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TMI Blog2024 (12) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is not seen as a representative of Aircom International Company, U.K; no representative rights have been given to the appellant; the independent existence of the appellant is manifest by various agreement they have entered into with Indian customers. Mere granting of right to distribute sub- license, copy right products of Aircom International Company, U.K; it does not make the appellant a Franchisee of Aircom International Company U.K. - Department has not made out any case regarding the levy of service tax on the appellants on the Franchise Service alleged to have been availed by them. Maintenance or Repair Service - HELD THAT:- It has been held in a number of cases that levy of service tax critically hinges on the identification of service provider, the service provided, the recipient of the service and the consideration paid or payable for the same thereof. It is found that Show Cause Notice dated 22.04.2010 simply takes out the figures from the balance sheet on account of license fee; support and maintenance; training fee; reimbursement and management fee etc. and quotes the relevant provisions of law pertaining to the definition of the said services and proceeds to say tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses, salary and wages, consultancy, repair and maintenance etc; it was also noticed that the appellant has availed inadmissible credit of Rs.3,90,743/- on invoices received at the premises which is not registered. On conclusion of investigation, two Show Cause Notices dated 15.10.2009, covering the financial years 2003-04 to 2007-08, demanding service tax of Rs.1,16,53,293/- and inadmissible CENVAT of Rs.3,90,743/- and Show Cause Notice dated 24.02.2010, covering the period 2008-09, demanding service tax of Rs.2,81,94,672/- were issued to the appellants; the proposals in the Show Cause Notice were confirmed by the impugned order vide which Rs.72,34,265/- and Rs.3,90,743/- paid by the appellants has been appropriated. 3. Shri Atul Gupta, learned Consultant for the appellant submits that the transaction involved in the case is with reference to the license given by the parent company for using their software to the appellant under the license agreement; the appellant supplies the software to the customers and provides related services like technical support and training; 45% of the gross amount realized is paid to the parent company; the appellant also customizes the software a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable to the licensor i.e parent company in U.K. comprises of fees payable by the customer for any lease/ rental/ license of the software, for provision of support, maintenance and technical support; Part B of Schedule 1 clearly specifies that in case the overseas entity provides any technical support that will be billed separately; while journalizing the accounts, the appellant has booked both 45% of the amount received towards support and maintenance as well as amount payable towards support services under the same Head. Normally, maintenance service is provided by the appellant to their customers; when the issues arise in respect of basic designing, the parent company provides assistance; however, the consideration for the same is already included in the charge payable to the parent company i.e. 45% of the gross revenue. 6. Regarding the demand with respect to Training and Coaching Service, learned Consultant submits that the training received by the appellant from the parent company is integral to the purchase of software; the personnel of the appellant are trained so that they can attend to the services required by the customers; in the instant case, the alleged training has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was excess demand and confirmation. Learned Consultant submits that the service tax was computed at an average rate of 12.36% whereas different rates like 12%, 12% and 10% were applicable during the periods 18.04.2006 to 31.05.2007, 01.06.2007 to 23.02.2009 and from 24.02.2009 onwards respectively. 10. Learned Consultant for the appellants further submits that the second Show Cause Noticefor the period 2008-09 was vague and was issued without mentioning any specific Head or category of the services alleged to have been provided by the appellant and the remuneration thereof; learned Consultant submits that demand was computed on same expenses two-three times on the same expenses; he submits that such a Show Cause Notice cannot be sustained as held in the following cases: Brindavan Beverages Pvt. Ltd. 2007 (213) ELT 487 (SC) Shubham Electricals 2015 (40) STR 1034 (Tri. Del.) Shubham Electricals 2016 (45) STR J314 (Del.) 11. Learned Consultant submits that extended period cannot be invoked in the instant case as there was no clarity as regards the taxability of Software ; on the issue of Franchise Service, there were divergent opinion even among different benches of the Tribunal. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013 (288) ELT 161 (SC) Continental Foundation Joint Venture Holding vs. Commissioner of Central Excise, Chandigarh-l, reported in 2007 (216) E.L. . 177 (SC) Bharat Hotels Limited vs. Commissioner of Central Excise (Adjudication), cited in 2018 (12) GSTL 368 (Del.) Telephone Nigam Ltd. vs. Union of India and others - W.P. (C) 7542 of 2018 decided on 06.04.2023 (Delhi High Court) M/s G.D. Goenka Private Limited vs. The Commissioner of Central Goods and Service Tax, Delhi South Service Tax Appeal No. 51787 of 2022 dated 21.08.2023 (Delhi CESTAT) 12. Learned Consultant lastly submits that as there is no suppression with intent to evade payment of duty, penalty under Section 78 is not tenable; moreover, learned Commissioner have imposed penalty under Section 76 and Section 78 which are mutually exclusive. He relies on the following cases: Commissioner of C. Ex. Vs. First Flight Courier Ltd. - 2011 (22) S.T.R. 622 (P H) Madhav NagrikSahkari Bank Ltd. v. Commissioner of C. Ex., Indore - I, reported in 2012 (27) S.T.R. 352 (Tri. Del.) Suganthi Travels v. Commissioner of Central Excise, Trichy, cited in 2011 (22) S.T.R. 72 (Tri. - Chennai) 13. Shri Anurag Kumar, learned Authorized Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware, further 20% of total sale value of training booked by the business unit, software development is charged back to the parent company Further M/s Aircom International, UK granted the representational right to the Noticee including right to sell their software, use their trade mark, service mark, trade name and logo , Aircom International Company, UK provides the concept of business operation such as managerial expertise and training; Further Aircom International India is wholly owned subsidiary company of Aircom International, UK. Such the conditions under franchise agreement are fulfilled by the Noticee, that the amount pending remittances shown as license fee in the balance sheet covered under franchise services only. 16. It is seen that the Department infers that the license fee paid by the appellant to their masters in U.K. fulfills the definition of Franchise Service and says that Aircom International Company, U.K. has granted the representational rights to the appellant including right to sell the software, used their trademark, service mark, trade name and logo; 45% of the gross sales and 20% of the training fee booked is paid to the overseas masters; the appellant sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that this Bench in the case of Reckitt Benckiser India Ltd. (supra) held that : 42. This apart, in a franchisee agreement, the franchisor has the authority to exert a significant degree of control over the method of operation of the franchisee. The agreement executed between the parties in the instant Appeal clearly shows that the licensor does not have any significant control over the manner in which the Appellant conducts its operation. The Appellant is free to procure the raw materials as per its will and it has a right to fix the selling price of the final product. It is also free to run its business, marketing, distribution, sourcing and other activities as per its own choice without any inference by the licensors. It also makes its own marketing strategy. The only right which the licensor have is to supervise whether the products manufactured by the Appellant are in conformity with the quality, 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 licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to the second and third requirement, the Court found that from a perusal of the agreement it was reasonable to conclude that Englert exercised control over the defendants only in regard to a single product line and that Englert did not have the ability to control any of the product of the defendant other than LeafGuard gutters which was one of the multiple products and services provided by the defendants. The level of control exerted by Englert over the defendant s method of operation was, therefore, not significant for the purpose of the FTC Franchise Rule and so the agreement between the parties was not franchise but a license agreement . 45. It would now have to be seen whether the services received by the Appellant can be classified as IPR service . 46. The definitions of IPR and intellectual property service as contained in Section 65(55)(a) and Section 65(55)(b) of the Act 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical support. From this, it is clear that whenever Aircom International Company U.K has provided technical support, the appellant is required to raise an invoice and Aircom International Company U.K. pays for the same; the appellant pleads that charges for such support service are already included in the 45% and the 20% payable to Aircom International Company U.K; therefore, the same cannot be treated as provision of any service by Aircom International Company U.K. to the appellant for which they have to pay service tax on Reverse Charge Mechanism; it is immaterial that the appellant treats the same in their books of accounts. Similarly, the appellant pleads that the expenses of training and coaching were also included in the license fee charged for the use of software; as no separate charges are collected, no service tax is liable to be paid. In respect of service tax demand on consultancy charges, the appellant pleads that the same is nothing but sharing of expenses and reimbursable expenses. They rely on the decision of the Hon ble Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. (supra). Regarding the service tax credit denied to the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangements were entered into by the respondents with the franchise holder. On a perusal of the show cause notice the stand of the respondents clearly gets established. 10. There is no allegation of the respondents being parties to any arrangement. In any event, no material in that regard was placed on record. The show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague, lack details and/or unintelligible that is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice. In the instant case, what the appellant has tried to highlight is the alleged connection between the various concerns. That is not sufficient to proceed against the respondents unless it is shown that they were parties to the arrangements, if any. As no sufficient material much less any material has been placed on record to substantiate the stand of the appellant, the conclusions of the Commissioner as affirmed by the CEGAT cannot be faulted. 22. Tribunal in the case of Shubham Electricals (supra) held that : 13. We have noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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