TMI Blog2017 (2) TMI 775X X X X Extracts X X X X X X X X Extracts X X X X ..... been completely divested by it and assigned to the Petitioners, there is no question of the petitioners representing AAI in performance of those functions. There is no representation right that has been assigned to the petitioners by AAI. The taxable service is not mere granting of a franchise but is where the franchisor provides service to a franchisee. For the transaction to be taxable, it is necessary that the service should be provided by the AAI to the Petitioners. It is not pointed out by the Revenue as to how and in what form service is being provided by AAI to the Petitioners. The Annual Fees paid is not because of any service rendered by AAI to the Petitioner. AAI has entrusted the petitioners with some of its functions under Section 12 of the Airports Authority of India Act and no service is being rendered by the AAI to the petitioners in performance of those functions. Perusal of clauses of OMDA clearly shows that AAI does not render any service to the petitioners. The blocking of Escrow account cannot be sustained as the transaction is not exigible under the taxing entry “Renting of Immovable Property Services” and further the transaction does not fall within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SVTAX-ADJ-COM-035 to 038-1314 dated 26.03.2014, to the extent it holds that benefit of CENVAT Credit is not available to the service recipient and confirms the demand of tax under Section 65 (47) of the Finance Act, 1994 under the entry Franchise service , is sought. 4. Restrain is also sought against the Respondents from levying and recovering Service Tax under the impugned provision viz. Renting of Immovable Property Service and/or Franchise Services on the annual fees or any interest and/or penalty consequential thereto. 5. It may be pertinent to note, at this point, that the Respondent No. 4 Airports Authority of India (hereinafter referred to as AAI) had treated the Annual fee paid by the petitioners to AAI as chargeable to service tax under the taxing entry Renting of Immovable Property Services . Respondent No. 1 to 3 (the Revenue Department), in its counter affidavit and also in the impugned Order in Original, has taken the stand that the upfront fee and Annual Fee is exigible to service tax under the taxing entry Franchise Service . BRIEF FACTS 6. Under the Airports Authority of India Act, 1994 it is the responsibility of the AAI to develop, operate, man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the terms and conditions of this Agreement (the Grant ). 11. The Petitioners provide various Aeronautical Services and Non-Aeronautical Services as mentioned in Schedule 5 and Schedule 6 of the OMDA respectively to various consumers. For the services provided, the Petitioners charge from the users of the services. 12. Under Article 11.1 of the OMDA, in consideration of the Grant of Rights granted under Article 2.1.1 of the OMDA, the Petitioners have to, inter alia, pay an Annual Fee to AAI. The Annual Fees payable to AAI is @ 45.99% in the case of DIAL @ 38.7% in the case of MIAL, of the projected Revenue to be received by the Petitioners. 13. The revenue share payable to AAI is paid through an escrow bank account. Under the escrow mechanism, all receipts from various sources received by the Petitioners are deposited into a Receivable Account from which they are transferred to a Proceeds Account. From the Proceeds Account, payments are first made towards statutory dues and out of the balance, AAI is paid the Annual Fees and any other amounts due to it under the OMDA. The balance is transferred to a Surplus Account, which comes to the Petitioners as their respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entry of Renting of immovable property Service . 21. By the Order-in-Original dated 26.03.2014, the Commissioner of Service Tax adjudicated the show cause notices issued to AAI. It may be noted that as the notices were issued to AAI, no notice was issued to the petitioners. By the impugned order-in-original it has been held that the services of undertaking statutory functions of the AAI under OMDA are the services provided by AAI to the petitioners under the taxable category of Franchise Service specified and defined under Section 65 (105) (zze) and Section 65 (47) read with Section 65 (48) of the Act. 22. The adjudicating authority has held that the meaning of franchise is confined to the definition of the terms given in the Act itself and the right to represent the AAI by the petitioners is not necessary as per the definition clause inasmuch as it is not necessary that the JVCs should utilize the trade mark, service mark, trade name or logo or any such symbol of the AAI by the petitioners so as to give an indication to the general public that petitioners are representing AAI. It has been held that the AAI has granted rights to the petitioners to perform those functions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the Petitioners. It is contended that the Annual Fees is not a consideration paid by the Petitioner to AAI for any service, but is an appropriation of Revenue by AAI even before any part of the Revenue is received by the Petitioners. 29. It is contended that the AAI has a right to receive its specified revenue share. The gross revenue is appropriated by AAI at its very source and the Petitioner receives only the balance of the gross revenue. There is no payment by the Petitioner to AAI from its funds but AAI appropriates its share from the escrow account as per the priority mentioned in the escrow mechanism. It is submitted that AAI renders no service to the Petitioners for earning this share of the revenue on which the Petitioners have already paid Service Tax under the taxing entry Airport Services . 30. It is contended that the said entry to be attracted the franchisee should be granted a representational right to sell or manufacture goods or to provide services. It is contended that the Petitioners perform services in their own name and have not been granted any representational right by AAI to render services. The Petitioners do not carry on any activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Petitioners. It is submitted that there is no service, which has been provided or is being provided by AAI to the Petitioners. 39. It is further contended that the reference to renting of immovable property is not at all apposite for determining the present dispute as the definition of renting immovable property under Section 65(90)(a) makes it clear that renting of immovable property includes renting, letting, leasing or similar arrangement for use in the course or furtherance of business or commerce . It is submitted that it is this activity of renting, which is treated as taxable service under Section 65(105)(zzzz). 40. However, in the present case, it is the case of the Revenue, that there is no question of attracting the provisions relating to renting of immovable property and the Revenue is seeking to bring the OMDA under the service tax provisions as a Franchise Agreement. SUBMISSIONS ON BEHALF OF THE DEPARTMENT OF SERVICE TAX 41. It is contended that the petitions are not maintainable as against the adjudication order and the remedy lies by way of appeal before the CESTAT. 42. It is contended that the annual fee paid by DIAL to AAI is chargeable to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not in the traditional sense of the term. In the present scenario where AAI has entered into franchise agreements with the Petitioners to operate, develop and maintain the airports, there is a significant amount of value addition to the overall services being offered at the airport premises. REASONING AND ANALYSIS 49. Since the stand of the respondent Revenue is that the Upfront Fee and Annual fee is exigible under the taxing entry Franchise Services and not under the taxing entry Renting of Immovable Property Services , we are limiting the examination to the taxing entry Franchise Services . 50. Section 65(47) of the Finance Act, 1994 reads as under: franchise means an agreement by which the 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. 51. To constitute a franchise, an agreement has to satisfy the following conditions: (i) the franchisee must be granted a representational right to: (a) sell or manufacture goods, or (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided by AAI to the Petitioners. 60. Some of the relevant clauses of the OMDA are as under: TRANSFER OF RIGHTS IN RELATION TO AIRPORT ON EFFECTIVE DATE AND TRANSITION PHASE 5.1 Upon satisfaction or waiver, as the case may be, of the Conditions Precedent, on and from the Effective Date, the rights and obligations associated with the operation and management of the Airport would stand transferred to the JVC, who shall be solely responsible and liable for the performance of all Aeronautical Services, Essential Services and all other activities and services as presently undertaken at the Airport (other than Reserved Activities). JVC shall perform under all existing contracts and agreements between AAI or any Relevant Authority and any third party as relatable to the Airport from the Effective Date, as if JVC was an original party to such contracts and agreements instead of AAI and towards this end shall perform all responsibilities, liabilities and obligations of AAI at JVC s risk and cost (including payment obligations to counter parties). Provided however that in order to ensure smooth transfer of the Airport from the AAI to the JVC, AAI shall during the Transition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing under such contracts (including, for the avoidance of doubt, contracts relating to capital work-in-progress included in the list of Mandatory Capital Projects), including specifically, payments due to the counter-parties of such contracts or to any other Entities pursuant to such contracts. Any benefits arising from such contracts shall also vest with JVC. Nothing contained in this Articles 5.2(b)(i) shall prejudice the payment obligation of the JVC in respect of payments due from August 30, 2005 under contracts for capital work-in-progress as contained in Article 5.2 (b)(ii) hereof. ***** ***** ***** 5.3 At the end of the Transition Phase, JVC would operate and maintain the Airport independently. CHAPTER VI OPERATION SUPPORT 6.1 Operation Support 6.1.1 For a period of 3 (three) years from the Effective Date (herein referred to as the Operation Support Period ), AAI shall provide operational support to the JVC through the General Employees in the manner and subject to the terms provided herein (such support is hereinafter referred to as Operation Support ). The estimated annual Operation Support Cost is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently upon such appointments by the JVC, AAI shall reduce (at no cost to JVC) the number of its senior management (employees above the level of Deputy General Managers or equivalent of AAI on the date hereof) located at the Airport, such that upon the expiry of the Transition Phase, no such AAI senior management (employees above the level of Deputy General Managers or equivalent of AAI on the date hereof) remain at the Airport. It is expressly understood by the parties that salary, benefits, statutory payments, perks and contribution towards terminal benefits payable to the senior management of the AAI for the duration of their deployment at the Airport during the Transition Phase shall be paid by the JVC to the AAI. Without prejudice to the generality of the foregoing, the JVC shall engage the experts listed in Schedule 15 hereof at the Airport for the duration mentioned therein. ***** ***** ***** 8.3 Master Plan 8.3.1 The JVC shall prepare a Master Plan for the Airport setting out the proposed development for the entire Airport, planned over a 20 year time horizon. The Master Plan shall include traff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Master Plan. The JVC must prepare a Major Development Plan for each major development or any development, which is expected to have a capital cost in excess of ₹ 100,00,00,000/- (Rupees One Hundred Crores Only) and shall ensure that each such major development is undertaken by contractors selected pursuant to a competitive bidding process. The Major Development Plan must be in accordance with the finalized Master Plan and, in the case of aeronautical developments, must be the subject of full consultation with Airport users. 8.4.2 The JVC hereby agrees to submit each Major Development Plan to the AAI for its information and MCA for its review and comments. The Major Development Plan must be submitted to the MCA for its review and comments as soon as it is prepared. Provided, however that, notwithstanding Article 3 hereof, the JVC shall submit the Major Development Plan(s) relating to the design, development and construction of (i) terminal buildings; and (ii) parallel runways at the Airport, within six(6) months of the date hereof. ***** ***** ***** 8.5.7 Contracts, Leases and Licences (i) Sub-Contracting, Sub-lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tipulates that at the end of the Transition Phase, the Petitioners have to operate and maintain the Airports independently. Under clause 6.1, for a period of three years AAI had to provide operation support in the form of General Employees. The General Employees have to perform such function and undertake such duties and in such capacity as may be required by the JVC. For the limited purpose of provision of Operation Support, AAI was to act for and on behalf of the Petitioners and to direct the General Employees to undertake such functions and duties as may be reasonably directed by the Petitioners. The Petitioners could even require AAI to take disciplinary action against/remove any General Employee. 63. In terms of clause 6.2, during the transition period, the Petitioners were to employ, in a phased manner, increasing number of senior management personnel and consequently AAI was to reduce the strength of its senior management so that on the expiry of the transition period, no senior AAI management official remains at the airport. 64. In terms of clause 8.3, the Petitioners had to prepare a master plan for the Airports setting out the proposed development for the entire Air ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is not mere granting of a franchise but is where the franchisor provides service to a franchisee. For the transaction to be taxable, it is necessary that the service should be provided by the AAI to the Petitioners. It is not pointed out by the Revenue as to how and in what form service is being provided by AAI to the Petitioners. The Annual Fees paid is not because of any service rendered by AAI to the Petitioner. AAI has entrusted the petitioners with some of its functions under Section 12 of the Airports Authority of India Act and no service is being rendered by the AAI to the petitioners in performance of those functions. Perusal of clauses of OMDA clearly shows that AAI does not render any service to the petitioners. 69. Clearly, as there is no representational right conferred by AAI on the petitioners, the OMDA cannot constitute a franchise in terms of Section 65(47) of the Finance Act. Further as no service is being provided by AAI to the petitioners, there cannot be said to be any taxable service in terms of section 65(105) (zze). 70. The reliance placed by the Revenue upon the decision in Home Solutions (Supra) to contend that as the transaction between the partie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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