TMI Blog2023 (9) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... he various territories. The amount of Exclusivity Fee of Rs. 30 Lakh being charged by the appellant from its distributors in the five equal installments of Rs. 6lakh each is an amount of deposit with the appellant and if any distributorship get cancelled before the period of five years, the deposit which has been made by the appointed distributors under the category of Exclusivity Fee is being returned on the pro-rata basis by the appellant - The Exclusivity Fee which is being charged by the appellant from its distributors is a kind of guarantee amount rather than any franchisee fee. From the terms of agreement, appellant is not given any representational right to its distributors to sale or manufacture goods or provide service or undertake any process identify with the franchisor and the agreement is purely for marketing of product and therefore same cannot be termed as agreement between the franchisor and franchisee. This Tribunal in the case of M/S. SITI CABLE NETWORK LTD. (FORMERLY KNOWN AS WIRE WIRELESS (I) LTD.) VERSUS COMMISSIONER OF SERVICE TAX, DELHI-III (VICE-VERSA) [ 2020 (8) TMI 79 - CESTAT NEW DELHI] where it was held that Representational right means a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant have contested that the show cause notice as well as the impugned orders have not appreciated the facts of the matter in a proper way. It has been the contention of the learned advocate that there is no franchisee and franchisor relationship in the facts and circumstances of this case. The learned advocate has taken us through the definition of franchisee and franchisor, which is reproduced below:- The definitions of franchise and franchisor under section 65 (47) (48) of the Act with effect from 16th June, 2005: (47) 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 log or any such symbol, as the case may be, is Involved (48) franchisor means any person who enters into franchise with a franchisee and includes any associate of franchisor or a person designated by a franchisor to enter into franchise on his behalf and the term franchisee shall be construed accordingly. It has been the contention of the learned advocate that only a person having representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant and therefore, it is wrong on the part of the department to demand any service tax under the franchisee service under sub-clause (zze) (105) of Section 65 of Finance Act, 1994. 8. Learned advocate has relied upon CBIC Circular dated 27.07.2005, the relevant portion of the Circular is reproduced hereunder:- Letter F.No. B1/6/2005-TRU, dated 27-7-2005 Government of India Ministry of Finance (Department of Revenue) Central Board of Excise Customs, New Delhi Subject : Budget 2005-2006, Issues pertaining to Service tax. In the Budget for 2005-2006, proposals were incorporated to levy service tax on nine new services and to expand the scope of twelve existing taxable services [refer clauses (a) and (b) of section 88 of the Finance Act, 2005]. Certain other important legislative changes have also been made relating to, - (a) taxable services received from abroad; (b) linking payment of service tax with receipt of payment for the taxable services provided or to be provided; and (c) issue of show cause notices and adjudication. The Finance Act, 2005 (hereinafter referred as the Finance 2. Act) has come into force with effect from 13th May, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws in their support:- (A) Delhi International Airport P. Limited vs. UOI - 2017 (2) TMI-775- Delhi High Court (B) Tata Consultancy Service Limited vs. CCE - 2019 (6) TMI-109-CESTAT-MUM (C) Siti Cable Network Limited vs. CST - 2020 (8) TMI-79-CESTAT-NEW DELHI (D) Rackitt Benckiser (India) Limited vs. CCE - 2020 (7) TMI-384-CESTAT-CHANDIGARH (E) Global Transgene Limited vs. CCE - 2013 (8) TMI 748-CESTAT MUMBAI (F) Manipal Universal Learning Pvt. Limited vs. CCE - 2019 (12) TMI-943-CESTAT-BANGALORE 9. We have also heard Shri Rajesh K Agarwal, learned Superintendent (DR) who has reiterated the findings given in the impugned order-in-original. 10. Having heard both the sides and perused the record of the Appeals. We feel that before proceedings further in the matter it will be relevant to have a look at the definition of the Franchisee and Franchisor given in the Finance Act, 1994:- Section 65 (47) of the Finance Act, 1994:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er this category. Similarly, if rights are granted for rendering services identified with the principal on his behalf, such services by the principal to the service recipient would be taxable. Details of franchisees may be obtained from Yellow Pages, website http://franchiseindia.com/ and other advertisements. Field formations may undertake a survey and suitably advise the potential tax payers. 10.2 From the above explanation provided by the Circular (supra), it can be seen that merely because by an agreement a right is confirmed on the party to sale of goods or service undertaken was not ipso-facto bringing the agreement within the ambit of franchisee. What is essentially required is to establish that as per the agreement the rights has not conferred on franchisee which amount to representational rights. To our understanding, the representational right would mean that for all practical purposes the franchisee losses its own identity and acquire with that of the franchisor. Before proceedings further in the matter it would be relevant to refer to the relevant clauses of the distributor agreement:- WHEREAS: A. ITW is engaged in the manufacture and sale of Industrial Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xploit the full sales potential of the territory by ensuring that targeted sales, as specified by ITW, are achieved; and (b) Assist ITW for all sales and promotional activities. (v) To conduct its operations in a manner that shall consistently promote and uphold the high image, credibility, and reputation of ITW and the products and shall not act in any manner or make any statements that would be detrimental to them. Distributor shall not issue any press releases or otherwise give any statements / interviews to the media, without first clearing the text for the same in writing by ITW. (vi) To clear, collect, unload, store all consignments of the products at its own cost and store them under proper security. Distributor shall take all necessary actions/ precautions to prevent theft, fraud, misuse or total destruction from fire, accident or other natural disasters of the products and ITW property. (vii) To take delivery of the products dispatched to it promptly and avoid demurrage and other such charges. In the event of any such damages or any other costs being incurred due to its failure to take delivery in time, the same will be borne and paid by the distributor. (vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusive distributor of ITW in the territory. The Exclusivity Fee shall be payable in 5 (five) equal. Installments of Rs. 600,000/- each (Rupees six lakhs only) with the first installment being payable on the execution of this agreement. The balance two installments shall become payable on the commencement of the successive six month period(s). The parties agree and understand that the Exclusivity Fee is for the total period of the agreement. In the event of earlier termination of this agreement, due to any reason whatsoever, ITW shall refund the pro-rata amount of the Exclusivity Fee for the unexpired period to the distributor. The unexpired period shall be calculated at six monthly rests. For example, if the agreement is terminated after two years one month, the unexpired period shall be reckoned as two years six months. (ii) In addition to the above, the distributor shall pay to ITW the AMC royalty as per Annexure A, such AMC royalty and the mode of payment to be decided from time to time by the mutual agreement of the parties. (iii) Subject to fulfillment of its obligations under this agreement, the Distributor shall purchase the products from ITW at the price in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion of the decision is reproduced below:- 19. The issue that arises for consideration in these Appeals is whether the service contemplated under the agreements is a franchise service as contended by the Department or a service in the nature of supply of tangible goods for use w.e.f. May 16, 2008, as contended by Siti Cable. 20. To appreciate this issue, it would be pertinent to examine the agreements. On record there are two agreements. One is an agreement dated April 1, 2003 between Siti Cable and the proprietor of Ashirwad Cable TV Network [Ashirwad Cable]. The other is an agreement titled right to use agreement dated April 1, 2004 between Siti Cable and Direct Home Services Pvt Ltd. 21. The relevant terms of the first agreement dated April 1, 2003 between Siti Cable and Ashirwad Cable require examination. The First Party is Siti Cable and the Second party is Ashirwad Cable. The relevant clauses are reproduced below; WHEREAS First Party is in the business of running a cable networking business and is also in the business of running a Cable Channel (s) under the brand name SITI CABLE/SITI CHANNEL in various Cities/ Towns by establishing Cable Networking Bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for laying the cable has been granted by Haryana State Electricity Board (hereinafter referred to HSEB) in favour of the First Party. The Second Party has agreed to deposit the annual pole rentals to the concerned department on behalf of the First Party during the period of this agreement alongwith the arrears accrued from time to time and the Second Party shall submit a proper receipt issued by the concerned department showing the payments deposited on behalf of the First Party. The Second Party hereby undertake to indemnify the First Party against all claims, demands, recovery, charges, penalties be made or brought by HSEB against First Party on or after execution of this agreement. 5. PAY CHANNELS : The Second Party shall deal/ negotiate with all pay channels companies including Zee pay channels and he would be liable to pay the pay channel charges to all the broadcasting companies/ distributors/franchisees from time to time. Any activation/ de-activation of any pay channel is the sole responsibility of the Second Party and for this the Second Party shall indemnify the First party after execution of this agreement from any third party. It is agreed by the Second Party that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pected to give. xxxxxxx 18. OWNERSHIP: It is understood by Second Party that all the assets, equipments and materials used in establishing and running the network as mentioned in the Annexure-A exclusively belong to First Party and the Second Party shall not have any right/claim, of whatsoever nature, over the assets or cable TV networking business except as provided in the agreement. 19. USE OF LOGO: It is expressly understood by the parties that the Siti Cable / Siti Channel logo is a Registered Trade Mark and property of the first party, and the First Party authorizes the Second Party to use its logo during the currency of this agreement only for business under this agreement. It has been understood and accepted by the Second Party that he shall stand prohibited from using the logo in any manner upon the consent having been withdrawn by the first party. 22. There is no material change in the second agreement dated April 1, 2004 between Siti Cable and Direct Home Services Pvt. Ltd. and therefore, the relevant terms of the agreement are not being reproduced. 23. It is clear from the aforesaid agreement that Siti Cable is in the business of running cable netw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Siti Cable with effect from June 16, 2005 under the amended definition of franchise . It has been defined under section 65(47) of the Finance Act to mean an agreement by which the franchisee is granted a representational right to provide service or undertake any process identified with the franchisor, whether or not a trademark, service mark, trade name or logo or such symbol, as the case may be, is involved. 25. Thus, what is important to note is that the party should be granted a representational right to provide service or undertake any process identified with the franchisor. In other words, if the condition relating to representational right is not satisfied, there can be no franchise service. 26. Representational right means a right that is available with the franchisee to represent the franchisor and in that case the franchisee loses its individual identity and is known only by the identity of the franchisor . 27. The Delhi High Court in Delhi International Airport laid down the requirements for an agreement to be considered as franchise agreement and the observations are as follows:- 55. For OMDA to constitute a franchise, it would have to sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surrender his own identity and in addition must step into the shoes of the franchisor. (emphasis supplied) 31. The same view has been expressed by the Tribunal in National Internet Exchange and M/s. Easy Bill Ltd. 32. In 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 December 14, 2009, the Court emphasised that there must be a significant control over the method of operation of the party for the agreement to be called a franchise agreement. 33. An analysis of the agreement between Siti Cable and Ashirwad Cable clearly establishes that no franchise service has been rendered by Siti Cable to Ashirwad Cable for the following reasons: i) The agreement is for the right to use assets. Siti Cable provides equipment to the cable operators for rendition of cable operator services to their end customers. The consideration received by Siti Cable from the cable operator is also only in lieu of provision of such equipment/assets. The relevant clause of the agreement states that the cable operator would pay a certain sum for use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, processes, qualifications of staff, etc. as elaborated in the MOU. Though the MOU states that it is not a franchise arrangement and is a model of public-private partnership for deciding classification of the service rendered thereunder, we have to see the nature, terms and conditions thereof; it is immaterial as to what nomenclature is assigned to it. Thus, notwithstanding that the MOU states that it is not a franchise agreement, the aforesaid analysis leaves no doubt that it satisfies all ingredients of franchise as defined in section 65(47) of the Finance Act, 1994 in as much as Learning Centers were granted representational rights to provide service and to undertake various activities identified with the Appellant. (emphasis supplied) 36. It is for the aforesaid reasons that the Tribunal held that the arrangement between Punjab Technical University and the Learning Centers was a franchise arrangement. This decision, therefore, does not help the Department. 37. In Amway India Enterprises, the Tribunal observed that the distributors/ABOs have not only been granted right to sell Amway products, but they have the representational rights to sell such products. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Tribunal in Board of Control for Cricket India, thus, does not help the Department. 41. Learned counsel for Siti Cable also submitted the objective of the agreement entered into between Siti Cable and the cable operators is to grant the right to use the Head-end and other hardware, which was required by the cable operators for rendering services to their end customers. The hardware was always owned and controlled by Siti Cable and against such right to use, Siti Cable was recovering periodical payments from the cable operators. Such service would, according to the learned counsel be classifiable under the category of supply of tangible goods for use , which was introduced by Finance Act, 2008 and made leviable to service tax w.e.f May 16, 2008. Learned counsel submitted that the agreement between Siti Cable and the cable operators stipulates that Siti Cable would allow the cable operators to use the hardware without transfer of possession and therefore, after May 16, 2005 Siti Cable has been duly paying service tax on such supply of hardware under the said category of service. Thus, when payment of service tax under the category of supply of tangible goods for use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as listed below: Service 4/05 to 9/05 10/05 to 12/06 Total Rs Service Tax Cess Service Tax Cess Franchisee Service 2787272 50895 1626893 32538 4497598 Business Support 0 0 4738478 94770 4833248 Total 2787272 50895 6365371 127308 9330846 b. From the above table it is quite evident that demands have been made under the category of Franchisee Service for the period from 4/05 to 12/06 and for the period from 10/05 to 12/06 demand is in category of Business Support Services. While confirming the demand the commissioner has confirmed both the demands under category of Franchisee Services. As per Section 65 (47) w.e.f 16/06/2005, franchise has been defined as follows: franchise means an agreement by which the franchisee is granted representatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement completely meets requirement of first clause. Therefore, the agreement did amount to a franchise for the period from 16/06/2005 d. The findings recorded by the Commissioner clearly show that he has not been able to appreciate as to what is meant by grant of representational right . Grant of representational right would imply that the person to whom such rights have been granted under takes the entire activity as if it had been undertaken by the person granting such right. In this case the so called Sub Certifying authorities and Sub CA Administrators (Sub CAA), Registering Authorities and RA-Administration appointed by appellants have any authority to issue DSC certificates, representing them to be issued by appellant. Such transfer of right granted to appellant, by the certifying authority in terms of IT Act, 2000, is also not permissible. It is only the Appellants who could have issued the Digital Signature Certificate and this could not have been done by any other person or agency appointed by appellant. Hence mere act of collecting the applications and verification of the same for onward submission to the appellant cannot be termed as grant of representational ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, nor entitled to grant or they have actually granted any representational right to the sublicensees. 5.4 The Revenue s case rests on the premise that the logo or hallmark belonging to the appellant is put on the seed package manufactured/marketed by the sublicensees. The appellants produced a few samples of the product package labels before us. On perusal of the samples, we agree with the appellant that the packages contain a mark Fusion BT which only denotes that the seeds being sold contain Fusion BT genes, and it does not denote that the said mark is either a logo or a trademark or hallmark of the appellant. The department could not show that any logo or hallmark belonging to the appellant has been put on the packages manufactured/marketed by the sub-licensees. We further find force in the contention of the appellant that a laptop containing a label of windows , only denotes that the processor or the operating system/software, as the case may be in the said laptop and by putting such label, the laptop manufacturing company does not represent Microsoft or become the franchisee of Microsoft . Admittedly, in a franchisee transaction the franchisee loses his indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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