By TIOL News Service

MUMBAI, SEPT 27, 2017: THE appellant is engaged in providing Management Consultancy Services in relation to operation and management of hotels.

They have entered into a "Territory License Agreement" with Park Global Holdings Inc. Delaware, USA (PG).

The said agreement grants exclusive rights to the appellants to develop hotels in India which includes the rights to use the names of ‘Park Inn', Park Inn International', ‘Park Plaza', and ‘ Park Plaza International' as well as to use the system of hotel management.

Further, the appellant is required to set aside for each calendar year an amount equal to 1% of the Gross Room Revenues. The said amount is to be retained by the appellants and is to be utilized for the advertisement, promotion and marketing in order to maximize general public recognition, acceptance and use of the said brand names.

During the course of the audit,it was observed that the appellant had made payments in foreign currency to M/s PG and the same was indicated in the audited balance sheet but service tax was not paid on the same. It was alleged that the appellants have received Franchisee Service from PG and service tax on the same was payable under reverse charge as import of services in terms of Section 66A of the FA, 1994.

SCNdt. 21.10.2010 was issued demanding service tax of Rs.1,29,68,456/- on amount remitted and advertisement fees retained for the period April 2005 to March 2010. The adjudicating authority confirming the demand with interest for the period 18.4.2006 to 31.03.2009 and also imposed penalty.

The appellant is before the CESTAT and the primary claim is that the demand is not sustainable on the ground of revenue neutrality. It is further submitted that the appellant during the relevant period i.e. 2005-06 to March 2010 has paid service tax of Rs.7,31,04,837/-in cash through challan and had the amount of service tax demand of Rs.1,11,65,145/- been paid the same could have been claimed as CENVAT credit thus reducing the total tax liability.

Reliance is placed on the following decisions -

+ Jet Airways (I) Ltd. - 2016-TIOL-2072-CESTAT-MUM

+ United Phosphorous Ltd. - 2016-TIOL-1572-CESTAT-MUM

+ Rochem Separation Systems (India) P. Ltd. - 2015-TIOL-120-CESTAT-MUM

+ Coca-Cola India Pvt. Ltd. - 2007-TIOL-245-SC-CX

+ Mafatlal Industries Ltd. - 2009-TIOL-14-CESTAT-AHM upheld by Supreme Court

Inter alia , it is also submitted that the service received by the appellant M/s. Park Global Holdings Inc., PG does not fall under the definition of Franchise services since the Foreign Service Provider had not given the representational right to the appellant; that M/s PG have only permitted the appellant to use their brand name, accordingly, the services are not taxable under Franchise service.

The AR supported the order of the original authority.

The Bench observed –

++ We observe that the so called service of Franchise was provided by PG, USA to the appellant for which the appellant has paid the fees in convertible foreign exchange, this amount was paid out of the total receipt by the appellant from the ultimate service recipient i.e. Indian Hotels, therefore, the service received from PG, USA got subsumed in the service provided by the appellant to Indian Hotels.

++ There is no dispute that the appellants have discharged service tax on the overall services provided to Indian Hotels which is more than Rs. 7 crores. As regard the service tax liability on the appellant, even if they are liable to pay the said service tax, they are legally entitled for the CENVATCredit on the entire amount which will reduce the liability of service tax on the appellant. Accordingly, the appellants' net payment of service tax to the Government exchequer will reduce to the extent of service tax payable in respect of Franchise service, therefore, the entire issue is revenue neutral.

++ As per the undisputed fact, as against the total payment of service tax by the appellant for an amount of more than Rs.7crores, demand in this case is Rs.1,11,65,145/- which is cenvatable, therefore this is a clear case of revenue neutrality.

The impugned order was set aside and the appeal was allowed.

(See 2017-TIOL-3504-CESTAT-MUM)