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M/s Ace Calderys Ltd Versus Commissioner of Service Tax, Bhopal

2015 (10) TMI 2412 - CESTAT NEW DELHI

Franchise Service – appellant, it is alleged, granted franchise for manufacture of firebricks of specifications, design and quality prescribed by it to some other small manufacturing units located at Katni. - Whether service rendered by appellant to manufacturers fell under scope of franchise service? - Appellant contends that it is not a franchise agreement and there was no franchise fee and goods manufactured were property of appellant and so called franchisees had no right over them - Sales t .....

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ement franchise service was rendered and thus agreement miserably fails to qualify as franchise agreement - Goods were sold to appellant and were consigned only to those persons whom he directed manufacturer to consign them to – Actual transactions between appellant and manufacturer are also in conformity with agreement – Impugned demand not sustainable – Decided in favour of assessee. - Appeal No. ST/1565/2010 & ST/394/2012-CU (DB) - F. Order No.52833-52834/2015 - Dated:- 3-7-2015 - G Raghu .....

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Besides manufacturing the said goods in its own factory, the appellant, it is alleged, granted franchise for manufacture of firebricks of specifications, design and quality prescribed by it to some other small manufacturing units located at Katni. During the period of the demand, as per the figure submitted by the appellant, it was seen that there was a difference between the amount realised on account of sales of the products to its customers and the purchase price actually paid by the appella .....

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s before franchise service became taxable and that while the word franchise or franchisee have been used in the agreement, in substance it is not a franchise agreement and there was no franchise fee prescribed therein, (b) As per the agreement it gave orders for manufacture (and supply) of firebricks to these manufacturing units which manufactured firebricks as per the specification, design, quality directed by it and consigned them to its customers as per its directions, (c) The firebricks were .....

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isees were nothing but mere manufacturers who were manufacturing goods on its direction and the goods so manufactured were the property of the appellant and were dispatched as per its direction and the so called franchisees had no right over these goods. (e) It did not provide any concept of business operations such as know-how, method of operation, managerial expertise, marketing technique, standards of quality control etc to these manufacturers. (f) The appellant paid the manufacturers as per .....

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rectly from the customers. The difference between the amount of excise invoice on which the taxes and duties were paid and the purchase price paid to these manufacturer as per the purchase order was termed as incremental/opportunity costs and it did not represent any service charges and the prices mentioned in the manufacturers' invoices to it did not represent the sale price but the price only for the purpose of calculating excise duty and sales tax. The manufacturers were only paid the pur .....

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sign these goods to any other person except to those they were directed by it to consign them to. (j) The manufacturers were selling the manufactured goods to the appellant for which the manufacturers raised invoices on the appellant. In the said invoices, the appellant was shown as buyer and the customer of the appellant whom the goods were ultimately sold by it was shown as consignee. Thus it was sale of the goods by the manufacturers to the appellant for which payment of sale proceed was made .....

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y was paid on this amount, no service tax could be levied on the same amount. (k) The difference between the amount charged by the manufacturers from the appellant in respect of the goods manufactured by them and the value at which the goods are finally sold by the appellant to its customers was nothing but trading profit of the appellant and does not represent franchise fee. (l) All the manufacturers have denied the existence of any franchise relationship between them and the appellant. (m) The .....

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fit needs to be extended. (p) The judgement of Skol Breweries Ltd. Vs. CCE, Aurangabad - 2014-TIOL-588-CESTAT-Mumbai has decided the issue in its favour. 4. The ld. DR supported the reasoning of the adjudicating authority and added that even the agreement with the manufacturers mentions the words franchise/franchisee. He cited the CESTAT judgement of Delhi Public School Society Vs. CST, Delhi - 2013 (32) STR 179 (Tri.-Del.) . 5. We have considered the contentions of both sides. The only issue in .....

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ise on this behalf and the terms 'franchisee' shall be construed accordingly." "Franchise" means an agreement by which (i) Franchisee is granted representational right to sell or manufacture good or to provide service or undertake any process identified with franchisor, whether or not a trademark, service mark, trade name or logo or any such of symbol, as the case may be, is involved. (ii) The franchisor provide concept of business operation to franchisee, including know-h .....

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ssion "franchise" w.e.f. 16.6.2005. "Franchise" means an agreement by which franchisee is granted representational right to sell for manufacture, good or to provide service or undertake any process identified with franchisor, whether or not a trademark, service mark, trade name or logo or any such of symbol, as the case may be, is involved." A careful perusal of the aforesaid definitions makes it clear that one of the non-derogable conditions to cover any agreement under .....

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ng its head office at 121 Maharshi Carve Road, 'Cement House', Bombay and unit called Katni Refractory Works at Katni (M.P.) hereinafter called Party No.1 and M/s. KATNI TILE WORKS, KATNI (MP) a registered partnership firm, through its partner Shri Jashwant Singh Gugalia, Katni hereinafter called the PARTY NO.2 witnesseth: WHEREAS the Party No.1 is the biggest manufacturers and supplier of firebricks and other refractory products; AND WHEREAS Party No.2 M/s. KATNI TILE WORKS, KATNI has a .....

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rs; AND WHEREAS the party no.2 has agreed to supply the firebricks on the terms and conditions of party no.1 and to the customers of party no.1 alone on the price dictated by party no.1 and shall reimburse the incremental cost to party no.1 as mentioned in the Purchase Order/Annexure by way of payment of opportunity cost. NOW THEREFORE IT HAS BEEN AGREED BETWEEN THE PARTIES AS FOLLOWS: (a) That the party no.2 shall dispatch the firebricks to the customers of Party no.1 as per the directions of P .....

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d on the advise and directions of Party No.1. (d) That the Party No.2 shall not demand, receive or collect any amount towards the supplies from the customers directly. Such amount shall be collected by Party No.2 from party no.1 on production of the dispatch Advice-cum-Invoice-cum-Gate Pass along with a credit note issued in favour of Party No.1 representing the incremental cost to be reimbursed to Party No.1 on account opportunity cost. (e) That the party no.1, on receipt of the documents menti .....

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That in the event of termination of this agreement including the right of franchisee, the party no.2 shall have no legal right to sell the product to anyone else but the remaining stock of goods with party no.2 shall be disposed off on the directions of party no.1 at such rate which shall be decided by party no.1. In case of any dis-agreement in the rate for disposal of the remaining stock, the dispute shall be resolved by a sole arbitrator to be appointed by party no.1 and the decision of such .....

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ciples of interpretation/construction of documents. 16. Before we part with the aspect relating to interpretation of the agreements between the assessee and the other parties, for establishing schools under the brand name, motto and logo of the assessee, a brief analysis of the general principles of interpretation/construction of documents is appropriate. (a) In Radha Sundar Dutta v. Mohd. Jahadur Rahim - AIR 1959 SC 24; Puzhakkal Kuttappu v. C. Bhargavi and Others - (1977) 1 SCC 17; Ford agains .....

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ding Society, while observing that almost all the old intellectual baggage of "legal" interpretation was discarded, summarized the principles by which contractual documents are presently considered, as under: (i) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (ii) The bac .....

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missible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (iv) The meaning which a document (or a .....

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that the parties must, for whatever reason, have used the word, words or syntax [Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. - (1997) ALL ER 352]. (v) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must .....

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d to business common sense'. 17. In Hideo Yoshimoto, Thomas, J. for the New Zealand Court of Appeal after quoting with approval the restatement of law by Lord Hoffmann in West Bromwich Building Society and noting that the five principles Lord Hoffmann articulated were reiterated and applied by the New Zealand Court of Appeal in Boat Park Ltd. v. Hutchison, referred to a paradigm shift in the interpretative principles noticed by Wigmore [Wigmore on Evidence - 1981-vol. 9, para 2461] and agree .....

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courts will strive to ascertain their true intention or, certainly, not to arrive at a meaning of their contract which is at variance with their actual intention. They cannot expect that the judicial exercise of constructing their contract will be buried under a stockpile of excessive formalism. Lewison [Kim Levison - The Interpretation of Contracts, Sweet and Maxwell, (1989)] refers to a lucid summary of the relevant principles set out in the judgment of Saville, J. in Vitol B.V. v. Compagnie E .....

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y also did not have any right to sell those goods to any person except the appellant or even consign those goods to any person except the customers of the appellant and in accordance with the directions of the appellant. (iii) No payment from the consignees came to the manufacturers. The payment by the consignees was made to the appellant. (iv) The manufacturers did not pay any amount to the appellant; on the other hand, it was the appellant which paid to the manufacturers for manufacturing thos .....

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ecause the words 'franchise' and 'franchisee' have been used in the agreement between the appellant and the manufacturers does not ipso facto mean that as per that agreement franchise service was rendered. As elucidated in para 7 above, whether franchise service has been rendered as per the said agreement has to be ascertained from the actual context, intent and content of the agreement. As has been analysed, no part of the agreement gives the slightest support to the contention .....

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ght to render service identified with Delhi Public School Society and also that judgement dealt with totally different facts and circumstances. 9. We have seen some of the invoices issued by the appellant as well as the manufacturers. We find that the manufacturers have issued invoices where the goods were shown to be sold to the appellant and the consignee is the person to whom the goods were consigned as per the direction of the appellant. The appellant in turn sent the invoice to the consigne .....

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anufactured and consigned by these manufacturers as per the purchase orders placed by the appellant in which it indicated the name of the consignee but there was no direct contact between the manufacturers and the consignee either with regard to placing of orders or with regard to payment for the goods. The payment for the goods by the consignee- customers was made to the appellant and appellant, in effect, paid to the manufacturers the amount agreed upon for manufacturing those goods. It was on .....

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the amount which the manufacturer was entitled to receive for manufacturing those goods as a result of which the appellant was enabled to pay to the manufacturer only that amount which was agreed upon between the appellant and the manufacturer for manufacture of those goods while the transactions as per invoices also got squared off. Thus, the actual transactions are also in conformity with the agreement and clearly support the analysis/inference in the preceding para. 10. We find that CESTAT in .....

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