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PJ/CASE LAW/2016-17/3217

Whether service tax has to be levied on franchise service provided prior to the introduction of condition (iv) under section 65(47) of the Finance Act 1994?

Case-SAANJ AND SAVERA EDUCATIONAL WELFARE TRUST Versus COMMR. OF S.T., DELHI
 
Citation- 2016 (41) S.T.R. 458 (Tri. - Del.)


Brief Facts- Stay application along with appeal has been filed against order-in-appeal dated 20-8-2013 which upheld the order-in-original dated 31-3-2011 in terms of which service tax demand of Rs. 6,60,338/- was confirmed along with interest and penalties and an amount of Rs. 3,42,355/- towards service tax and Rs. 36,942/- towards interest deposited by the appellant was appropriated. It is seen that the penalty imposed in this case was Rs. 3,17,983/- under Section 78 and this amount represented the difference between the total demand of Rs. 6,60,338/- confirmed and Rs. 3,42,355/- deposited and appropriated. The demand was confirmed under franchisee service.
 
Appelants Contention-The appellant has contended that :
(i)     It had entered into a franchise agreement with the franchisee in terms of which it gave right to use the name Shemrock to the franchisee for running a pre-preparatory/preparatory school.
(ii)    After the amendment to the definition of franchise with effect from 16-6-2005, it has paid service tax due along with interest which has also been appropriated.
(iii)   It contended that prior to 16-6-2005 the definition of franchise under Section 65(47) of the Finance Act, 1994 was as under :
“Franchise” means an agreement by which -
(i)     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;
(ii)    the franchisor provides concepts of business operation to franchisee, including know-how, method of operation, managerial expertise, marketing techniques 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.”
It pleaded that its franchise agreement satisfied the conditions (i), (ii) and (iii) above, the condition (iv) was not satisfied, inasmuch as the franchise was not under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person and therefore the service tax was not leviable during the period prior to 16-6-2005.
 
Respondents Contention-The ld. DR, on the other hand, stated that under franchise agreement the franchisee was under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person and therefore service tax was leviable even prior to 16-6-2005

Reasoning Of Judgement-The tribunal has considered the contentions of both sides. It is seen that there is no dispute about leviability of service tax under franchise service with effect from 16-6-2005 and that amount has already been paid along with interest and duly appropriated. Indeed we find that while imposing penalty under Section 78 ibid only the amount of service tax leviable for the period prior to 16-6-2005 has been taken into account and no penalty was levied in relation to the amount of service tax leviable with effect from on 16-6-2005. As is evident from the forgoing the only issue involved in this case is whether condition No. (iv) of the definition of franchise given in Section 65(47) of Finance Act, 1994 was satisfied in terms of the franchise agreement entered into by the appellant. The Tribunal finds that the condition in this regard in the agreement is as under :
  “In case this franchise agreement is cancelled, the name of the school and children on rolls will be the exclusive rights of the first party and the school will be taken over by the franchisor. The franchisee will not open any school with any name in the existing premises/building operational area of the school for a period of two years after the cancellation of this agreement.”
A careful perusal of the above quoted condition reveals that franchisee was obliged not to open any school with any name in the existing premises/building operational area of the school. In other words, the franchisee was free to open any school with any name in a “different premises/building operational area of the school”. Thus in Tribunal’s view condition No. (iv) of the definition of franchise quoted above is not satisfied in the present case and consequently the agreement does not fall in the category of franchise agreement as defined under Section 65(47) ibid prior to 16-6-2005. In the case of Dewsoft Overseas Pvt. Ltd. v. CST, New Delhi - 2008 (12)S.T.R.730 (Tri.-Del.), the CESAT inter alia held as under :
 “During the period of dispute, as per the definition of the word “franchise” as given in Section 65(47) the franchise agreement, which attracted service tax was to satisfy four conditions, and if the Revenue wants to subject a person to service tax under this entry, the burden of proving that the agreement between that person and his client is a “franchise agreement” within the meaning of this term, as defined under Section 65(47) of the Finance Act, 1994, would be on the Revenue.”
  In the light of the aforesaid discussion, the Tribunal allows the appeal to the extent that no service tax is leviable under franchise service prior to 16-6-2005 and consequently the demand, interest and penalty relating to the period prior to 16-6-2005 are set aside.
 
Decision- Appeal allowed

Comment- In accordance withSection 65(47) of Finance Act, 1994 [paras 4, 5] ,since the Appellant was running schools as a franchisee , a condition in agreement only prohibited the appellant to open any other school with any other name in existing premises/building operational area of school. Appellant was free to open any school with any other name in any other premises .Since the condition (iv) to Section 65(47) of Finance Act, 1994, as it existed prior to aforesaid date is not satisfied , Appellant is not liable for Service Tax
 Therefore,the Tribunal allowed the appeal to the extent that no service tax is leviable under franchise service prior to 16-6-2005 and consequently the demand, interest and penalty relating to the period prior to 16-6-2005 are set aside.
 
Prepared By- Praniti Lalwani
 
 

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