By TIOL News Service

MUMBAI, DEC 18, 2013: APPELLANTS in all the cases are owner of certain property. Appellants have entered into separate agreements titled as "The Franchise Agreement……" with M/s. Amalgamated Bean Coffee Trading Company Ltd. (ABCTCL). The property belonging to appellants were given to M/s. Amalgamated Bean Coffee Trading Company Ltd. to run café, making and selling coffee and other eatables under the brand name of ‘Cafe Coffee Day'.

SCNs were issued to the appellants demanding service tax under the category of Business Auxiliary Service. In four appeals,the demands are issued by classifying the service in the last clause of BAS as Auxiliary Service while in fifth appeal it is for promotion, marketing and sale of goods and services. The period involved in the appeals is varying and is from June 2003 to February 2006.

The demands were confirmed by the original authorities and were also upheld by the appellate authorities by various orders and it is against the said orders of the first appellate authority that the appellants are before the CESTAT.

It is submitted by the various appellants that though the agreement is titled as "Franchisee Agreement" but essentially they have rented out their property to M/s. ABCTCL for a consideration which is a fixed amount or percentage of turnover whichever is higher.

It is further submitted that the monthly expenditure on electricity and water is borne by M/s. ABCTCL; they have taken permission from the Co-operative Housing Societies Ltd. and from the local bodies for running café by M/s. ABCTCL; that although certain paragraphs in the agreement give an impression as if they have some role to play in day to day working of the "Café Coffee Day" outlets, the fact is that they have no role whatsoever to play; that all the outlets are run by the staff of M/s. ABCTCL, they only collect the money and remit it to the main company. In view of the above, the activity cannot be classified under business auxiliary service and further the service is appropriately classifiable under ‘Renting of immoveable property' which is taxed from 1.6.2007 and they have started paying service tax under this category from the said date.

The Revenue representative submitted that the agreement clearly indicates that the appellants are involved in selling of the goods and, therefore, the demands have been correctly raised and upheld.

The Bench observed that even though the agreement is termed as "Franchise Agreement", it is essentially an agreement relating to letting out immoveable property for running outlet of "Café Coffee Day"; that as the properties are being taken to run Café Coffee Day, certain conditions have been enumerated so as to ensure the smooth functioning of outlets on day to day basis and cooperation by Appellants in this regard; that Appellants have also been obliged to help M/s. ABCTCL, in taking necessary clearance from the Co-operative Housing Societies, Local bodies etc. However, beyond that appellants have no role for day to day running of the outlets.

The Bench then took note of the definition of "Business Auxiliary Service"w.e.f. 1.7.2003 and after its amendment from 10.09.2004 & 16.06.2005 and observed -

"…As noted earlier out of the five appeals, in four appeals demands have been made in the last clause which provides that a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision. In one case the demand has been made as promotion or marketing or sale of goods or services produced by the client. We do not find that appellants have done any activity relating to promoting or marketing or sale or goods produced or provided by, belonging to the client. We also do not find any auxiliary service relating to any of the clauses mentioned in the definition has been provided by the appellants. They have not provided any service of the type enumerated in the last clause of the definition. Under the circumstances, we are unable to accept the Revenue's contention that the service provided by the appellants are covered under Business Auxiliary Service."

The appeals were, therefore, allowed.

In the matter of two appeals, the CESTAT noted that the appellants have paid the tax and later on filed refund claims and which were rejected on merits. The said orders were also set aside as far as merits were concerned but the Bench opined that the said claims would be required to be examined from other angles as provided under law such as unjust enrichment, limitation etc. before refund is granted.

(See 2013-TIOL-1880-CESTAT-MUM)