CESTAT, BANGALORE BENCH
Navayuga Engineering Co. Ltd.
Commissioner of Central Excise & Customs, Visakhapatnam
STAY ORDER NO. 1195 OF 2012
APPLICATION NO. ST/STAY/407 OF 2010
APPEAL NO. ST/730 OF 2010
JULY 11, 2012
P.G. Chacko Judicial Member – This application filed by the appellant seeks waiver of pre-deposit and stay of recovery in respect of the adjudged dues which include an amount of Rs. 12.75 crore demanded from them towards service tax and education cess under the head ‘franchise service’. On a perusal of the records, we find that the impugned demand is a levy on an amount of Rs. 125 crore taken as taxable value of the said service. This amount of Rs. 125 crore was the consideration paid to the appellant by their wholly owned subsidiary M/s. Godavari Toll Bridge Pvt. Ltd. as per a resolution passed on 25-3-2006 by the Board of Directors of the appellant. As per the said resolution, the appellant assigned to the said subsidiary the entire right to collect toll in respect of Yenam-Yedurulanka in Bridge in East Godavari District in the State of Andhra Pradesh. The said bridge was constructed by the appellant under a ‘Build-Operate-Transfer’ (BOT) Agreement with the Government of Andhra Pradesh, dated 6-10-1999. Under that agreement, the total investment was Rs. 110 crore and subsidy to the extent of Rs. 69 crore was granted by the State Government and the balance amount constituted the appellant’s investment. As per the agreement, the appellant was entitled to collect toll from the users of the bridge for a period of 15 years. They did collect the toll for the first 4½ years. In respect of the remaining period, the right to collect toll came to be assigned to the appellant’s subsidiary as per the company’s resolution dated 25-3-2006 ibid. These facts are not in dispute. The case of the appellant is that no franchise as defined under section 65(47) of the Finance Act, 1994 was involved in the transaction between the appellant and its subsidiary inasmuch as no representational right to provide any taxable service to any other person was granted by the appellant to its subsidiary. It is submitted by the learned counsel for the appellant that the very levy of toll itself has been recognized by the Board as a non-taxable service by virtue of such levy having been included in the State List of Schedule VII to the Constitution. The reference is to Circular No. 152/3/2012-S.T., dated 22-2-2012. The learned counsel further relies on the Tribunal’s decision in the case of Intertoll India Consultants (P) Ltd. v. CCE,  32 STT 269 wherein the users of a similar bridge were held to be not customers of the agency which collected the toll and consequently it was held that service tax was not leviable under the head ‘business auxiliary service’ on the amount retained by the toll collector. Support has been claimed from Swarna Tollway (P.) Ltd. v. CCE, Guntur [2011 (24) STR 738 (Tri.-Bang.)] also. It is further pointed out that the impugned demand is on a one-day transaction of 31-3-2006 and the show-cause notice was issued as late as on 30-6-2008 invoking the extended period of limitation it is submitted that there was no valid reason for invoking the extended period of limitation in this case.
2. The learned Special Consultant for the respondent refers to the facts of the case in general and particularly to the terms of the BOT agreement between the appellant and the Andhra Pradesh Government and the assignment dated 25-3-2006 by the appellant to its subsidiary. It is his submission that the subsidiary received from the appellant the right to collect toll from the users of the bridge representing itself to be the grantee of the right granted by the appellant. It is submitted that, even in the absence of such an arrangement between the appellant and the subsidiary, the appellant ought to have operated the bridge by allowing it to be used by the vehicle owners and keeping the bridge in good repairs. It is argued that such activity being a service to the people and the State Government, the appellant has granted their subsidiary a franchise and, therefore, the amounts collected by them from the subsidiary should be subjected to service tax under the head ‘franchise service’. Apart from this, the findings of the adjudicating authority have also been reiterated. It is also submitted by the learned Special Consultant that the appellant did not disclose the relevant information to the Department and hence the extended period of limitation was rightly invoked.
3. After giving careful consideration to the submissions, we are of the prima facie view that the appellant has not been able to make out a case against the impugned demand of tax. The activities which we have spelt out are not in dispute. On those facts, it appears to us that a service (whether taxable or not) which the appellant would otherwise have rendered to the bridge users and the State Government was assigned to their subsidiary under the Board’s Resolution dated 25-3-2006. It is not in dispute that the subsidiary collected the toll representing itself to the bridge users to be the grantee of the appellant’s obligations and nights in respect of the bridge. On a perusal of the definition of “franchise” given under Section 65(47) under the Finance Act, 1994, we note that it refers to an agreement by which the franchisee is granted representational right to provide service identified with the franchisor whether or not any ‘service mark’ is involved. Prima facie, in the absence of such an agreement, the appellant themselves would have provided the service to the people/State Government in respect of the bridge under the BOT agreement. They did provide this service for nearly 4½years also. For the rest of the period, this right was granted to the subsidiary-company with all the obligations and rights associated with it and that company has been rendering the same service, apparently, in exercise of representational right granted by the appellant. Prima facie, therefore, the arrangement between the appellant and the subsidiary-company would fit in the definition of ‘franchise’ and, for that matter, the appellant and the subsidiary-company should be appropriately called franchisor and franchisee. In this view of the matter, prima facie service tax is leviable on the amount of Rs. 125 crore under the aforesaid head. We have also considered the plea of limitation. It is not the case of the appellant that they disclosed the facts related to franchise to the Department of filed statutory returns or paid service tax. The facts came to the knowledge of the Department only at the stage of investigation which culminated in the show-cause notice which, prima facie, rightly invoked the extended period of limitation on the ground of suppression of facts. The appellant has not pleaded financial hardships in the present application.
4. We have also considered the Board’s Circular and the Tribunal’s decisions cited by the learned counsel. The decisions are not in respect of ‘franchise’ and the question debated before us was lot before the Tribunal in the cited cases. The Board’s Circular simply says tolls on bridges etc. are in the State List and hence not exigible to service tax. The Circular did not advert to transactions like the present one involving collection of toll. Prima facie, therefore, the Circular is also not supportive to the appellant.
5. Nevertheless, we are not asking for full pre-deposit. We direct the appellant to pre-deposit an amount of Rs. 3 crore (Rupees three crores only) within six weeks and report compliance to the Assistant Registrar on 26-9-2012. Assistant Registrar to report on 27-9-2012. Subject to due compliance, there will be waiver of pre-deposit and stay of recovery in respect of the penalty imposed on the appellant and the balance amount of service tax and education cess and interest thereon.