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ST - As per service tax law there is no exemption provided to franchise service relating to educational activity: CESTAT

By TIOL News Service

MUMBAI, SEPT 13, 2017: THE appellant is a body constituted by Anandilal & Ganesh Podar Society who entered into an agreement with various educational institutes to whom they have provided the Franchise Pre-school activities under the brand name of Podar Jumbo Kids for which the appellant being a franchisor is charging the franchise fees.

These services are taxable w.e.f. 1.7.2003 but the appellant did not take registration nor pay service tax for the period 1.7.2003 to 30.6.2005.

SCN was issued and the demand was confirmed. The Commissioner (Appeals)also concurred with the views of the adjudicating authority.

The appellant is before the CESTAT and submits that the definition of “franchise” at the material time reads -

'(47) "franchise" means an agreement by which-

(i)  franchisee is 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;

(ii)  the franchisor provides concepts of business operation to franchisee, including know-how, method of operation, managerial expertise, marketing technique or training and standards of quality control except passing on the ownership of all know-how to franchisee;

(iii)  the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and

(iv)  the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person;'

Inasmuch as it is submitted that the component under sub-clause (ii) & (iv) are not fulfilled, therefore, the service does not qualify as franchise service in terms of Section 65 (47) of the Finance Act.

Moreover, it is emphasized that penalty ought not to have been imposed under Sections 76, 77 & 78 as there is no malafide intention on the part of the appellant. [Chief Commissioner of Income-Tax Vs. St. Peter's Educational Society - 2016-TIOL-143-SC-IT & Delhi Public School Society - 2013-TIOL-1282-CESTAT-DEL relied upon.]

The AR supported the order of the lower authorities.

The Bench extracted the definition of “Franchise” and observed thus -

+ From the above discussion, we find that the franchisor has granted representational right to the franchise to provide service in relation to education under the trademark of the appellant therefore the clause (i) is clearly exist.

+ As per sub-clause (ii) the franchisor provides the concepts of business operation with the franchisee, including know-how method of operation etc. In the facts of the present case the appellant have indeed provided the know-how and method of teaching technique to the franchise.

+ However, the ownership of know-how under the brand name of Podar Jumbo Kids was not passed on to the franchise accordingly the sub-clause (ii) also stands complied with.

+ As per clause (iii) the franchisee is required to pay the franchisor fee which is not under dispute as the franchise has paid the fees to the franchisor on which the demand of service tax was raised.

+ As per clause (iv) the franchisee is under an obligation not to engage in providing similar goods or services or process, identified with any other person. As per the agreement in clause (h) an obligation to be undertaken by the franchisee shall not be entitled to allow any sub-franchisee entered into any arrangements whatsoever with any other person or party for conduct of Podar Jumbo Kids with a view to sub franchising or sub delegating the rights and duties granted to the franchisee under this agreement. As per this clause of the agreement the sub-clause (iv) of the definition of franchisee also stands fulfilled.

+ Therefore in our considered view the service is clearly falls under the category of franchise service i.e. liable for service tax.

Case laws cited by appellant:

+ The case of St. Peter's Educational Society (supra) , the same is on the Income Tax law and cannot be applied in the case of service tax. As per the service tax law there is no exemption provided to the franchise service relating to educational activity, therefore, the said judgment cannot be made applicable in the present case.

+ As regard judgment in the Delhi Public School Society (supra) the Tribunal has rather held that as per the agreement all the four ingredients of the definition of Franchise are fulfilled accordingly the service was classified as franchise service.


+ As per the nature of service there was no doubt regarding the classification of service as franchise service, therefore, there was no reason to interpret differently by the appellant. Accordingly, the penalty imposed by the lower authority is also in order.

The appeal was dismissed.

(See 2017-TIOL-3317-CESTAT-MUM)