By TIOL News Service

NEW DELHI, AUG 29, 2013: THE appellant, The Delhi Public School Society is engaged in entering into agreements with different entities interested in establishing schools in different areas. As per the agreements, named as ‘Education Joint Venture', the appellant (assessee) permits, allows and grants a revocable license to the party to the agreement to use the name DPS, its Logo and motto for the purpose of the school to be established. The school shall be established, managed and run by a Board of Management (BOM) consisting of members nominated by the assessee and the parties. The parties are required to pay the consideration, in advance commencing from the year the school starts functioning.

It is the case of revenue that the consideration received by the appellant is taxable under the category of Franchisee service and confirmed the demands under extended period. The appellant are before the CESTAT challenging the demands.

The appellant contended that the agreement is a joint venture agreement and hence the services provided by the assessee would not constitute taxable service. However, the Tribunal held:

"On a true and fair analyses of the agreements between the parties it is clear that not only is the assessee wholly immune to any losses arising out of the enterprise - the educational institution to be established pursuant to the agreement but has also no entitlement to any share in the profits arising therefrom. Any accretions to the enterprise, accruing as a result of profitable running of the schools would constitute assets which would be transferred only to the other party (not the assessee), vide clause 9 of the agreement. The participation of the assessee in the management of the schools, through its representation on the BoM is calibrated only for effectuation of the assesses perceived expertise and experience, in establishing and running quality English Medium Schools. For this service provided, the assessee receives remuneration as clearly indicated in clause 3 of the agreement. All financial inputs, obligations and liabilities, including liabilities arising out of any litigation in respect of the enterprise is to the account of the other party and to the exclusion of the assessee. In the totality of circumstances neither the indicia of a partnership or a joint venture is discernable from the terms and conditions of the agreements between the parties, particularly since there is neither a contribution of assets nor a sharing of profits and/or losses provided in the agreements between the parties. These normative ingredients of a partnership or a joint venture are absent".

The fact that the other party is required to pay a specified amount to the assessee clearly and compellingly indicates that the assessee is remunerated for services provided to the other party to the agreement. Clearly therefore there is a service provided by the assessee to another, for consideration. There is no element of service to the assessee itself.

With regard to taxability of the services under Franchisee service, the Tribunal held:

As per the definition of Franchise in Section 65(47), a franchise is defined during the period (01.07.2003 to 15.06.2005) as comprising four ingredients:

(a) The franchisor granting representational to the franchisee to provide service or undertake any process identified with the franchisor;

(b) The franchisor providing concepts of business operation to the franchise including know-how, method of operation, managerial expertise, marketing techniques or training and standard of quality control except passing on ownership of the know-how, to the franchisee;

(c) The franchisee having to pay a fee to the franchisor, directly or indirectly; and

(d) The franchisee being under an obligation not to engage in providing similar services or process, identified with any other person.

Since the assessee, under the terms of the agreements receives an annual fee from the other party to the agreements, the third ingredient is clearly fulfilled. The terms of the agreement clearly reveal that the other party to the agreements is granted a representational right to provide services by way of imparting of education through the school to be established representing the name (DPS), the motto and the logo of the assessee, the holder of the brand associated therewith. Further the assessee provides its established concepts of imparting education; its managerial expertise and operational techniques and standards of imparting education to the other party to the agreements. On this view of the matter the first and second ingredients of 'franchise' are also fulfilled. Thus, during 01.07.2003 to 15.06.2005, the terms of the agreements fulfil the four ingredients of the expression "franchise" as defined in Section 65(47) and therefore the assessee has provided the said taxable service.

On similar reasoning, the Tribunal held with effect from 16.06.2005 also, the assessee is liable to pay service tax under Franchisee service.

However, on limitation, the CESTAT held:

It is settled law that misstatement or suppression of facts must be associated with wilful intention and that contravention of any provisions of the Act or the Rules must be with the associated intent to evade payment of tax; Where this mental element is alleged and established, only then would invocation of the extended period of limitation be justified. The material on record discloses that the assessee had furnished the information requisite for the Department to have initiated proceedings, by 15.1.2004 and 12.7.2004. Nevertheless, the first show cause notice was issued on 24.1.2006 (in respect of the period 1.7.2003 to 31.3.2005, the subject matter of ST Appeal No. 248/2006). Subsequent show cause notices were issued on 04.11.2008 for the period 01.04.2007 to 31.03.2008 and on 05.10.2009 for the period 01.04.2008 to 31.03.2009.

As pointed in Tecumseh Products India Ltd. vs. C.C.E., Hyderabad (2004-TIOL-54-SC-CX), in Fedders Lloyd Corporation Pvt. Ltd. vs. C.C.E., New Delhi (2002-TIOL-324-CESTAT-DEL-LB) and in Modipon Fibre Company vs. C.C.E. Meerut (2007-TIOL-188-SC-CX), apart from the decision of the apex Court in Uniworth Textiles Ltd., the extended period of limitation could not be invoked when there is a bona fide dispute between the parties in regard to issues as to tax liability; where the department was aware of the essential ingredients of the transactions on which liability to tax could be determined; and no suppression could be inferred when the assessee had categorically sensitized the Department as to the relevant facts on which a view could have been taken as to the liability to tax. In Nizam Sugar Factory vs. C.C.E. A.P. (2006-TIOL-56-SC-CX), Supreme Court clearly pointed out that suppression of facts cannot be alleged in each subsequent show cause notice, when the first show cause notice was issued and relevant facts were within the knowledge of the authorities; and that the same or /similar facts could not be urged to constitute suppression of facts on the part of the assessee.

In view of the above, the Tribunal upheld the demands falling within normal period of limitation.

(See 2013-TIOL-1282-CESTAT-DEL)