TMI Blog2020 (7) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... l identity and would be known only by the identity of the franchisor. The Mumbai Tribunal in GLOBAL TRANSGENE LTD VERSUS COMMISSIONER OF CENTRAL EXCISE CUSTOMS SERVICE TAX, AURANGABAD [ 2013 (8) TMI 748 - CESTAT MUMBAI] also observed that the foremost requisite for a service to qualify as a taxable franchise service is that the franchisee should have been granted a representational right and that in a franchisee transaction, the franchisee loses its individual identity and represents the identity of the franchisor to the outside world. There is nothing in the agreement which may indicate that the franchisee has lost its individual identity and is representing the identity of the franchisor to the outside world. The arrangement is clearly a typical case of a licensing transaction and is in no way similar to a franchisee agreement as understood in the commercial world. In a franchisee agreement, the franchisor owns IPR and allows the franchisee to set up and run the business in the name of the franchisor. The customers coming to the outlets of the franchisor believe that they are directly dealing with the franchisor - The terms of the agreements leave no manner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER JUSTICE DILIP GUPTA: The order dated 16 October, 2012 passed by the Commissioner of Central Excise, Panchkula, The Commissioner, confirming the demand of Service Tax amounting to ₹ 15,76,47,158/- by invoking the extended period of limitation provided for under the proviso to section 73 of the Finance Act, 1994, The Act, but dropping the demand for the remaining amount of ₹ 5,15,14,778/- pertaining to the period prior to 18 April, 2006 has been assailed in this Appeal. The Commissioner also imposed penalty of the same amount under section 78 of the Act as also penalty of ₹ 10,000/- under section 77 of the Act. 2. The Appellant is engaged in the manufacture and sale of various formulations (fast moving consumer goods) and is interalia registered with the Service Tax Division, Gurgaon under Intellectual Property Right Services, IPR Service . The Appellant entered into licensing agreements with two licensors, namely, M/s Rackitt and Colman Overseas and M/s Rackitt Benckiser, N. V. The Appellant discharged Service Tax liability on the royalty paid by the Appellant to the licensors under the category of IPR Service under reverse charge me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 9. A franchisor has been defined under section 65(48) of the Act as follows:- (48) franchisor means any person who enters into franchise with a franchisee and includes any associate of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term franchisee shall be construed accordingly. 10. The taxable service under section 65(105)(zze) of Act means a service provided or to be provided to a franchisee, by the franchisor in relation to franchise. 11. To appreciate the issue involved in this Appeal, it will be appropriate at this stage to refer to the relevant terms of the agreement, because the terms of the agreement would determine whether the service received by the Appellant is IPR service or franchise service . The agreement which is titled as License Agreement was executed on 15 September, 2005 between Reckitt Benkiser N.V. and Reckitt Benckiser (India) Limited. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts reasonable opinion, deems necessary for the purpose specified in article 2.1. 2.4 The licensor will not during the term and other than to its group companies grant any license to any third party in the Territory to exercise the rights granted to the Licensee under article 2.1. 2.5 The Licensor hereby grants to the Licensee the right to sublicense the rights granted herein to the Licensee to third parties (hereinafter Sub-Licensee ) for the purposes of manufacture, packaging, sale and distribution of Product(s). It is however agreed that Licensee may not assign, charge encumber or transfer (any part of) the rights granted under this Agreement without prior consent of the Licensor. Any sub-licenses granted shall contain the limitations set out in this Agreement. The Licensee shall be responsible as between itself and the Licensor for the observance by its sub-licensees of the obligations contained in this Agreement as if such sub-licensees were party to this Agreement. 2.6 On the (partial) termination of this Agreement, the Licensee shall immediately terminate all sub-licensees granted under the terminated (part of the) Agreement, unless the Licensor, in its absolute d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n inferior quality. The Licensor is at all times allowed to inspect and control if the use of the Intellectual Property Rights by the Licensee is in conformity with its reasonable instructions and requirements. The Licensee shall provide the Licensor with all assistance as it may reasonable require in that respect, including access to the premises of the Licensee. If in the reasonable opinion of the Licensor the use of any of the Intellectual Property Rights by the Licensee is not in conformity with the Licensor s requirements, the Licensor will inform the Licensee thereof and the Licensor and the Licensee will then discuss what reasonable changes are necessary to bring about the desired conformity, which reasonable changes the Licensee shall carry out without delay and at its own cost. (emphasis supplied) 16. Article 6 of the agreement deals with royalties and is as follows:- Article 6 Royalties 6. In consideration of the rights and Intellectual Property Rights granted by the Licensor under this Agreement, the Licensee shall pay the Licensor: (i) royalty equivalent to 5% of net sales of Product(s) in India or such other percentage as may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81366240 1627325 813662 2008-09 791824000 95018880 1900378 950189 2009-10 939022000 93902200 1878044 939022 Total 385959920 7719199 2702873 20. The show cause notice also invoked the extended period of limitation mentioning therein that the Appellant deliberately classified the taxable service under IPR Service for the purpose of availing abatement under the Notification dated 10 September, 2004 and also deliberately and intentionally suppressed the facts to avoid liability of Service Tax. 21. The Appellant filed a reply dated 15 March, 2011 denying all allegations contained in the show cause notice. It specifically pointed out that the demand made for franchise service was not sustainable since an analysis of the agreement would indicate that licensing had taken place in relation to Intellectual Property Rights. The Appellant also pointed out that the extended period of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice. 23. The Commissioner, thereafter, analysed Article 2, Article 5 and Article 6 of the agreement and concluded that the service received by the Appellant would be covered under the category of franchisee services and not under IPR services . The relevant portion of the order is reproduced below:- From the above enumerated terms and condition, it is amply clear that the basic purpose of the activity of the noticee/transaction between the noticee and the franchisor, is basically allowing the noticee or giving the noticee right to manufacture and sale of goods identified with franchisor. No doubt, in this arrangement, there the use of intangible property such as trademarks, designs, patents, etc, is also involved. But this would not simply make it merely an IPR service and the basic purpose of the agreement is found to be manufacture and sale of goods identified with the franchisor/licensor. Thus, the activity in the instant case is squarely covered under the category of franchisee services and not under intellectual property services and the submissions of the noticee that the agreement between them and the licensor is for IPR services, have not grounds. 24. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT-MUM, and Tata Consultancy Service Ltd. Vs. Commissioner of Central Excise ST (LTU), Mumbai (Vice-Versa) 2019 (6) TMI 109 CESTAT MUMBAI. Learned Counsel also placed reliance upon a decision of the Principal Bench of the Tribunal in National Internet Exchange of India vs. C.S.T-Delhi Vide Final Order No. 52638 /2018 dated 27.07.2018; (iv) Reliance has also been placed on the decision of the United States District Court, D. South Carolina, Florence Division in Englert, Inc. v. Leafguard USA Civil Action No. 4:09-cv-00253-TLW. (D.S.C. Dec 14,2009) decided on 14 December, 2009; (v) In the alternative, it has been submitted that even if it is held that the services received by the Appellant were classifiable as franchise agreement , then too the Appellant was entitled to the benefit of the exemption Notification dated 10 September, 2004 since from a conjoint reading of the notification and the definition of IPR, it would be clear that the notification would be applicable where a taxable service is provided by an IPR holder to any person in relation to a temporary transfer or permission to use/enjoy any IPR; (vi) In this connection, it has been submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as correctly invoked the extended period of limitation. 28. The submission advanced by the learned Counsel for the Appellant as also the learned Authorized Representative of the Department have been considered. 29. The issue that arises for consideration in this Appeal is whether the services received by the Appellant under the aforesaid two agreements, each dated 15 July, 2005, would fall under the category of IPR services or franchise services . According to the Appellant, the services received by the Appellant would fall under the category of IPR service , while according to the Department the services received by the Appellant would fall under the category of franchise service . 30. Before examining as to whether service received by the Appellant would be classifiable under IPR service, it is considered appropriate to first examine whether the services received by the Appellant can be classified under the category of franchise service with effect from 16 June, 2005. 31. Prior to 16 June, 2005, the definition of franchise was: 65(47) franchise means an agreement by which- (i) franchisee is granted representational right to sell or manufacture goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to establish that the right conferred is a representational right . 57. The term representational right would necessarily qualify all the three possibilities i.e., (i) to sell or manufacture goods, (ii) to provide service, and (iii) undertake any process identified with the franchisor. 58. A representational right would mean that a right is available with the franchisee to represent the franchisor. When the Franchisee represents the franchisor, for all practical purposes, the franchisee loses its individual identity and would be known by the identity of the franchisor. The individual identity of the franchisee is subsumed in the identity of the franchisor. In the case of a franchise, anyone dealing with the franchisee would get an impression as if he were dealing with the franchisor. (emphasis supplied) 34. The Mumbai Tribunal in Global Transgene Limited also observed that the foremost requisite for a service to qualify as a taxable franchise service is that the franchisee should have been granted a representational right and that in a franchisee transaction, the franchisee loses its individual identity and represents the identity of the franchisor to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business in the name of the franchisor. The customers coming to the outlets of the franchisor believe that they are directly dealing with the franchisor. A typical example of such an agreement, as has been noticed by a Division Bench of the Mumbai Tribunal in Global Transgene Ltd. v/s Commissioner of Central Excise Customs and Service Tax, Aurangabad 2013-TIOL-1259-CESTAT-MUM , is of McDonalds where the customer are not concerned with who owns the McDonald restaurant because the customers identify the restaurant with McDonalds. 41. The terms of the agreements, therefore, leave no manner of doubt that the agreement is not a franchisee agreement. 42. This apart, in a franchisee agreement, the franchisor has the authority to exert a significant degree of control over the method of operation of the franchisee. The agreement executed between the parties in the instant Appeal clearly shows that the licensor does not have any significant control over the manner in which the Appellant conducts its operation. The Appellant is free to procure the raw materials as per its will and it has a right to fix the selling price of the final product. It is also free to run its busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationship and failure to provide FTC franchise disclosure statement under the Franchise Rule amounted to violate of unfair Trade Practice; (ii) Whether the franchisor has authority to exert a significant degree of control over the franchisee s method of operation or provide a significant assistance in the franchisee s method of operation; and (iii) Whether the franchisor must pay a certain amount after the franchise business begins. 44. There was no dispute about the first requirement as the agreement did involve sale or distribution of goods associated with the trademark of the plaintiff. In regard to the second and third requirement, the Court found that from a perusal of the agreement it was reasonable to conclude that Englert exercised control over the defendants only in regard to a single product line and that Englert did not have the ability to control any of the product of the defendant other than LeafGuard gutters which was one of the multiple products and services provided by the defendants. The level of control exerted by Englert over the defendant s method of operation was, therefore, not significant for the purpose of the FTC Franchise Rule and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken s Intellectual Property i.e. proprietary technical information, knowhow etc. for manufacture of products and for service of the main products as is defined in the intellectual property service. Rather the various terms of the contract as given above indicate that the Appellant has to represent the Timken (USA) to their various customers in such a way that the Appellant loses its own individual identity and would perhaps be known only by the identity of Timken (USA). 50. This decision will not come to the aid of the Department since a finding therein was recorded that the Appellant had lost its individual identity and would only be known by the identity of Timken (USA). This is not the factual position in the present Appeal as it has been found as a fact that the Appellant has not lost its individual identity to be known only by the identity of the licensor. 51. Likewise, the decision of the Principal Bench of the Tribunal in Amway India Enterprises Pvt. Ltd. will also not help the Department. The Tribunal found as a fact that the licensor had given a representational right to sell its products to the licensee. 52. The decision of the Principal Bench in Delhi Publ ..... 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