ST - key pre-requisite to qualify as taxable service is that franchisee should have been granted representational right to manufacture goods or to provide service - order not sustainable - Appeals allowed: CESTAT
By TIOL News Service
MUMBAI, AUG 23, 2013: THE appellant obtained licence to use/get used Fusion BT. Technology from M/s Biocentury Transgene (China) Co Ltd. (BTC). The appellant also obtained the right under agreement to multiply cotton seed containing Fusion BT Technology for transferring the technology to the sub-licensees.
Pursuant to this agreement, the appellant entered into sub-licensing agreement with various seed producing companies to transfer the technology obtained from BTC for a consideration in the form of sub-license fee. Alleging that on this fee, the appellant is liable to pay Service Tax under ‘franchise services', the CCE, Aurangabad issued SCNs.
The demands were confirmed and, therefore, the appellant is before the CESTAT.
Inter alia it is submitted that it is essential in a franchisee transaction that the franchisee loses his own identity and holds out to the outside world as if he is the franchisor himself; several clauses in the agreement with BTC as well as sub-licensees, clearly bring out the fact that underlying purpose of the transaction is that of the transferring technology in the form of seeds for a consideration. The appellant also argued that the demand is hit by limitation inasmuch as the demand notice for the period April 2004 to September 2007 was issued only on 08/04/2009.
The Bench, after extracting the definition of "franchise" as contained in section 65(47) of the FA, 1994 before and after 16/06/2005, observed -
"5.2 From the above, it will follow that before the amendment w.e.f. 16.5.2005 and thereafter, the foremost and key pre-requisite to qualify as taxable service is that the franchisee should have been 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. Board vide Circular No. 5918/2003-ST and Circular No. B1/6/2005 TRU has recognized this aspect.
5.3 Undisputedly, the appellants have imported the Technology which is owned by BTC and patented in China. The said technology is imported in the form of the mother seeds and the same are multiplied in the laboratory by or on behalf of the appellants and given to the sub-licensee to further multiply for onward sale by them to the farmers for the purpose of growing commercial crop. The appellants are not granted any ‘representational right' from BTC to represent them in India, nor entitled to grant or they have actually granted any representational right to the sub-licensees.
5.4 The Revenue's case rests on the premise that the logo or hallmark belonging to the appellant is put on the seed package manufactured/marketed by the sub-licensees. The appellants produced a few samples of the product package labels for us. On perusal of the samples, we agree with the appellant that the packages contain mark "Fusion BT" which only denotes that the seeds being sold contain Fusion BT genes, and it does not denote that the said mark is either a logo or a trademark or hallmark of the appellant. The department could not show that any logo or hallmark belonging to the appellant has been put on the packages manufactured/marketed by the sub-licensees. We further find force in the contention of the appellant that a laptop containing a label of ‘Windows', only denotes that the processor or the operating system/software, as the case may be in the said laptop and by putting such label, the laptop manufacturing company does not represent ‘Microsoft' or become the franchisee of ‘Microsoft'. Admittedly, in a franchisee transaction the franchisee loses his individual identity and represents the identity of franchisor to the outside world, as in the case of ‘McDonald' the customers are not concerned with who owns the ‘McDonald's restaurant (franchisee). The customers identify it with ‘McDonald (the franchisor).
5.5 Thus the department failed to show that the appellant (the franchisor) granted representational rights to franchisee to sell or manufacture or provided service identified with them (the appellant i.e. the franchisor)."
In fine, the order passed by the CCE, Aurangabad was set aside and the appeal was allowed.
(See 2013-TIOL-1259-CESTAT-MUM)
