By TIOL News Service

MUMBAI, DEC 21, 2017: AGAINST the confirmation of service tax demand under head of Franchise Service and imposition of penalty, the appellant is before the CESTAT.

The appellant submits that they are not covered under the said service as they have not granted any representational rights to their client; that they are involved in supply of beverage vending machine bearing name BEVERAGE EXPRESS to various clients; that the said machines are installed in the clients premises; that in terms of the agreement entered, as a consideration, the client has to make one-time payment apart from certain monthly payments; that the clients are obliged to purchase the beverages ingredient from the appellant; that the premises of the client are approved by the appellant in terms of the agreement and position where machine is to be placed in the clients premises is decided by the appellant; that the clients are prohibited to sell any other beverages other than those specified by the appellant from time to time from the said vending machine; that the clients are also obliged to maintain and keep intact, the original logo, advertisement or any other indication, mark affixed on the said machine; that the ‘Franchisee' are prohibited from obstructing, moving or removing the said logo/advertisement/mark or adding any other logo, advertisement, mark etc. to the said machine.

It is also submitted that the agreement is not a franchisee agreement and that the word “franchisee” has wrongly been used since there is no transfer of representational rights granted in this agreement.

The appellant relies on the following decisions in support viz. Delhi International Airport P. Ltd - 2017-TIOL-394-HC-DEL-ST, ACE Calderys Ltd - 2015-TIOL-2250-CESTAT-DEL, Advantage Media Consultant - 2008-TIOL-548-CESTAT-KOL.

It is also submitted that since they were paying sales tax on the same transaction,there cannot be any intention to evade service tax inasmuch as extended period of limitation cannot be invoked.

The AR argued that appellants are squarely covered under the definition of franchise service as they granted representational rights to their clients.

The Tribunal noted that the case law of Delhi High Court in Delhi International Airport P. Ltd [2017-TIOL-394-HC-DEL-ST] relied upon by the appellant does not apply to the present case as the facts involved are clearly distinguishable since the appellants were receiving money from clients.

After extracting the terms and conditions of the agreement entered, the Bench inter alia observed –

++ In terms of above condition of the agreement itself apparent that the appellant have granted representational right to the franchisee. To any person wishing to have beverages, it would appear that he is buying beverages from the appellant and not from the franchisee as it is the appellants name that appears on the machine and same is prominently displayed on the machine. The raw material used also appearing the brand name of the appellant. To a person purchasing the beverage from the said vending machine it would appear that he has buying the same from the appellant through franchisee. In this circumstances, it cannot be denied representational rights have been granted to the franchise by the appellant.

++ The next issue raised by the appellant related to fact that they are paying sales tax/VAT on the said transaction under the category of transfer of rights to use as deemed sale and therefore no service tax can be demanded on the said transaction. It is not for this Tribunal to decided if the liability under sales tax arises or not. This tribunal can only adjudicate if the liability under service tax arises or not. In this regard appellant argument that they have paid sales tax is of no avail. The appellant also raised the issue of limitation relying on the facts that they have paid sales tax on the same transaction therefore there was no intention to evade duty. We find that the mere fact of payment of sales tax is not sufficient to hold that they are not liable to service tax.

++ Appellant have themselves described their client in their agreement as franchisee. From the above description, it is apparent that when the agreement was drafted, appellant themselves believed that they are granting franchisee rights. In this circumstances failure to take responsibility and pay duty can only be attracted intention to evade.

Agreeing that cum-tax benefit needs to be extended to the appellant, the matter was remanded to re-calculate the tax liability.

As regards imposition of penalty, the Tribunal held that since the entire period of dispute is prior to 16.05.2008, simultaneous penalties u/s 76 and 78 could be imposed in view of the Delhi High Court decision in Bajaj Travels Ltd. - 2011-TIOL-896-HC-DEL-ST.

The appeal was partly allowed.

(See 2017-TIOL-4488-CESTAT-MUM)