CESTAT, Mumbai Bench
Podar Jumbo Kids Vs. Commissioner of Service Tax, Mumbai – I
Section 65(47)
Ramesh Nair, Judicial Member And Raju, Technical Member
Order No. A/89219/17/STB
Appeal No. ST/323/2011
August  21, 2017
ORDER
Ramesh Nair, Judicial Member – The fact of the case is that the appellant are engaged in providing franchise service which is taxable w.e.f. 1.7.2003. They were not registered with the service tax authorities and they have not paid the service for the period 1.7.2003 to 30.6.2005. The appellant M/s. Podar Jumbo Kids is a body constitute by Anandilal & Ganesh Podar Society who entered into an agreement with various educational institute to whom they have provided the Franchise for Pre-school activities under the brand name of Podar Jumbo Kids for which the appellant being a franchisor charging the franchise fees. The Revenue has issued a show cause notice it was culminated into adjudication order wherein it was held that the arrangement between the appellant and educational institute of franchise agreement accordingly the franchise fee is liable for service tax. Being aggrieved by the order-in-original the appellant filed appeal before the Commissioner (Appeals), who also concurring with the views of the adjudicating authority upheld the order-in-original and rejected the appeal therefore the appellant are before us.
2. Shri R.S. Samria, Ld. Chartered Accountant appearing on behalf of the appellant submits that the demand was confirmed under the franchise service. As per the definition of Franchise service as provided under Clause (47) of Section 65 of Finance Act, 1994 there are four components in the definition. However, 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. He further submits that the penalty imposed under Sections 76, 77 & 78 were also wrongly imposed as there is no malafide intention on the part of the appellant. He placed reliance on the following judgment:
(i) Chief CIT v. St. Peter’s Educational Society [2016] 385 ITR 66/240 Taxman 392/70 taxmann.com 171 (SC).
(ii) Delhi Public School Society v. CST [Final Order No. 57036-57039 of 2013, dated 19-7-2013]
3. Shri B. Kumar Iyer, Ld. Superintendent (A.R.) appearing onbehalf of the Revenue reiterates the findings of the impugned order. He further submits that both the lower authorities have given a detailed finding explaining that the service of the appellant it clearly covered under the franchise service as provided under Section 65(47) of the Finance Act. He further submits that all the four sub-clauses of Clause (47) are existing therefore the service is rightly classifiable as franchise service and consequential demand is also legal and correct.
4. We have carefully considered the submissions made by both the sides. We find that as per the agreement, the appellant is providing the technical school of education as well as their brand name Podar Jumbo Kids to the franchisee against which the appellant is collecting the franchise fee. The definition of Franchise reads as under:
“(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”
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 with the franchisor fee which is not under the disputes in the present case 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) of 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 franchise 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. As regard the judgments relied upon by the Ld. Chartered Accountant in the case of St. Peter’s Educational Society (supra), the same is on the Income Tax Law for Income Tax 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 judgement in the Delhi Public School Society (supra) the Tribunal in the order in Para 19 of the order on the issue of Franchise concluded as under:
’19. Issue ‘B’ : This issue requires determination as to whether during the period 1-7-2003 to 15-6-2003 [prior to amendment of I the definition of “franchise” in Section 65(47)], the services provided by the petitioner satisfy the ingredients of “franchise” as defined. As earlier adverted to, franchise is defined during the period (1-7-2003 to 15-6-2005) as comprising four ingredients :
(a) The franchisor granting representational to the franchisee to provide service or undertake any process identified with the franchisor;
(b) The franchisor providing concepts of business operation to the franchise including know-how, method of operation, managerial expertise, marketing techniques or training and standard of quality control except passing on ownership of the know-how, to the franchisee;
(c) The franchisee having to pay a fee to the franchisor, directly or indirectly; and
(d) The franchisee being under an obligation not to engage in providing similar services or ‘ process, identified with any other person.
On 20-6-2003, Board Circular No. 59/8/2003-S.T. was issued to clarify the contours of new taxable services introduced pursuant to the Finance Act, 2003, including “franchise service”, brought into force w.e.f 1-7-2003. This circular states that “franchise” service as defined, in Section 65(47) of the Act sets out four generic ingredients and unless all the four ingredients of the sub-section are satisfied, an agreement cannot be called “franchise” agreement. Revenue does not contest this proposition, in view of the clear definition of “franchise” w.e.f. 1-7-2003, until its redefinition w.e.f. 16-6-2005.
Since the assessee, under the terms of the agreements receives an annual fee from the other party to the agreements, the third ingredient is clearly fulfilled. In our analysis on Issue ‘A’ we have concluded against the assessee that the enterprise pursuant to the agreements is not a Joint Venture in the true sense of the term and that the services provided by the assessee to the other party would not constitute services to itself but would clearly constitute services to another. The terms of the agreement clearly reveal that the other party to the agreements is granted a representational right to provide services by way of imparting of education through the school to be established representing the name (DPS), the motto and the logo of the assessee, the holder of the brand associated therewith. Further the assessee provides its established concepts of imparting education; its managerial expertise and operational techniques and standards of imparting education to the other party to the agreements. On this view of the matter the first and second ingredients of franchise‘ are also fulfilled. The fourth ingredient enjoins that the franchisee should be under an obligation not to engage in providing services or processes, identified with any other person. This ingredient indicates that the other party to the agreements should be obligated not to establish or administer an English Medium School identified with any other person. In clause 8(h) [of the representative agreement considered for analysis], we have noticed that rights in the name/motto/logo are stipulated to be the absolute property of the assessee and the use of these is prohibited to the other party for establishing branches or granting sub licenses. Clause 7(p) and (r) clearly stipulate that amongst the obligations of the other party is the clear obligation to ensure that no other educational or other institution, connected with the assessee purports to claim an association with the school, to be established, under the agreements; and the other party also undertakes not to cause or use, connect, associate or relate the name, logo or motto of the assessee with any other activity commercial or otherwise, other than for the School to be established under the agreement, either in the media, advertisements, greeting cards or any other means of communication, including but not limited to letter heads, visiting cards. The interactive effect of the aforementioned stipulations, considered in the general tenor of the agreement clearly fulfil the fourth ingredient of the definition of franchise as well.
We therefore conclude, in concurrence with a similar conclusion by the adjudicating authority, that during 1-7-2003 to 15-6-2005, the terms of the agreements fulfil the four ingredients of the expression “franchise” as defined in Section 65(47) and therefore the assessee has provided the said taxable service. Issue ‘B’ is answered accordingly and against the assessee’.
From the above conclusion drawn by the Tribunal it was 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 above discussion, we hold that the appellant service is correctly classifiable as franchise service which is liable for service tax. We accordingly uphold the demand of service tax. As regard penalties imposed under Sections 76, 77 & 78 of the Finance Act, we find 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 impugned order is upheld. The appeal is dismissed.
[2017-taxcaselaw-84-CESTAT-Mumbai-GST]
