Allowing other schools to use name 'Mayoor School', its logo and motto, in lieu of consideration is covered under Franchise services.

Case:- MAYO COLLEGE GENERAL COUNCIL Vs COMMR. OF C. EX. (APPEALS), JAIPUR-II

Citation:- 2012 (28) S.T.R. 225 (Raj.)

Issue:- Allowingother schools to use name 'Mayoor School', its logo and motto, in lieu of consideration is covered under Franchise services.

Brief Facts:-The facts of the case are that the appellant is a Society established solely for educational purposes. It has been running international renowned schools namely Mayo College, Mayo College Girls School and Mayoor School in Ajmer. The object of the appellant Society is to establish schools/colleges in India on the lines of the progressive independent schools/colleges established in England and other countries, open to all without distinction of race, creed, caste or social status with a view to develop an atmosphere of Indian tradition, culture and social environment, best features of progressive independent colleges, the building up of character, team work, physical development and spirit of chivalry fair play and straight dealing; to develop a spirit of Indian nationality by removing all social, communal, religious or provincial prejudices among the students and fostering a spirit of comradeship among them and to develop a spirit of service to Society. Based on these objectives, the Appellant entered into an agreement with four institutions for the purpose of establishment of schools in different parts of India, namely Mayoor Foundation, Jalandhar; Taparia Foundation, Bhopal; V.R. Educational/ Trust, New Delhi; Mayoor School, Noida; and K.C. Gurukul, Jammu & Kashmir. It is stated that intelligence collected by the Anti Evasion Wing of Central Excise Division, Ajmer, revealed that the appellant was engaged in providing 'franchise service' to various parties/schools, who were running their institutes using its school name "Mayoor School". On scrutiny of record submitted by the appellant, it came to notice that they had received franchise fee/collaboration fee in their books of account from various parties/schools. The service provided by the appellant was classified under Section 65(105)(zze) of the Finance Act, 1994. During the period the appellant had received against providing franchise service. The appellant was issued a show cause notice on proposing recovery of the service tax. The appellant filed its written submission. The matter was adjudicated, wherein demand of service tax was confirmed along with interest. Penalties under Sections 76, 77(1)(a), 77(2) and 78 of the Finance Act, 1994 were also imposed. Aggrieved with the order, the appellant filed an appeal before the respondent no. 1 Commissioner, Central Excise (Appeals), Jaipur-II, together with a stay application imploring to dispense with the pre-deposit of service tax, interest and penalties.

Appellant Contentions:-The appellant filed an appeal on the ground that the appellant was a non-profit society and entailed in non-commercial activities. They were registered under Income Tax Act, as Society for educational purpose. It did not fall in the net of service tax. The appellant entered into an agreement with aforesaid four institutions for establishment of schools. These institutions are either societies or trust. The appellant collaborated with them for setting up of schools. The appellant contended before the respondent no. 1 that merely permitting other societies/trust to use the name "Mayoor School" does not make the agreement a 'franchise agreement'. A reading of the agreement in their entirety makes it abundantly clear that agreements do not constitute a franchise agreement. They did not give any representational right to four schools/institutions to provide services nor received any franchise fees. It received amounts towards its collaborative efforts in assisting them to set up and run the schools. The appellant also submitted before the respondent no. 1 that their case was fit for dispensing with pre-deposit of service tax, penalties and interest.

Respondent Contentions:-The Respondent appeared and reiterated those very submissions before him, but the Commissioner, Central Excise (Appeals), Jaipur-II, found that the services provided by the appellant to various institutions were prima facie covered under 'franchise service'. It also observed that the four institutions namely Mayoor Foundation, Jalandhar; Taparia Foundation, Bhopal; V.R. Educational Trust, New Delhi; Mayoor School, Noida; and K.C. Gurukul, Jammu &Z Kashmir, were permitted to use their name "Mayoor School", its logo and motto. These institutions were also required to observe certain obligations as per terms and conditions of the agreement. The Appellate Authority also observed that the appellant failed to point out any specific notification under which the services provided by them to these four institutions were exempted from levy of service tax. Since, the respondent no. 1 Commissioner, Central Excise (Appeals), Jaipur-II, did not find any force in the contentions of Mr. Ashok Sagar, Advocate nor found any prima facie case in favour of the appellant and further found that the balance of convenience was in favour of Revenue, the Appellate Authority disposed of the stay application directing the appellant to deposit the entire amount of service tax together with interest and penalties, as indicated above. The respondent defended the impugned order and stated the same to be just and proper and contended that it did not justify any intervention.

Reasoning of Judgment:- Heard the both the parties and carefully pursued the relevant material on record including the impugned order. Learned counsel for the appellant has reiterated all those grounds as enumerated in the writ petition and canvassed that the appellant did not provide any franchise service to any of the aforesaid four institutions, rather they provided their expertise for the establishment and development of these schools. A bare perusal of the agreement does not reveal that any franchise service was provided by the appellant to these schools. Learned counsel took us through the various articles of the agreement and canvassed that the main obligation of the appellant was to maintain the high standard of the education in the said schools, as is in MCGC; to provide expertise and consultancy and know-how in educational material to set academic standards and other co-curricular activities in the school in such manner, as maybe considered fit and proper and, as stipulated by the agreement. Neither the franchise fees was collected by the appellant from these schools nor there is any whisper of the word franchise in the whole agreement and the appellant does not fall in the net of service tax and thus, is not liable to pay service tax. Neither the adjudicating authority nor the respondent no. 1 Commissioner, Central Excise, took into consideration all these aspects and the adjudicating authority in undue haste, passed the order and confirmed the demand of service tax and imposed penalty under Sections 76, 77 and 78 of the Finance Act and also directed to pay the interest. Similarly, the Commissioner, Central Excise (Appeals), Jaipur-II also, did not consider these grounds and arbitrarily adjudicated the stay application in a cursory manner directing the appellant to deposit the said amount of service tax, penalty and interest, as indicated above. The impugned order passed by the Commissioner, Central Excise (Appeals) is arbitrary, contrary to material on record, unjust and improper which deserves to be set aside.

Having reflected over the submissions made at the bar and carefully scanned the relevant material on record including the agreement entered into between the appellant and other four schools, it is revealed that the appellant not only permitted, allowed and granted a revokable license to these schools to use the name 'Mayoor School', its logo and motto, but in consideration of the grant of said license, the appellant MCGC realized an initial one time nonrefundable payment from the said four schools at the time of execution of this agreement for the services and obligations of MCGC. Not only this, the appellant also realized annual fees of Rs. 10 lacs in advance for the stipulated service by the appellant for first three years, which was liable to be reviewed after every three years. A bare perusal of the language of Article 1, Article 2, Article 6(e)(h), Article 7(e), Article 11(a)(b) and Article 14(b)(c)(d) tangibly suggests that an amount of was received by the appellant from the aforesaid four schools, as a collaboration fees. The respondent no. 1 and the adjudicating authority found that this 'collaboration fees' was nothing but the 'franchise fees' and it clearly fell in the net of service tax. These four institutions were permitted to use their name 'Mayoor School', its logo as also its motto. These institutions were required to observe certain obligation as per the terms and conditions of the agreement and further observed unimpeachable confidentiality. Permitting other schools by the appellant to use their name, logo as also motto clearly tantamounts to providing 'franchise service' to them and if the appellant realize the 'franchise' or 'collaboration fees' from the franchise schools, the appellant was duty bound to pay the service tax to the respondent department. The appellant is found to have utterly failed to make out a prima facie case in its favour. The impugned order rendered by the Commissioner, Central Excise (Appeals), Jaipur-II, is found to be just and well merited. It suffers from no infirmity and we are in unison with the finding arrived at by the Commissioner, Central Excise to this effect that the appellant is a registered society and it provided the franchise service to aforesaid four schools, who were permitted to use their name 'Mayoor School', logo and motto. Learned counsel for the appellant has failed to convince us to take a view contrary to that of the view taken by the adjudicating authority and the Commissioner, Central Excise (Appeals), Jaipur-II. We do not find any ground to interfere with the impugned order and thus, the writ petition being devoid of any substance deserves to be dismissed.

Further the balance of convenience is also not found to be in favour of the appellant and in case the recovery of said service tax is stayed, a great irreparable loss shall be caused to the Revenue. The Hon'ble Apex Court has deprecated the practice of granting stay in the recovery of tax, cess, fees etc. In the case of United Bank of India v. Satyawati Tondon and Others reported in 2010 (8) SCC 110, the Hon’ble Apex Court has held thus:

"It must be remembered that stay of an action initiated by the State and/or its agencies/instrumentalities for recovery of taxes, cess, fees, etc. seriously impedes execution of projects of public importance and disables them from discharging their constitutional and legal obligations towards the citizens. In cases relating to recovery of the dues of banks, financial institutions and secured creditors, stay granted by the High Court would have serious adverse impact on the financial health of such bodies/institutions, which (sic will) ultimately prove detrimental to the econ -Thorny of the nation. Therefore, the High Court should be extremely careful and circumspect in exercising its discretion to grant stay in such matters."

In view of above, the writ petition fails and the same being devoid of any merit stands dismissed, accordingly. However, the appellant is granted three weeks from today to deposit the entire amount of Service tax, 50% of penalties and interest, as directed by the Commissioner, Central Excise (Appeals), Jaipur-II. Consequent upon the dismissal of the Writ petition, the stay application does not survive and the same also stands dismissed.

Decision:-Appeal dismissed.

Comment:-The analogy drawn from this case is that receiving consideration for allowing others to use name, logo, motto etc. is chargeable to service tax under Franchise Services even when society is a non-profit organisation carrying on non-commercial activities having its main obligation to maintain high standard of education.

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PJ/Case Laws/2012-13/1399

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