By TIOL News Service

NEW DELHI, OCT 20, 2015: THE appellant is engaged in the manufacture of branded alumina firebricks and other refractory material. 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.

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 appellant to these manufacturing units which manufactured the goods.

The lower authorities took a view that this difference reflected the value of the franchise service and consequently the adjudicating authority confirmed the Service Tax demand of Rs. 4.65 crores under franchise service along with interest and penalties.

Before the CESTAT against this order, the appellant inter alia submitted -

+ The agreements with various manufacturing units to manufacture the said products on its behalf as per the specifications, designs and quality as directed by it were entered into several years 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.

+ 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.

+ The demand is time-barred inasmuch as the 1st interaction in this regard with Revenue took place in 2005 and thus the nature of transactions was in the knowledge of Revenue at least from 2005 onwards and there was no wilful misstatement/suppression on its part.

+ The judgement of  Skol Breweries Ltd. Vs. CCE, Aurangabad - 2014-TIOL-588-CESTAT-MUM  has decided the issue in their favour.

The AR reiterated the findings of the adjudicating authority and added that even the agreement with the manufacturers mentions the words franchise/franchisee. Reliance is placed on the decision in Delhi Public School Society -   2013-TIOL-1282-CESTAT-DEL.

The Bench extracted the definition of 'franchisor/franchise' given in the FA, 1994 and observed -

A careful perusal of the aforesaid definitions makes it clear that one of the non-derogable conditions to cover any agreement under the scope of franchise is that the franchisee is granted  representational right to sell or manufacture goods  identified with franchisor.

After reproducing the representative agreement under which the appellant got the goods manufactured from various manufacturers and the ratio contained in paragraphs 16 & 17 of the Tribunal decision in DPSS case (supra), the Bench drew the following inference -

(i) The manufacturers did not have any right to manufacture the goods identified with the appellant except in compliance of the purchase orders of the appellant,

(ii) They 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 those goods as per its purchase orders.

Based on the aforesaid inferences, the CESTAT commented -

++ It thus comes out loud and clear that the manufacturers did not have any representational right to manufacture goods identified with the appellant. Indeed the appellant did not provide any service to these manufacturers nor did the manufacturers make any payment to the appellant for any service. The flow of payment was from the appellant to the manufacturer which would not have been the case had the appellant provided any service to the manufacturers.

++ Merely because 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 has been analysed, no part of the agreement gives the slightest support to the contention that it gave representational right to the manufacturers to manufacture goods identified with the appellant. As a consequence notwithstanding the presence of words, 'franchise'/'franchisee', therein, the said agreement miserably fails to qualify as franchise agreement.

The judgement of CESTAT in the case of Delhi Public School Society cited by the AR was held as not relevant to the circumstances involved. As for the case law relied by the appellant the Bench observed that there was nothing much in it to derive mileage from.

Holding that the appellant did not provide franchise service, the demand was set aside and the appeal was allowed.

(See 2015-TIOL-2250-CESTAT-DEL)