By TIOL News Service

MUMBAI, AUG 08, 2015: THE appellant is a society recognised as a Scientific and Industrial Research Organisation by Ministry of Science and Technology, and by Ministry of Communications and Information technology. Its Governing Council is chaired by the Minister of State of Science & Technology and has other senior officials on its Board. Under the Memorandum of Association, the society is mandated to undertake design and development of advance computing systems as also to build high quality research and development manpower in advance computing.

It introduced a scheme to provide quality training through diploma and post graduate diplomas in advance and short term course. For this purpose they entered into training agreements called Authorisation Agreements with authorised computer education training centres (referred to ACETC). Under the agreements, ACETC is to provide infrastructure, recruit faculty, select trainees, collect and pay fees to the account of the appellant. Further, it collects course material and question papers from the appellant and conducts examination based on such question papers. ACETC runs the centre in its own name.

The appellant receives Authorisation fees as well as renewal fees every year from ACETC for grant of Authorisation for conduct of educational training activities. On these amounts, the appellant paid service tax under the category of franchise service.

Under the same Authorisation agreement, the appellant receives course fees from the students who are enrolled for the course. The fees is collected at the authorisation training centres i.e. ACETC. After deducting 25% of its share and other recoverables, C-DAC forwards 75% of the fees to the authorised training centres.

The case of Revenue is that the appellant have not included their share of the course fees in the taxable value while discharging service tax liability under the category of franchise service . Service tax of Rs.32,14,844 is demanded for the period 01.07.2003 to 30.09.2004. Another issue raised in the SCN is that the appellant utilised Cenvat credit of service tax of Rs.2,79,463/- without having balance in their credit account on 30.09.2004 and thereby contravened Rule 14 of CCR, 2004.

The adjudicating authority played his role to a 'T' and so did the Commissioner(A).

Therefore, the appellant C-DAC is before the CESTAT.

It is submitted that in the sharing of course fees between the appellant and the authorised training centre there is no service provider and service receiver relationship and, therefore, no service tax is payable. The appellant relied on Board Circular no. 109/03/2009 dated 23.02.2009 in which it is clarified that revenue sharing activities are not taxable.

After adverting to the definition of 'Franchise Service' given in the FA, 1994, the appellant submitted that none of the four clauses in the definition are satisfied and, therefore, their activity is not covered in the ambit of franchise service; that the Commissioner (Appeals) has wrongly held their activity to be "in relation to" franchise service.

Alternative arguments were also made pertaining to exemption notification and also time bar. Regarding the demand of Cenvat credit, the appellant produced a copy of the Cenvat credit register for the period 01.07.2003 to 30.09.2004 evidencing that credit was available.

The AR justified the department stand by reiterating the findings of the lower authorities.

The Bench observed -

+ The Authorisation Agreement, under Para 10 Schedule of Fees provides for Authorisation fee and course fees separately and distinctly. Only because all the fees are provided in one Agreement does not necessarily lead to a conclusion that the different components of fees are only for the purpose of grant of franchise. Their very names suggest differently.

+ Under Para 10B, the Authorisation fees is for grant of authorisation for conduct of training at the sites of authorisation training centres as approved under the Agreement. The authorisation fee is paid at the time of signing of the Authorisation Agreement. On these fees the appellant have paid service tax under the category of franchise service. We do not understand how the course fees can be said to be a part of the franchise fees.

+ We agree that as the course fees are paid by the students for the training and the fees is shared in the ratio of 25% : 75% between the appellant and various training centre, therefore, it cannot be said that the share of 25% received by the appellant is received towards the franchise service. This share is clearly for their role in providing training to students in advance computing. Their role is to ensure that the standard of infrastructure, faculty, selection of training, course material, examination is maintained at a high standard. The Agreement is clearly akin to the revenue sharing model held to be non-taxable under Board circular (supra). The details of the Agreement show that the appellant and the training centre jointly participate in the activity of providing high level skills and knowledge in computers. It is a Principal to Principal arrangement. We see no reflection of franchise service by the appellant to the training centre in this activity of training.

+ All the clauses from (i) to (iv) (of the definition) must be met to fall under the category of franchise service. We find that there is no right given to the training centre to provide training independently in the name of the appellant. The activity is only a joint business activity between the two. Neither can it be said that the appellant is providing concepts of business operation to the training centre; the appellant is merely ensuring that the standard of training is maintained. The words "business operation" have a totally different connotation. Business operation would mean passing of ideas and knowledge in running the business from a commercial point of view. In the present case, the whole activity is only to impart high standard training. Even clause (iii) of the definition of franchise is not met because the fees is not paid by the training centre to the appellant. Rather the fees collected from the students comes into the account of the appellant who then pay 75% of the share to the training centre. In this view of the matter, the activity clearly falls outside the scope of the franchise service.

+ The argument of the revenue that the words "in relation to" used in the definition of franchise service signify that any activity in connection with the franchise service will also be considered as part of the franchise service. Since the course fees is part of the franchise activity, it should be included in the value of the service for purpose of service tax. In our view the words "in relation to" have to be read in the context in which they are used. Thus words are in the context of franchise service. But the issue before us is the course fees or training fees.

+ The service tax law nowhere states that if two distinct activities are undertaken or provided in a single agreement, they should be taxed under the same service category. The activity of coaching for which course fees is received is not even remotely connected to the franchise granted by the appellant in the form of Authorisation .

The second portion of the demand that the appellant utilised Cenvat credit of service tax amount to Rs.2,79,463/- without having balance in their credit account on 30.09.2004 was held as a non-starter with the CESTAT commenting - "We do not understand the significance of Commissioner's findings that the balance as on 30.09.2004 was nil."

The appeal was allowed by setting aside the order impugned.

In parting: Also see 2015-TIOL-723-CESTAT-MUM & 2015-TIOL-1108-CESTAT-MUM .

(See 2015-TIOL-1642-CESTAT-MUM)