By TIOL News Service

MUMBAI, AUG 14, 2014: THE appellant is engaged in the activity of registration of website domain names. The appellant is also accredited by International Corporation for Assigned Names and Numbers (ICANN) for certain top level domains. The appellant is registering domain names permitted by ICANN and ICANN accredited registries. The appellant is paying fee as per agreements, fixed and variable to ICANN and various registries (who are also accredited by ICANN).

Service Tax on reverse charge basis was demanded from the appellant for the period March 2006 to November 2010 in respect of the foreign remittance made by the appellant during the said period to the ICANN and ICANN accredited registries.

The appellant is also appointing resellers for worldwide services of registration, renewal, cancellation, deletion of domain names and has been collecting charges for the services rendered. Another SCN is for the period April 2006 to March 2011and is on account of amounts received by the appellant during the said period from all the resellers.

Both the SCNs demanding ST under the category of "franchise services" were confirmed by the CST, Mumbai.

Extensive submissions were made by both sides and the CESTAT after considering the same and minutely going through the agreement between ICANN and the appellant in the backdrop of the terms "Franchisee" and "Franchisor" as defined under Section 65 (47) and 65 (48) of the Finance Act, 1994 at the material time, observed -

++ From the mission and core values as also the agreement between ICANN and the appellant we are not able to find out any service or a process for which ICANN is associated and is being provided by the appellant. Appellants provided registrar service as per the powers under Article II of powers for ICANN, ICANN "from acting as registrar. From the agreements or bylaws, we are not able to find any process that has been developed by the ICANN and being used by the appellants. We find what is being done by the ICANN is to set minimum standards for the performance of registration function and recognize that the appellants are meeting those standards. Revenue has not been able to pinpoint to us either any service or any process for which is known and that process is being used or being provided by the appellants. In the absence of any such service or process we are unable to agree with the Revenue that the appellants are franchise service of ICANN. Even the agreement which permits the use of ICANN symbols clearly indicates that appellants are ICANN Accredited Registrar and nothing beyond that. We are in agreement with the appellant's submission that accreditation and representing the ICANN are two different things and the appellants are only accredited by ICANN and they are not representing ICANN.

++ It has been alleged in the demand notice that the registries are associate franchisor (of ICANN) and therefore the agreement between the associate franchisor and the appellant is a franchisee agreement. It is presumed that the registries are franchisees of the ICANN.

++ We find that agreement between ICANN and Registry has not been produced either by Revenue or the appellant. We find that Revenue have not been able to bring on record any service or process identified with ICANN which is required to be provided by various registries accredited by ICANN. It appears that registries are also accredited like registrars. ICANN might have provided minimum standards for registries but that does not imply that registries are providing any service or process identified with ICANN. A reading of the above mentioned agreement clearly indicates that this is an agreement between registry and the appellant and has nothing to do with ICANN and under the circumstances we are not able to persuade ourselves that the appellants are providing franchise service of the associate franchisor of ICANN (i.e. registries).

++ Coming to the second Show Cause Notice, which is between the appellant and reseller, the appellant have appointed a large number of resellers all throughout the world who are required to sell the products and services of the appellants.First of all, we observe that the resellers are specifically prohibited from using the name of ICANN. They only represent the appellant. In fact they are reselling the services of registrar being provided by the appellant. After selling the services of the registrar they remit the money to the appellant as per the agreement. We find that the agreement is of a nature of principal to principal basis and resellers cannot be considered as franchisee or associate franchisor of ICANN. We have already held earlier that appellant cannot be considered as a franchisee of ICANN and, therefore, resellers cannot be considered as franchisee of the associate franchisor.

Observing that the Revenue's contention that the resellers are providing the franchisee services of ICANN does not hold water, the Bench held that there is no strength in the second demand notice also.

In fine, it was held that no service tax is leviable under the head ‘franchise service' and accordingly, both the demands and penalties were held as not sustainable.

The appeals were allowed.

(See 2014-TIOL-1505-CESTAT-MUM)