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2025 (6) TMI 767 - HC - Service TaxMaintainability of petition - availability of alternative remedy - liability of petitioner to pay tax under the provisions of Finance Act 1994 as it stood amended w.e.f. 01.07.2012 particularly in light of the exemption under Clause 2(i) of Service Tax Mega Notification No.25/2012-ST dated 20.06.2012 for health care services by clinical establishments. HELD THAT - The Ten Schedules attached to the Franchise Agreement dated 17.12.2015 have not prescribed the amount that the Petitioner would be charging the Franchisee/M/s.Pranav Labs for the equipment. The said Franchiser Fee payable to the Petitioner thus remains hidden in the percentage of amount collected and adjusted inter se from the Government referrals and Walk-in tests conducted by the Franchisee/M/s.Pranav Labs under the Franchise Agreement. Lending of equipment is a separate service which was provided by way of supply of standard equipments for which the Petitioner was entitled to charge fee. Prior to 01.07.2012 the aforesaid activity would have invited levy under Section 66 r/w. Section 65(105)(zzzzj) of the Finance Act 1994 viz. supply of tangible goods service. However after 01.07.2012 till 13.06.2017 which includes the period in dispute between January 2016 June 2017 such supply of tangible goods is taxable under Section 66B r/w. 66D(a) of the Finance Act 1994 as inserted by the Finance Act 2012 w.e.f. 01.07.2012 and in view of Section 66BA of the Finance Act 1994 as inserted by the Finance Act 2013 - there is no dispute that two distinctive services have been provided by the Franchiser/Petitioner to the Franchisee/M/s.Pranav Labs. Out of the said two services namely the Franchise Service provided by the Petitioner for which the Franchisee fee was charged under the Franchise Agreement has suffered tax. The Impugned Order has merely referred to the Education Guide that was circulated on the eve of the change brought to provisions of Chapter V of the Finance Act 1944 w.e.f. 01.07.2012. That apart the Impugned Order has merely referred to certain decisions than actually referring to the core issue relating to valuation that was to be adopted - The huge amount of Rs. 11, 66, 786/- has been confirmed by invoking extended period of limitation under Section 73(2) of the Finance Act 1994 with a consequential interest under Section 75 of the Finance Act 1994 and penalty for a equal amount under Section 78 of the Finance Act 1994. Conclusion - The Impugned Order dated 24.11.2021 is quashed and the case is remitted back to the 1st Respondent for passing fresh orders on merits for determining the value of the service provided by way of supply of standard equipments in the Franchisee premises by the Franchiser/Petitioner to the Franchisee/M/s.Pranav Labs with reference to Section 67 of the Finance Act 1994 and Rule 3 of the Service Tax (Determination of Value) Rules 2006 within a period of 30 days from the date of receipt of a copy of this order. Petition disposed off by way of remand.
The core legal questions considered in this case include:
1. Whether the Petitioner was liable to pay service tax under the Finance Act, 1994 for the period January 2016 to June 2017, particularly in light of the exemption under Clause 2(i) of Service Tax Mega Notification No.25/2012-ST dated 20.06.2012 for health care services by clinical establishments. 2. Whether the extended period of limitation under Section 73(2) of the Finance Act, 1994 could be invoked in this case, given the absence or presence of fraud, collusion, willful misstatement, or suppression of facts by the Petitioner. 3. The proper characterization and valuation of services rendered by the Petitioner to the Franchisee, specifically distinguishing between franchise services and supply of standard equipment, and the consequent tax implications. 4. Whether the Show Cause Notice issued complied with the procedural requirements, including clear disclosure of the method for determining taxable value. 5. The applicability and scope of relevant legal provisions, including Sections 65(105)(zzzzj), 66B, 66D(a), 66BA, 73, 75, and 78 of the Finance Act, 1994, and the Service Tax (Determination of Value) Rules, 2006. Issue-wise Detailed Analysis: 1. Liability to Pay Service Tax and Applicability of Exemption The Petitioner contended that the services rendered were exempt under Clause 2(i) of Service Tax Mega Notification No.25/2012-ST dated 20.06.2012, which exempts health care services by clinical establishments. The Petitioner operated under a Franchise Agreement dated 17.12.2015 with M/s. Pranav Labs, where diagnostic services were provided to government-referred and private patients, with revenue sharing arrangements. The Franchise Agreement defined "Standard Equipment" as equipment provided by the Franchisor (Petitioner) to the Franchisee, who was required to pay prescribed charges for such equipment. The Petitioner argued that the service provided was exempt healthcare service and that the amounts received were revenue shares, not consideration for taxable services. The Respondents contended that two distinct services were rendered by the Petitioner: (i) franchising services, for which fees were charged and taxed, and (ii) supply of standard equipment to the Franchisee, which was a separate taxable service under the Finance Act, 1994. They argued that the Franchise Agreement contemplated payment for supply of equipment and that the Petitioner had not declared or paid service tax on this component. The Court noted that the supply of tangible goods including machinery and equipment without transferring right of possession and effective control was taxable under Section 65(105)(zzzzj) prior to 01.07.2012, and post that date, under Section 66B read with 66D(a) and 66BA of the Finance Act, 1994. However, the Franchise Agreement did not separately itemize or charge for supply of equipment, and the valuation of such service was not determined in the Impugned Order. The Court emphasized the necessity to determine the taxable value of the supply of standard equipment under Section 67 of the Finance Act, 1994 and Rule 3 of the Service Tax (Determination of Value) Rules, 2006, which was not done by the adjudicating authority. 2. Invocation of Extended Period of Limitation under Section 73(2) Section 73(1) of the Finance Act, 1994 mandates issuance of Show Cause Notices within 30 months from the relevant date for short payment or erroneous refund of service tax, except in cases involving fraud, collusion, willful misstatement, or suppression of facts, where extended limitation under Section 73(2) applies. The Petitioner argued that there was no suppression or fraud, and thus the extended period could not be invoked. The Petitioner relied on several Supreme Court decisions holding that mere allegations or mechanical invocation of extended limitation without proof of suppression or fraud are impermissible. The Respondents relied on Supreme Court precedents stating that the extended period is reckoned from the date of knowledge of suppression. However, the Court clarified that such reckoning is relevant only when suppression is established, which was not done here. The Court observed that the Petitioner had filed returns, albeit belatedly, and had paid some service tax, negating any inference of suppression. The returns were filed within dates that did not justify extension of limitation. 3. Valuation and Characterization of Services under the Franchise Agreement The Franchise Agreement detailed the operational modalities, including revenue sharing for government-referred and private patients, payment of franchise fees, and supply of standard equipment. The Petitioner contended that the franchise fees were taxed, but supply of equipment was not separately charged or valued. The Court noted that the Franchise Agreement did not explicitly specify amounts for supply of equipment, and the fees for such supply appeared embedded within revenue shares. The adjudicating authority failed to determine value as per Rule 3 of the Service Tax (Determination of Value) Rules, 2006. The Court emphasized that lending or supply of equipment is a separate taxable service and must be valued distinctly. The absence of such valuation in the Impugned Order was a significant omission. 4. Procedural Compliance in Issuance of Show Cause Notice The Show Cause Notice dated 26.06.2020 demanded service tax, interest, late fees, and penalties but did not clearly disclose the method for determining the taxable value of the services, especially the supply of equipment. The Court found this lack of clarity problematic. The Court directed the Respondents to issue a corrigendum to the Show Cause Notice to clarify the valuation method, ensuring procedural fairness and transparency. 5. Treatment of Competing Arguments and Application of Law to Facts The Petitioner's argument that the entire service was exempt under the Mega Notification was accepted only partially. The Court recognized that while healthcare services may be exempt, supply of equipment is a distinct service liable to tax. The Respondents' reliance on extended limitation was rejected due to lack of evidence of suppression or fraud. The Court underscored the necessity of establishing such elements before invoking extended limitation. The Court found that the adjudicating authority did not apply valuation rules appropriately and failed to distinguish between different services rendered under the Franchise Agreement. Conclusions The Court quashed the Impugned Order dated 24.11.2021 and remitted the matter to the adjudicating authority for fresh consideration. The fresh adjudication was to determine the taxable value of the supply of standard equipment under Section 67 and Rule 3 of the Service Tax (Determination of Value) Rules, 2006. The Court directed issuance of a corrigendum to the Show Cause Notice clarifying the valuation method. The extended limitation period was held inapplicable due to absence of proven suppression or fraud. Significant Holdings: "The Petitioner has been awarded the contract of providing clinical laboratory services at Government Hospitals... This service has been outsourced from the Franchisee... The Franchise Agreement contemplates supply of standard equipment by the Franchiser to the Franchisee, for which remuneration is chargeable and taxable." "Section 73(1) of the Finance Act, 1994 stipulates that the Show Cause Notice must be issued within 30 months from the relevant date unless there is proven fraud, collusion, willful misstatement or suppression of facts. Mere mechanical invocation of extended limitation without proof is impermissible." "The valuation of the supply of standard equipment is to be determined in terms of Section 67 of the Finance Act, 1994 and Rule 3 of the Service Tax (Determination of Value) Rules, 2006. The Impugned Order does not disclose that such exercise has been carried out." "The Show Cause Notice must clearly disclose the method of determination of taxable value to enable the Petitioner to make a meaningful defence." "The Impugned Order is quashed and the matter remitted for fresh adjudication on merits within 30 days."
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