By TIOL News Service

MUMBAI, MAR 18, 2019: THIS is a Revenue appeal.

The respondent is engaged in the manufacture and sale of various petrochemical products for retail sale. Various sales outlets in the shape of petroleum pumps etc. are established. To operate those, dealers are appointed. In some cases the premises and the land is owned by the respondent (Company Controlled Site) while in other cases, land is owned by the dealers (Dealer Controlled Site).

There are agreements entered between the respondent and the dealers in terms of which the respondent recovered licence fees from dealers as follows:

It is the case of the Revenue that this Licence Fee is to be charged to service tax as provider of Franchise service.

Five SCNs were issued demanding service tax for the period July 2003 to December 2007.

However, the Commissioner of Service Tax, Mumbai-I dropped the demands and, therefore, Revenue went in appeal before the CESTAT. The Commissioner, inter alia , held that the service provided by the respondent is not in the nature of franchise service but it is a service in the nature of supply of tangible goods which is chargeable to tax only w.e.f 16.05.2008.

It needs mention that as per the respondent such licence fee is collected from the company controlled and dealer controlled outlets where the respondent are supplying pumps, storage tanks, pipes, etc. & the said licence fee is not collected when no outfit is provided.

The CESTAT did not find merits in the Revenue appeal and held thus -

"…From the clause (1) of the agreement, it is apparent that the purpose of the agreement is to grant rights to use the premises which are ready for operation (as in company controlled outfit) or right to use the storage tanks, pipes, pumps etc. as per design of the respondent (in case of dealer controlled outfit) - Thus the preliminary purpose of the agreement would clearly be the grant of rights to use the premises and/or equipment - clause (10) which Revenue relies upon nowhere grants representational rights to the dealers - no merit in the appeal of the Revenue, hence the same is dismissed."

We reported this order as - 2018-TIOL-43-CESTAT-MUM.

Unhappy with this decision, the Revenue has filed an appeal before the Bombay High Court.

The counsel for the Revenue emphasised that in view of clause (10) of the agreement entered into between the assessee/respondent and the dealer, the products have to be sold under the name and logo of Bharat Petroleum Corporation Limited/assessee which is indicative of the fact that a representational right to sell such product has been granted; that if the licence fee is charged only for such a right, then, this is clearly an arrangement falling within the meaning of rendering of franchise service.

The High Court considered the submissions and observed that in view sub-clause (zze) of clause (105) of section 65 of the Finance Act, 1994, the definition of "taxable service" means any service provided or to be provided and, in the instant case, to a franchisee by the franchisor in relation to franchise.

The High Court held -

"7. We do not see how by reading clause (10) of the agreement in isolation can the Revenue reach this conclusion. The tribunal found that clause (10) of the agreement between the assessee and the dealer was picked up and read in isolation to arrive at the above conclusion. That is not justified at all. The agreement will have to be read as a whole and precisely, that is done by the tribunal in the impugned order. Its discussion in para 4, therefore, meets our approval. Once the matter is approached in a holistic manner and looked as such, then, we do not find any perversity or error of law apparent on the face of the record in the impugned order…"

The Revenue appeal was dismissed.

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(See 2019-TIOL-611-HC-MUM-ST)