consigned and it received payment directly from the customers. In these transactions, there was neither any payment on account of any franchise fees nor of any commission. Whenever manufacturers cleared the goods consigned to its customers, they customers, it paid excise duty on full value of the goods which included the trading profit of the appellant. Once excise duty was paid on this amount, no service tax could be levied on the same amount. (k) The difference between the amount charged by the manufacturers f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting technique or training and standards of quality control except passing on the ownership of all know-how to franchisee; (iii) The franchisee is required to pay to the franchisor, directly to indirectly, a fee; and (iv) The franchisee is under an obligation not to engage in selling or providing similar goods or services for process, identified with any other person." The finance Act 2005 has substituted the following definition for expression "franchise" w.e.f. 16.6.2005. "Franchise" means an agreement by which franchisee is granted representational right to sell for manufacture, good or to provide service or undertake any process identified with franchisor, whether or not a trademark, service mark, trade name or logo or any such of symbol, as the case may be, is involved." A careful perusal of the aforesaid definitions makes it clear that one of the non-derogable conditions to cover any agreement under the scope of franchise is that the franchisee is granted representational right to sell or manufacture goods identified with franchisor. 6. We have perused the representative agreement under which the appellant got the goods manufactured from various manufacturers. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomers directly. Such amount shall be collected by Party No.2 from party no.1 on production of the dispatch Advice-cum-Invoice-cum-Gate Pass along with a credit note issued in favour of Party No.1 representing the incremental cost to be reimbursed to Party No.1 on account opportunity cost. (e) That the party no.1, on receipt of the documents mentioned in clause (d) shall deduct the amount of incremental cost as per the credit note and shall pay the balance amount to party no.2 (f) That the party no.1 shall have an absolute right in their discretion to terminate this agreement at any time without assigning any reason and the party no.2 shall have no legal right to dispute/challenge such right and authority of Party no.1. (g) That in the event of termination of this agreement, the franchisee rights shall automatically stand terminated. (h) That in the event of termination of this agreement including the right of franchisee, the party no.2 shall have no legal right to sell the product to anyone else but the remaining stock of goods with party no.2 shall be disposed off on the directions of party no.1 at such rate which shall be decided by party no.1. In case of any dis-agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this exception are in some respects unclear. But this is not the occasion on which to explore them. (iv) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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. xxxxxx 8. It is evident from the agreement reproduced earlier that: (i) The manufacturers did not have any right to manufacture the goods identified with the appellant except in compliance of the purchase orders of the appellant, (ii) They also did not have any right to sell those goods to any person except the appellant or even consign those goods to any person except the customers of the appellant and in accordance with the directions of the appellant. (iii) No payment from the consignees came to the manufacturers. The payment by the consignees was made to the appellant. (iv) The manufacturers did not pay any amount to the appellant; on the other hand, it was the appellant which paid to the manufacturers for manufacturing those goods as per its pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any right to sell these goods directly to any customer in the market. The goods were manufactured and consigned by these manufacturers as per the purchase orders placed by the appellant in which it indicated the name of the consignee but there was no direct contact between the manufacturers and the consignee either with regard to placing of orders or with regard to payment for the goods. The payment for the goods by the consignee- customers was made to the appellant and appellant, in effect, paid to the manufacturers the amount agreed upon for manufacturing those goods. It was only a financial mechanism that because the manufacturer's invoices raised on the appellant showed the value of the goods at which the appellant sold the goods to the customers so as to pay due excise duty and sales tax thereon but as the manufacturer was entitled to receive only the amount agreed upon between the appellant and the manufacturer for manufacture of goods the manufacturer also issued a credit note of an amount which represented the difference between the value of the invoice and the amount which the manufacturer was entitled to receive for manufacturing those goods as a result of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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