Liberty Group Marketing Division Vs Commissioner of Central Excise And Service Tax (CESTAT Chandigarh)
Introduction: The recent order by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chandigarh in the case of Liberty Group Marketing Division vs. Commissioner of Central Excise and Service Tax addresses crucial issues related to the classification of services provided by the appellants. The dispute revolves around the nature of agreements entered into by Liberty Group Marketing Division and Liberty Enterprises with Liberty Shoes Ltd., with a focus on the classification of services for service tax purposes.
Background: Liberty Group Marketing Division and Liberty Enterprises, engaged in the manufacturing and distribution of footwear, entered separate agreements in 2003 with Liberty Shoes Ltd. for the transfer of their business of respective manufacturing units. Payments were received by the appellants, and service tax was paid under the category of “Intellectual Property Service” until June 15, 2005. Post this period, the appellants started paying service tax under the category of “Franchise Service.” The dispute arises from the Department’s contention that both appellants should have paid service tax under the head “Franchise Service” even before June 15, 2005.
Key Issues:
Definition of Franchise: The primary contention revolves around the definition of “Franchise” under Section 65(47) of the Finance Act, 1994, applicable until May 16, 2005. The definition includes conditions related to representational rights, provision of business concepts by the franchisor, payment of fees, and an obligation on the franchisee not to engage in similar business activities with others.
Clause 7(j) of the Agreement: The Department relies on Clause 7(j) of the agreements to argue that the condition under Section 65(47)(iv) is satisfied. This clause prohibits the franchisee from allowing any other business venture to operate at the premises or extending the business at the leased premises without prior approval.
Jurisdiction and Limitation: The appellants contend that the information about the agreements was submitted to the jurisdictional Central Excise authorities in 2003. The show-cause notices issued in 2010 covering the period 2004-05 are contested on the grounds of limitation and bona fide doubt regarding service classification.
CESTAT’s Analysis and Decision:
Interpretation of Clause 7(j): The Tribunal analyzes the language of Clause 7(j) and concludes that, in essence, it restricts the franchisee from engaging in other business activities at the premises. The absence of evidence indicating approval for other business activities leads to the acceptance that the condition in Section 65(47)(iv) is met.
Classification as Franchise Service: Referring to precedent and the nature of the agreements, the Tribunal aligns with the Department’s view that the services received by the appellants are akin to franchise services. The judgment emphasizes the control exercised by the appellants over the business, process, product, and premises.
Limitation and Bona Fide Doubt: The Tribunal acknowledges that the appellants had informed the authorities about the agreements in 2003. The issuance of show-cause notices in 2010 for a period covered by the information raises questions about the Department’s diligence. The Tribunal recognizes the evolving nature of service tax laws and the ambiguities during the relevant period. It concludes that the appellants had a bona fide doubt on the classification of the service, supporting their case on the limitation aspect.
Conclusion: The CESTAT Chandigarh’s order in the case of Liberty Group Marketing Division provides clarity on the classification of services under the Franchise category. The analysis of contractual clauses and consideration of the evolving legal landscape demonstrate the importance of thorough scrutiny in tax disputes. This decision serves as a reference for businesses navigating complex service tax classifications and underscores the significance of timely and accurate communication with tax authorities.
FULL TEXT OF THE CESTAT CHANDIGARH ORDER
M/s Liberty Group Marketing Division (ST/373/2012) and Liberty Enterprises (ST/374/2012), the appellants, are engaged in the manufacturing and distribution of footwear and have entered into separate agreements dated 31.03.2003 with M/s Liberty Shoes Ltd. for transfer of their business of the respective manufacturing units; accordingly, they have received payments from M/s Liberty Shoes Ltd. and have paid service tax under the category of “Intellectual Property Service” up to 15.06.2005. For the period after 15.06.2005, they started paying service tax under the category of “Franchise Service”. Department entertained a view that both the appellants are required to pay service tax under the Head “Franchise Service” even before 15.06.2005, as they fulfilled all the criteria required to be so categorized. Two separate show-cause notices both dated 21.04.2010 were issued to the appellants and were confirmed by OIOs dated 29.04.2011; on an appeal filed by the appellants, Commissioner (Appeals) vide impugned order dated 23.12.2011 upheld the OIOs confirming the demands raised along with penalties. Hence, these appeals.
2. Shri R.K Hasija assisted by Shri Shivang Puri, learned Counsel for the appellants, submits that till 15.06.2005, the definition of “Franchise” as per Section 65 (47) of the Finance Act, 1994 was as under:
(47) “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 mark, trade name or logo or any such symbol, as the case may be, is involved;
(ii) the franchisor provides concepts of business operation to franchisee, including know-how, method of operation, managerial expertise, marketing technique or training and standards of quality control except passing on the ownership of all know-how to franchisee;
(iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and
(iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person.
3. Learned Counsel submits that as per the definition above, all the four conditions have to satisfied; however, in their case, condition no. (iv) is not satisfied. After the amendment in the definition of “Franchise” w.e.f. 16.05.2005, they have been discharging duty under Franchise Service. He submits that Circular No.59/08/2003 dated 20.06.2003 issued by CBEC clarified that unless all the ingredients are satisfied, the agreement cannot be said to be a Franchise Agreement. The appellants‟ agreement did not satisfy the condition no. (iv) that the franchisee is under an obligation not to engage in selling or providing similar goods or services or processes, identified with any other person was not satisfied. He submits that the Department relies heavily on Clause 7(j) of the Agreement to come to a conclusion that they fulfilled condition no. (iv); however, it is clear from the Clause that the franchisee cannot, without prior approval of the appellant, permit any other business venture to operate or trade at the premises or extend the business at the premises leased to M/s Liberty Shoes Ltd. (the franchisee); by no stretch of imagination, it can be treated that the agreement prohibits the franchisee for carrying out selling or providing similar goods or services. He relies on Dewsoft Overseas Pvt. Ltd. – 2008 (12) STR 730 and Saanj and Savera Educational Welfare Trust- 2016 (41) STR 458 (Tri. Del.)
4. Learned Counsel submits that they have submitted the copies of respective agreements dated 3 1.03.2003 to the jurisdictional Assistant Commissioner while surrendering the existing Central Excise registrations vide their letter dated 01.04.2004; the authorities were also informed that M/s Liberty Shoes Ltd. was taking over the business of the appellants; this being the fact, show-cause notice covering the period 01.07.2004 to 15.06.2005 was issued on 21.04.2010 invoking the extended period. He submits that as per the facts of the case, there was no suppression or wilful mis-statement on the part of the appellants as they have informed the jurisdictional Central Excise authorities in 2003 itself and have been submitting ST-3 Forms after paying service tax under the Head “Intellectual Property Service”. He further submits that the issue is revenue neutral as M/s Liberty Shoes Ltd. would have been eligible for the service tax paid by the appellants under any Head. He relies on the following:
