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TMI Blog2024 (5) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... position of requisite fee (which is to be deposited in the manner specified in Section 20 of the IGST Act read with Section 49 of the CGST and HGST Act respectively), the appeal of the Appellant is not admitted. The appeal of the Appellant, being incomplete for want of deposition of requisite fee as mandated under the GST law, deserves to be rejected. Therefore, the appeal filed by M/s. Subway Systems India Private Limited (Now Eversub India Pvt. Ltd.,) Gurugram-122002, Haryana, is not admitted. Appeal disposed of. - SH. UPENDER GUPTA, AND SH. ASHOK KUMAR MEENA, MEMBER Represented By : Sh. Abhishek A. Rastogi Sh. Pratyushprava Saha, Advocates Preamble 1. In terms of Section 102 of the Central Goods Service Tax, Act 2017/Haryana Goods Service Tax Act 2017 of the Act, in Short), this Order may be amended by the Appellate Authority, so as to rectify any error apparent on the face of the record, if such error is noticed by the Appellate Authority on its own accord, or is brought to its notice by the concerned officer, the jurisdictional officer or the Appellant within a period of six months from the date of the Order. 2. In terms of Section 103 (1) of the Act, this advance ruling pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confidential information such as recipes, formulas, food preparation procedures, business methods, policies, trade secrets, etc. The Appellant has been licensed to establish, operate and franchisee others to operate SUBWAY restaurants in India using the System. 1.4 The aforesaid license has been granted to the Appellant by way of a Master License Agreement dated October 2002 ( MLA ) by subway International B.V., Netherlands. The said MLA also authorized the Appellant to further license the System and the brand name 'Subway' to franchisees in India. The relevant extracts of the MLA are reproduced below: 1.00 The Company hereby grants to Master Licensee the right to franchise itself and others to establish and operate Sandwich Shops in the Territory, Master Licensee shall use the System and the Proprietary Marks solely in connection with the development and franchising of Sandwich Shops pursuant to this Agreement. The Company grants to Master Licensee the license to use all of the Company's rights in and to the System and the Proprietary Marks, and to license the System and the Proprietary Marks to Franchisees in the Territory. . . . . . 1.5 The Appellant has also been g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the right to use the System, the Appellant inter alia, charges; royalty calculated at a specified percentage of the gross sales made from the restaurant operated by the franchisee vide a Franchise Agreement. In the agreement, royalty has been stated to be payable by the franchisee on a periodic basis, at the rate of 8% of gross sales. 1.10 Such permissive use of IPR constituted a supply of taxable services and fell within the fold of taxability by virtue of Section 7 of the Central Goods and Services Tax Act, 2017 ( CGST Act ) read with Entry 5 (c) and Entry 5 (f) of Schedule II to the CGST Act. Relevant extract of Entry SC of Schedule Il of the CGST Act is as under: 5. Supply of services The following shall be treated as supply of services, namely: - (c) temporary transfer or permitting the use or enjoyment of any intellectual property right (f) transfer of right to use any goods for any purpose (whether or not for specified period) for sush, deferred payment or other valuable consideration. 1.11 The Appellant is liable to pay Integrate Tax ( IGST ) on import of services from SIBV, under reverse charge in terms of Section 5 (3) of the Integrated Goods and Services Tax Act ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Heading 9973 (Leasing or rental service without operator) (1) Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software 12 - Thus, the combined GST rate for the aforesaid service codes was at 12% for intra-state supply of services. 1.16 Vide Notification No. 06/2021-Integrated Tax (Rate) dated 30 September 2021 (the Amending Notification ), Government has effectuated certain changes in the Service Rate Notification. By virtue of the amending Notification, Entry 17 (i) has been omitted from the Service Rate Notification with effect from 1.10.2021. As a consequence, Entry 17 (i) ceases to exist with effect from 1 October 2021. 1.17 A tabular summary of the legal position prior to I October 2021 and the position pursuant to the amending Notification is set out below: Taxing Entry Till 30.09.2021 (Before operation of Amending Notification) Post 01.10.2021 (After operation of Amending Notification) Applicable Tax Entry 17 (i) Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate has been recommended by the GST Council vis-a-vis licensing services in respect of Quick Service Restaurants, as the Amending Notification purports. 1.20 The Appellant has therefore preferred this application to ascertain whether with effect from 1 October 2021, licensing services received by it from SIBV under the MLA and the TLA will be taxable at 18% under Entry 17 (ii) or continue to be taxable at 12% under Entry 17 (iii) of the Service Rate Notification, with effect from 1st October 2021. STATEMENT CONTAINING THE APPLICANT'S INTERPRETATION OF LAW AND/OR FACTS AS THE CASE MAY BE IN RESPECT OF THE AFORESAID QUESTION(S): The Appellant's interpretation of the law and/or facts in respect of the questions mentioned in their application is re-produced as under: Services received under codes 997336/997339 were taxable at 12% prior to October 2021 1.21 From 01.07.2017 till 30.09.2021 Tax rate covering royalty payments in respect of licensing of Intellectual Property Rights ( IPR ) was determinable at 12% under Entry 17 (i) of the Service Rate Notification which covers temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property ( IP ) in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license or permission is a very limited right and subject to various conditions and restrictions. 1.28 As per the MLA and TLA, the Appellant enjoys only the right to sub-license the System and the 'SUBWAY@ trademark to franchisees in the territory for limited permissive use to operate respective sandwich restaurants. It is well-settled that a person cannot transfer a better title than he himself has (as enshrined in the Latin maxim nemo dat quod non habet). Accordingly, the question of the Appellant transferring such right to use to franchisees does not arise. 1.29 The Bombay High Court, in the Appellant's own case examined franchise agreements of the Appellant [ Subway Systems India Private Limited v Union of India Ors, 2016 (8) TMI 717-Bombay HC]. The Hon'ble Bombay High Court has held that the franchisee Agreement entered into by the Appellant merely granted permissive use of defined intangible rights to the franchisees. The relevant extracts of the judgment are reproduced below:- 69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 17 May 2017 in McDonalds India Private Limited v. Commissioner of Trade and Taxes, New Delhi, 2017 (5) TMI 999 - Delhi HC, which had held that the franchisee agreements entered into by the petitioners therein permitted a limited right to use the system of the petitioners to the franchisees and the intention therein was not to transfer the right to use goods. 1.31 The relevant extracts of the judgment delivered by the Delhi High Court in Subway Systems (supra) are reproduced below: This Court is of the opinion that it would be appropriate to follow the judgment of 17.05.2017 because the issues are identical, however, In the event the final judgment is in any way set aside, modified or clarified by the Supreme Court in the pending proceedings before it, that decision will be binding upon the parties... It is pointed out on behalf of the petitioner that similar judgment was delivered by the Bombay High Court [Subway Systems India Private Limited vs. State of Maharashtra, W.P. No. 497/2015 decided 11.08.2016. Writ petition is accordingly disposed of in terms of the judgment dated 17.05.2017 in Writ Petition (C) No. 4453/2013 and Writ Petition (C) No. 3404/2015. 1.32 The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Applicant is essentially a license since it involves a mere permission to use of defined intellectual property rights. Similarly, the Delhi High Court, by following the decision in McDonalds India (supra) and recording an observation that the facts in the Appellant's case were identical, has held that the relevant agreements merely involved grant of a nonexclusive conditional right to use the system and no transfer of right to use goods had taken place. The Franchise Agreement between the Appellant and the SIBV is nothing but a result of assignment of right to sub-license IPR received by the Appellant from SIBV through the MLA and TLA. Services received under codes 997336/997339 should continue to be taxable at 12% under Entry 17 (iii) of the Service Rate Notification read with Entry 243 of the Goods Rate Notification with effect from I October 2021. 1.34. Entry No. 17 (iii) of the Service Rate Notification read with Entry 243 of the Goods Rate Notification, is the only specific entry in the Service Rate Notification that deals with the service of licensing of IPR in respect of goods other than Information Technology Software. 1.35. Entry No. 17 (ii) is a general entry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notification and will not be taxable at 12% under Entry 17 (iii) of the Service Rate Notification. 4. PRAYER OF 'APPELLANT': a) To quash the impugned ruling from advance ruling Authority dated 10.01.2022 for being passed without application of mind and without considering facts, records, arguments presented before the Authority in the Advance Ruling, and for going beyond the remit of question before the Authority, through the Advance Ruling; b) In the alternative, modify the impugned advance ruling passed by the Authority for Advance Rulings and hold that the services received by the Appellant under the MLA and TLA, for which a periodic consideration is charged by SIBV, are liable to IGST at the rate of 12% under Entry 17 (iii) of Notification No. 8/2017-IT(Rate) dated 28 June 2017 read with the Entry No. 243 of the Notification No. 1/2017-IT(Rate) dated 28 June 2017; c) Grant a personal hearing through video conferencing mode in view of COVID pandemic; d) Pass any such further or other order(s) as may be deemed fit and proper in facts and circumstances of the case. 5. GROUNDS OF APPEAL: A. AUTHORITY HAD VERY LIMITED QUESTION TO DEAL WITH: 5.1 It is submitted that the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the legal position prior to 1 October 2021 and the position pursuant to the amending Notification is set out below: Taxing Entry Till 30.09.2021 (Before operation of Amending Notification) Post 01.10.2021 (After operation of Amending Notification) Applicable Rate Tax Entry 17 (i) Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology software Entry omitted, ceases to exist 12% Entry 17 (ii) Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right in respect of Information Technology software Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right 18% 5.6 The Appellant understands that this forum may not have the jurisdiction to decide on the constitutional matters. However, the unconstitutionality of the government action may be recorded by way of absence of minutes of meeting of the 45th GST Council Meeting, in public domain, pursuant to which the amending Notification cannot be issued. It is also evident from the press release of the 45th GST Council vis-a-vis licensing services in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been passed by the Hon'ble AAR without providing adequate reasons/justifications for holding that the licensing services received by the Appellant from SIBV under the MLA and TLA will be taxable at 18% under Entry 17 (ii) of the Service Rate Notification and will not be taxable at 12% under Entry 17 (iii) of the Service Rate Notification. Therefore, it is evident that elaborate and critical facts that have been duly recorded in the 'Background' section were completely neglected while arriving at Conclusion. 5.12 Further, the conclusion drawn in the impugned order, that licensing services received by the Appellant from SIBV under MLA and TLA will be taxable at 18% under Entry 17 (ii) of the Service Rate Notification and will not be taxable at 12% under Entry 17 (iii) of the Service Rate Notification. is not backed by any reason, independent discussion or finding. 5.13 Reliance in this regard is placed on the decision of Hon'ble Supreme Court in case of Kranti Associates Pvt Ltd vs. Masood Ahmed Khan [2011 (273) ELT 345 (SC)], wherein the Hon'ble Supreme Court, relying several landmark decisions relating to the principles of natural justice, laid down comprehensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject to broader scrutiny. No reference has been placed on MLA or TLA 5.14 It is submitted that authority has failed to even consider the MLA and TLA filed along with the Application. The authority has acted in complete ignorance of the Agreements while ruling against the Appellant's in the present case. It is submitted that, authority is of the opinion that they have carefully analysed the records however, the ruling completely fail to consider the clauses of the MLA and TLA extracted and submitted along with the application. 5.15 Therefore, the AAR ought to have recorded reasons and relevant provisions for holding as to how licensing services received by the Appellant from SIBV under the MLA and TLA will be taxable at 18% under Entry 17 (ii) and not at 12% under Entry 17 (iii) without sanction of the GST Council as mandated under Article 279A of the Constitution. The AAR has merely proceeded mechanically and denied the Appellant's contention without recording any reasons. On this aspect, reliance in this regard is also placed upon the following judgments: a. State of Orissa vs. Dhaniram Luhar [(2004) 5 SCC 568] In Alexander Machinery (Dudley) Ltd. v. Crabtree (1974 ICR 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral justice. The action of the Hon'ble AAR in making such classification the Appellant without adducing any' reason/ relying upon any provisions for the same is grossly in violation of the principles of natural justice. 5.17 Hence, it is submitted in this regard that impugned ruling is non-speaking and arbitrary in its very essence and shall be set aside to the extent it is against the Appellant on this count alone. D. THERE IS NO FRANCHISEE FEE FOR SIBV ONLY ROYALTY IS PRESENT: 5.18 As per the findings of impugned advance ruling dated 10.01.2022 the classification of services for which Franchisee Fee received in lump sum by them at the time of entering into Franchise Agreement with franchisee and Royalty amount received on monthly basis, at a pre-determined rate on gross sales revenue of the franchisee or fixed pre-determined amount, whichever is higher from the franchisee, for right to use their trademark, brand name and other proprietary knowledge (Intellectual Property). 5.19 However, it is submitted that there is no franchise fee for SIBV in the present case, instead there is only collection of Royalty. The same fact was made immensely clear in the Application filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d resources invested by the Appellant to receive a well-reasoned ruling to be able to make pragmatic business decisions accordingly. However, the Impugned Ruling makes the attempt of timely approaching the AAR frivolous and no effort of providing a reasoning or analysis has been attempted by the AAR. E. GROSS FAILURE OF THE MACHINERY OF ADVANCE RULING AUTHORITY IS ATTRIBUTED TO ABSENCE OF A JUDICIAL MEMBER: 5.24 In absence of a judicial member, the constitution of Authority for Advance Rulings, (Respondent No. 2) is unconstitutional. 5.25 In support of this contention, the Petitioners rely on the judgment of the Hon'ble Supreme Court in Columbia Sportswear Company vs. Director of Income Tax, Bangalore, reported at (2012) 11 SCC 224, wherein it was held that the Authority for Advance Ruling constituted under the provisions of Income Tax Act, 1962 is a 'tribunal' within the meaning of Article 136/227, as it is exercising judicial powers. In terms of the test laid by the Hon'ble Supreme Court in Columbia Sportswear Co. (supra), the Respondent No. 2 is also a Tribunal as it is determining the rights and liabilities of various stakeholders. 5.26 It is submitted that appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tle thereof [para 1(b)]; (b) Temporary transfer or permitting the use or enjoyment of any intellectual property right [para 5(c)]; (c) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration [para 5 (f)]. It is the case of the Appellant that: transaction (b) above i.e. permitting the use or enjoyment of intellectual property right (in other words, licensing the right to use intellectual property right, being the Appellant's services under the Franchise Agreement) is covered under service codes 997336 (Entry 1)/997339 (Entry 2); and transactions (a) and (e) above, i.e. transfer of right to use goods or in goods, in the context of trademarks and franchises, are covered under service code 998396 (Entry 3). transactions (a) and (e) above, i.e. transfer of right to use goods or in goods, in the context of trademarks and franchises, are covered under service code 998396 (Entry 3). 5.32 The term license means permitting someone to do something . Accordingly, the services covered under the said codes involve a permissible use certain IP products with certain conditions and restrictions. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used. Some (though not all) of the ingredients - breads, salad dressings and other 'key' items are to be sourced from Subway or Subway-authorised vendors and nowhere else. This gives Subway deep and pervasive control and dominion over the franchisee's daily operations, without, at the same time, ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology. 73... Indeed, it seems to us clear that if we accept that a franchise agreement is, by definition, one that requires territorial exclusivity, then the Subway agreements are not franchise agreements at all, but purely licensing agreement. 74... What must be looked at is the real nature of the transaction and the actual intention of the parties. The agreement must be considered holistically, and effect must be given to the contracting parties intentions. The label or description of the document is irrelevant. An agreement styled as a franchise might, on a proper examination, turn out to be nothing more than a mere license (as in Subway's case).. ...As discussed above, we find that Subway's franchise agreement grants to the franchisee nothing more than mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tipulated in their franchise arrangement. Clearly, this does not amount to a transfer of the right to use goods. 47...In the case of the franchise agreements involved in the present case, none of the franchisees or in the case of the trade mark licensee (or in GSK's petition the trade mark licensee), are empowered to safeguard violation of the mark, through enforcement mechanisms, such as filing suits for injunction or damages. This underlines that the most important attribute of ownership or transfer (even in the most evanescent sense) is absent. Furthermore, by reason of Section 48 of the Trade Marks Act, the utilization of the mark by the franchisee/licensee would accrue to the trade mark owner. Therefore, the reputation or brand building which accrues on account of increased volume of business because of the franchise/licensing arrangement, continues to be with the owner. No brand building or brand benefit accrues or arises to the franchisee/licensee. 48. From the above analysis, what irrefutably follows is that the franchise agreements in the three cases (and trade mark licensing agreement in GSK's petition) permit a limited right to use the composite system of the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... former. Reliance in this regard is placed on the decision of the Supreme Court in Commissioner of Central Excise v. M/s. Wockhardt Life Sciences Ltd, 2012 (3) TMI 40-SC. 5.44 Moreover, para 3 of the preface to the Explanatory Notes states that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description. 5.45 Relying on the above, the Appellant submits that the services received by the Appellant should be classified under Entry 17 (iii) which is a specific entry, instead of Entry 17 (ii), which is a general entry for all IPRs (including Information Technology related IPRs) and therefore, must continue to be taxable at 12%. 6. Record of Personal Hearing: 6.1 As per the records available, an enquiry was initiated by the DGGI-Gurugram Unit against the Appellant and DRC-OIA bearing CBIC DIN 202307ADGEE000000ACA dated 17.07.2023 issued for Tax amount Rs. 499918567/- for the period July-2017 to March-2022 due to mis-classification of services provided and received, short payment of IGST on import of services under RCM and nonpayment of GST on account of not raising the invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow for ready reference: Section 100 (3): Every appeal under this section shall be in such form, accompanied by such fee and verified in such manner as may be prescribed. Rule 106 (1) An appeal against the advance ruling issued under sub-section (6) of section 98 shall be made by an applicant on the common portal in FORM GST ARA-02 and shall be accompanied by a fee of ten thousand rupees to be deposited in the manner specified in section 49. The corresponding Section 100 (3) and Rule 106 (1) of HGST Act, 2017 also have not been adhered to by the appellant. 7.3 After the concurrent reading of both the provisions, it transpires that the Appellant was mandated to deposit a total of 20,000/- as fee under IGST Act as a mandatory statutory precondition for filing appeal against the order of the Authority for Advance Ruling, Haryana. However, it is found that vide challan No. 22020600173423 dated 23-02-2022, the Appellant has paid only 10,000/- as Tax under IGST head and not the required fee. Since the application of the Appellant is incomplete for want of deposition of requisite fee (which is to be deposited in the manner specified in Section 20 of the IGST Act read with Section 49 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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