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TMI Blog2020 (7) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in the manufacture and sale of various formulations (fast moving consumer goods) and is interalia registered with the Service Tax Division, Gurgaon under "Intellectual Property Right Services, IPR Service". The Appellant entered into licensing agreements with two licensors, namely, M/s Rackitt and Colman Overseas and M/s Rackitt Benckiser, N. V. The Appellant discharged Service Tax liability on the royalty paid by the Appellant to the licensors under the category of IPR Service under reverse charge mechanism. The Appellant also paid R & D cess @5% and availed the benefit of a Notification dated 10 September, 2004 that exempts the taxable service provided by the holder of IPR to any person in relation to IPR service from so much of Service Tax which is equivalent to the amount of cess paid towards the import of technology under the provisions of section 3 of The Research and Development Cess Act, 1986. These facts were stated by the Appellant in the ST-3 returns by the Appellant during the relevant period. 3. A show cause notice dated 22 October, 2010 was, however, issued to the Appellant proposing to classify the services received by the Appellant under the category of "franch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, by the franchisor in relation to franchise. 11. To appreciate the issue involved in this Appeal, it will be appropriate at this stage to refer to the relevant terms of the agreement, because the terms of the agreement would determine whether the service received by the Appellant is "IPR service" or "franchise service". The agreement which is titled as "License Agreement" was executed on 15 September, 2005 between Reckitt Benkiser N.V. and Reckitt Benckiser (India) Limited. The relevant clauses are reproduced below:- "Whereas A. the Licensor is entitled to grant licenses to its group companies with respect to the use of the Intellectual Property Rights (as hereinafter defined); B. the Licensor has granted the Licensee the sole license with respect to the use of the Intellectual Property Rights (s) in the Territory (as hereinafter defined) for the production, sale, distribution and marketing of the products (as hereinafter defined); C. In view of the merger between the Reckitt & Colman and Benckiser Group of Companies, the Licensor is desirous of recording its licensing rights and is further desirous of obtaining royalties for the licensed use of its Intellectual Property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons set out in this Agreement. The Licensee shall be responsible as between itself and the Licensor for the observance by its sub-licensees of the obligations contained in this Agreement as if such sub-licensees were party to this Agreement. 2.6 On the (partial) termination of this Agreement, the Licensee shall immediately terminate all sub-licensees granted under the terminated (part of the) Agreement, unless the Licensor, in its absolute discretion, agrees to treat any sub-license as a continuing license subject to the whole or part of the term of such continuing license being agreed." (emphasis supplied) 14. Article 3 of the agreement deals with Intellectual Property Right and clause 3.1 is reproduced below:- "Article-3 Intellectual Property Right 3.1 The Licensee acknowledges that all right, title, interest and goodwill in the intellectual property rights is and remains vested in the Licensor and shall not impair the rights of Licensor in the Intellectual Property Rights. In the event the Licensee claims adversely to the Licensor any right, title, interest or goodwill in and to the Intellectual Property Rights or any trademarks, service marks, trade names, design an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn cost." (emphasis supplied) 16. Article 6 of the agreement deals with royalties and is as follows:- "Article - 6 Royalties 6. In consideration of the rights and Intellectual Property Rights granted by the Licensor under this Agreement, the Licensee shall pay the Licensor: (i) royalty equivalent to 5% of net sales of Product(s) in India or such other percentage as may be permitted by the laws for the time being in force in India. (ii) royalty equivalent to 8% on exports from India or such other percentage as may be permitted by the laws for the time being in force in India. Any costs either directly or indirectly paid by the Licensee for any and all costs including legal services in relation to any Intellectual Property Rights owned by an RB group entity including without limitation for advise, registry related work, litigation (both civil and criminal), counterfeit actions and raid, administrative action, may be deducted from the royalty, provided that the Licensee supplies evidence of such payments to the Licensor. The claim for the royalty shall arise at the time the Products sold leave the premises of the Licensee." 17. Another agreement was executed on 15 Sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is in relation to use of only intangible property, such a transaction would merit classification of service under IPR services, but when in addition to the use of intangible property, the transaction involves a right to sell or manufacture the goods or to provide service or undertake any process identified with franchisor, it would merit classification under "franchise service". The Commissioner found that the Appellant was engaged in manufacture and sale of products, identified with the franchisor and so the service received by the Appellant would merit classification under "franchise service". The relevant portion of the order passed by the Commissioner is reproduced below:- "To make the coverage of franchise service more comprehensive, effective from 16-6-2005, amendments have been made to define "franchise" as an agreement by which the franchisor grants representational rights to franchisee to sell or manufacture goods or provide service or undertake any process identified with the franchisor, by any symbol such as a trade mark, service mark, trade name or logo. No other condition is required to be fulfilled for levy of service tax. In view of the amended definition, Licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emand contained in the show cause notice for a period prior to 18 April, 2006. 25. The Commissioner did not examine whether the Appellant was entitled to abatement under the Notification dated 10 September, 2004 to a holder of Intellectual Property Rights. The said notification is reproduced below:- "ABATEMENT IN SERVICE TAX TO HOLDER OF INTELLECTUAL PROPERTY RIGHT NOTIFICATION NO. 17/2004-SERVICE TAX, DATED 10.09.2004. In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service provided by the holder of intellectual property right to any person, in relation to intellectual property service, from so much of the service tax leviable thereon under section 66 of the said Act, as is equivalent to the amount of cess paid towards the import of technology under the provisions of section 3 of the Research and Development Cess Act, 1986 (32 of 1986) in relation to such intellectual property service." 26. Shri B. L. Narasimhan, learned Counsel for the Appellant assisted by Ms. Krati Singh made the following subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Abrol Watches Pvt. Ltd. Vs. Collector of Customs, Bombay 1997 (92) ELT 311 (S.C.), and Commissioner of Customs, Mumbai vs. Airport Authority of India 2015 (325) ELT 823 (S.C.); and (viii) In any view of the matter, the extended period of limitation could not have been invoked in the facts and circumstances of the case, as the Appellant had submitted the Service Tax Return under the category of IPR service mentioning therein that the Appellant had availed the benefit of the notification dated 10 September, 2004. Learned Counsel pointed out that the Department had failed to substantiate that there was any intention on the part of the Appellant to evade payment of Service Tax. To substantiate this submission learned Counsel placed reliance upon a decision of the Delhi High Court in Bharat Hotels Limited vs. Commissioner, Central Excise (Adjudication) 2018 (2) TMI 23-DELHI HIGH COURT. 27. Learned Authorized Representative of the Department, has however, supported the impugned order and made the following submissions:- (i) The Commissioner committed no legality in holding that the services received by the Appellant would be classifiable as "franchise service" and not "IPR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration to franchisee, including know-how, method of operation, managerial expertise, marketing 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 or indirectly, a fee; and (iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person." 32. The amended definition of "franchisee" contains only the first condition of the definition as it stood prior to 16 June, 2005 and the other three conditions have been left out. Under the amended definition, "franchise" means an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved. Thus, if the condition relating to "representational right" is not satisfied the transaction would not be classified as a "franchisee' service. "Representational right" means that a right is available with the "fran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranting such rights. 36. In National Internet Exchange of India, the Principal Bench at Delhi, after examining the definition of "franchise", observed as follows:- "Representational right permits the person to represent himself as someone else to the external world such that the external world feels that he is procuring goods or services from the brand owner which can be termed as franchise rights. For the purpose franchise must surrender his own identity and in addition must step into the shoes of the franchisor." (emphasis supplied) 37. To examine whether the agreement of the Appellant with M/s Reckitt Benkiser N.V. and M/s Reckitt Colman Overseas would fall under the category of a "franchisee" agreement, it would be necessary to examine the relevant terms of the agreement. 38. The preamble of the agreement mentions that the licensor has granted the licensee the sole license with respect to the use of the IPR for the production, sale, distribution and marketing of the products. 39. Article 2 of the agreement also mentions that the licensor has granted the licensee the sole license with respect to use of IPR for the production, sale, distribution and marketing of the prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the brand name of the licensor is being used by the Appellant. This singular right under the agreement will not constitute any control, much less significant control over the operations of the Appellant. Therefore, also the arrangement between the Appellant and the licensors will not constitute a franchisee agreement, since the licensor does not have any significant control over the operations of the Appellant. 43. In this connection it would be pertinent to refer to the decision of the United States District Court in Englert, INC. The Court examined an agreement that was executed between the parties for the distribution of LeafGuard gutters. It allowed Seamless Gutters to sell and install LeafGuard gutters in a limited territory. The agreement provided that Seamless Gutters would purchase a LeafGuard gutter-fabricating machine from the plaintiff for $26,000, and would comply with numerous conditions including the payment of royalties for each linear foot of LeafGuard gutters produced by the gutter-fabricating machine and certain reporting and minimum sales requirements. The Court examined whether the agreement executed between the parties was 'franchise' or 'a license agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have been reproduced above. The taxable service under section 65(55)(zze) of the Act has been defined to mean any service provided or to be provided to any person by the holder of intellectual property right, in relation to intellectual property service. The agreement executed between the parties is clearly for a temporary transfer of IPR as will be seen from the Preamble and Article 2 of the Agreement. Under Article 3 of the Agreement, the licensee acknowledged that all rights, title, interest or goodwill in the IPR is and remains vested in the licensor and shall not impair the rights of the licensor in the IPR. Article 6 provides that in consideration of the rights and IPR granted by the licensor under the agreement, the licensee shall pay the licensor royalty equivalent to 5% of net sales of products in India and royalty equivalent to 8% on exports in India. It is, therefore, clear that the services have been correctly classified by the Appellant as IPR. 47. The Commissioner committed an error in holding that the service received by the Appellant would fall under 'franchisee' service. The Commissioner completely overlooked that in a franchisee agreement, what was required to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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