Custom, Excise & Service Tax Tribunal
Amway India Enterprises Pvt. Ltd vs C.S.T., Delhi on 14 May, 2015
CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
West Block No.2, R.K.Puram, New Delhi
COURT-I
Date of hearing: 4.3.2015
Date of pronouncement: 14/05/2015
Service Tax Appeal No.56111 of 2013 with
Stay Application No.56574 of 2013
Arising out of the order in original No.92-94/AKM/2012 dated 29.11.2012 passed by the Commissioner of Service Tax, Delhi.
For approval and signature:
Honble Mr. Justice G. Raghuram, President
Honble Mr. R.K. Singh, Technical Member
1
Whether Press Reporter may be allowed to see the Order for publication as per Rule 26 of the CESTAT (Procedure) Rules, 1982?
2
Whether it should be released under Rule 26 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3
Whether their Lordships wish to see the fair copy of the Order?
4
Whether Order is to be circulated to the Departmental authorities?
Amway India Enterprises Pvt. Ltd. .. Appellant
Vs.
C.S.T., Delhi . Respondent
Appearance:
Present Shri Sujit Ghosh, Ms. Kanupriya Bhargava and Ms. Mannat Waraich, Advocates for appellants Present Shri Govind Dixit, A.R. for the respondent Coram: Honble Mr. Justice G. Raghuram, President Honble Mr. R.K. Singh, Technical Member Final Order No. 51612/2015 Per R.K. Singh:
Appeal has been filed against order-in-original No. 92-94/AKM/2012 dated 29.11.2012 passed in respect of three show cause notices dated 21.10.2009, 21.9.2010 and 1.9.2011 covering different periods confirming impugned service tax demands (along with interest and penalties). The demand had been raised under two taxable services: (i) Intellectual Property Rights Service (Rs.20,27,06,713/-) and (ii) Franchise Service (Rs.13,12,41,198/-), for the period 2008-09 to 2010-11. No penalty was however imposed under Section 78 of Finance Act, 1994.
2. Brief facts of the case as duly recorded in the impugned order are as under:
(i) The appellant (M/s Amway India Enterprises Ltd., new Delhi) is a wholly owned subsidiary of Amway Corporation USA which is a large direct selling company. The appellant is registered as a S.T. assessees.
(ii) It was alleged that (a) the appellant had not paid service tax on expenditure incurred in foreign exchange on taxable service namely Intellectual Property Right service received from its associate enterprises based abroad and also under Franchisee service on the income received by it in the form of subscription from various distributors appointed by the company which were given the representational rights to sell the products of the appellant. All these products bore the various brand names belonging to the appellant.
(b) The sale pattern of the company is such that these Amway products are sold by the distributor directly to the consumers and no product of the company is available across the counter in any shop or market. Subscription income basically consists of Joining and Business Fee , Business Renewal Fee and Back to Future Fee which are briefly described below:
Joining Fee Joining Fees is a onetime fee, which is paid as distributorship charges. The distributor is entitled to purchase the products only when he pays the joining fees.
Annual Business Fee Annual Business Fee is allocated on pro rata basis over a period of one year. The distributor is entitled to purchase the products only when he pays the fee.
Renewal Fee Renewal fee is allocated on pro rata basis over a period of one year. The distributor pays the renewal fee to get its distributorship renewed for a period of one year.
Income from Back to Future All such distributors who had discontinued the distributorship in the past, could again join the business on payment of only Annual Business Fee.
3. The adjudicating authority while dealing with the service tax liability with regard to IPR service held the service tax to be payable there-under essentially on the basis of its findings in the following paras of the impugned order:
28. It is seen that the noticees have not disputed that they have received the taxable services from their associated enterprises and they were liable to pay Service Tax under reverse charge in term of Section 66A of the Finance Act, 1994. However, they have made similar contentions that they are liable to pay service tax on these services only when the payment of these services is actually made by them . It was further contended that the amendment made in Section 67 enlarging the meaning of Gross amount charged for associated enterprises is prospective in operation and would not apply in their case.These contentions have already been discussed. Accordingly, the demand raised in the show cause notices secondary & higher education cess on account of taxable services like Intellectual Property Right Service is liable to be demanded and appropriated (amount has already been deposited).
29. Further the noticee contended that they are liable to pay service tax under Intellectual Property Service of the Finance Act only in respect of patents and designs which are registered in India. Accordingly, they paid service tax after claiming 5% deduction from service tax on account of deposit of R & D cess in terms of Notification No.17/2004-ST dated September 10, 2004. The noticee was not entitled to the benefit of Notification as the Noticee had not submitted the documentary evidence in this regard. Further , the interest also liable to be charged and recovered from them under Section 75 of the Act ibid.
4. As regards the impugned demand under franchise service, the adjudicating authority analysed the provisions of the appellants agreement with the distributors and concluded that the appellant granted representational right to sell the goods identified with it (i.e. the appellant) and therefore were liable to service tax under franchise service.
5. Regarding the impugned demand relating to IPR service, the appellant has essentially contended as under:
(i) The impugned order is a non-speaking order inasmuch as it has not dealt with the following submissions made before the primary adjudicating authority; (a) it had paid service tax in respect of such IPR service for which they were registered in India after claiming the benefit of Notification No.17/2004-ST dated 10.9.2004. (b) It cited the definition of Intellectual Property Right in Section 65 (55a) of the Finance Act, 1994 which is reproduced below:
intellectual property right means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property , under any law for the time being in force, but does not include copyright.
Referring to the above definition, it stressed that service tax under IPR Service was payable on such IRPs which were registered in India. In support of this contention, it cited Board Circular No.80/10/2004-ST dated 17.9.2004 which clarified as under:
Application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. in India, legislations are made in respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights, trademarks and designs. The definition of taxable service includes only such IPRs (except copyright) that are prescribed under law for the time being in force. As the phrase law for the time being in force implies such laws as are applicable in India, IPRs covered under Indian law in force at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services.
It argued that as the primary adjudicating authority has not considered its above submissions, the impugned order is a non-speaking order, that it was not open to CESTAT now to correct this deficiency in the impugned order and that consequently the order relating to demand of service tax under IPR service has to be simply set aside. It cited the judgment of Supreme Court in the case of Kalyan Singh Chouhan vs. C.P. Joshi (2011) 11 SCC 786 - wherein it has been inter alia observed that it is not permissible for the Court to allow the party to lead evidence which is not in line of the pleadings.
6. As regards franchise service, the appellant referred to the definition of franchise given in Section 65 (47) of the Act which is reproduced below:
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 logo or any such symbol, as the case may be, is involved.
It strenuously argued by referring to various provisions of Amways Business Starter Guide and Distributor Application and Terms & Conditions to stress the point that while a distributor had right to sell its goods they were not granted representational right to sell (i.e. appellants) its goods and therefore there was no franchise service at all. It cited the judgment in the case of UOI and Another vs. Hansoli Devi and Others (2002) 7 Supreme Court Cases 273 wherein it was held that it was not a sound principle of construction to brush aside words in a statute as being inapposite surplusage, if they can have appropriate application in circumstances conceivably within the contemplation of the statute. It also approvingly referred to a case of Quebec Railway, light Heat & Power Co. Ltd. vs. Vandry AIR 1920 PC 181 wherein it was observed that the legislature is deemed not to waste its words or to say anything in vain and a construction which attributes redundancy to the legislature will not be accepted except for compelling reasons. The judgment in the case of Global Transgene Ltd. vs. C.C.E. Cus & S.Tax, Aurangabad 2013 (32) STR 86 (Tri-Mumbai) was also cited essentially to stress that right to sell is different from the representational right to sell. It reiterated that it had only granted the distributors right to sell goods identified with it and not the representational right to sell such goods. It referred to the provisions relating to Franchise in some other countries and the dictionary meanings of representation or representational.
7. Ld. A.R. for Revenue on the other hand argued that (i) the non-speaking order can be set aside only by way of remand and the judgment of the Supreme Court in the case of Kalyan Singh Chouhan vs. C.P. Joshi (supra) was given in a different context. He cited the following judgments to the effect that in the case of non-speaking order, the case has to be remanded to the adjudicating authority for passing a speaking order:
i) Deepak Agro Foods vs. State of Rajasthan 2008 (228) ELT 510 (SC).
ii) Delhi Public School Society vs. C.S.T., New Delhi 2013 (32) ELT 179 (Tri-Del.).
iii) C.C.E. , Ludhiana vs. Gulab Industries (P) Ltd. 2015 (316) ELT 657 ( P & H)
(iv) Musashi Auto Paradise Pvt. Ltd. vs. C.S.T., Delhi III CESTAT Final Order No.57226 dated 30.7.2013 and
v) Gajanan Fabrics Distributors vs. C.C.E., Pune 1997 (92) ELT 451 (SC).
(ii) It is incorrect to say that IPR service would arise in respect of only such intellectual property which was registered under an Indian law and that there is no requirement for registration of intellectual property under an Indian law in the definition of IPR given in Section 65 (55a) of Finance Act, 1994.
(iii) Ld. A.R. also referred to in detail to Amways Business Starter Guide and Distributor Application and Terms and Conditions to bring out that the distributors were granted representational right to sell Amway products.
8. We have considered the contentions of both sides. As regards the demand relating to intellectual property service, while the appellant argued that the service tax was payable (and also paid) in respect of such intellectual property which was registered in India under an Indian law, the ld. A.R. argued that there was no requirement of registration in the definition of intellectual property right [(Section 65 (55a) ibid] and that intellectual property right can (and does) arise under various Indian laws without any requirement of such registration and all such intellectual property right would be covered under the said definition. However, both sides conceded that the impugned order is a non-speaking order with regard to confirmation of the impugned demand pertaining to intellectual property service inasmuch as it had not considered and analysed the various submissions of the appellant before coming to a finding. Paras 28 and 29 (reproduced earlier) which dealt with the impugned demand relating to intellectual property are clearly and admittedly non-speaking. Indeed, the first 6 = lines of the said para 28 are essentially reproduction of para 18 of the order-in-original No.01-ST/PKJ/CCE/ADJ/2011 dated 31.1.2011 passed in respect of the appellant in a case relating to a different show cause notice. The said para 28 is also factually misleading inasmuch as it incorrectly states that the noticees have not disputed that they have received taxable services from their associate enterprises and they were liable to pay service tax under reverse charge in terms of Section 66A of the Finance Act, 1994 Thus both sides have rightly agreed that the impugned adjudication order relating to the confirmation of service tax demand under intellectual property service is a non-speaking one.
9. The appellant has argued that by virtue of the impugned order being clearly non-speaking in respect of impugned demand under intellectual property service and it not being open for CESTAT to improve upon the same, the impugned order in relation to impugned demand under intellectual property service has to be summarily set aside. In this regard, it placed reliance on the judgment of Supreme Court in the case of Kalyan Singh Chouhan vs. C.P. Joshi (supra). However, we find that the said judgment deals with the Representation of People Act, 1951 and was delivered in totally different context and the Supreme Courts observation (quoted earlier) sought to be relied upon by the appellant was made in that context. In any case, the said judgment in no way leads itself to necessarily convey that a non-speaking quasi-judicial order has to be summarily set aside without recourse to remand. In the case of Deepak Agro Foods vs. State of Rajasthan (supra) the Supreme Court held that all irregular or erroneous or even illegal orders cannot be held to be null and void. In the case of Gajanan Fabrics Distributors vs. C.C.E., Pune (supra), the Supreme Court remanded the matter to the Commissioner of Central Excise, Pune because the order passed by the Collector (as Commissioner was then called) had confirmed the demand made in the show cause notice upon all seven units and their partners by treating them all as assessees while the demand ought to have been confirmed only against Gajanan Weaving Mills which was the assessee and therefore liable. Similarly in the case of Musashi Auto Parts India Pvt. Ltd. vs. C.S.T., Delhi III (supra) the Honble CESTAT remanded the case for fresh consideration observing in para 5 thereof as under:
5. Since the issue as to whether the transfer of technology and know-how by the Japanese holding company to the assessee fulfils the requirements of Section 65(105)(zzr) read with the definition of intellectual property Rights in Section 65 (55 a), has not been considered by the adjudicating authority. We are of the considered view that it is appropriate to remit the matter for consideration afresh and grant liberty to the assessee to raise any other issue as well before the adjudicating authority including as to whether the provisions of Section 65 (105) (zzr) are applicable to the assessees transactions, since the payment of royalties event though subsequent were pursuant to an agreement which was earlier to introduction of the taxable service. The assessee shall file a Memorandum of Written Submissions within 3 weeks from today before the adjudicating authority on this aspect but shall not however be entitled to personal hearing again. Any case supporting the assessees contentions may also be appended to the memorandum of written submissions, within the time stipulated herein.
Punjab and Haryana High Court in the case of C.C.E., Ludhiana vs. Gulab Industries (P) Ltd. (supra) in effect held that negligence by officers can not be a ground to allow a delinquent to go scot free and that an order issued in violation of principles of natural justice should be remanded instead of allowing the defaulting party to go scot free. In paras 8 & 9 of this judgment, the P & H High Court observed as under:
8. We have heard counsel for the parties, perused the impugned order as well as the order passed by the adjudicating officer and are sanguine, in the case correctness of our opinion, that the case in hand may disclose collusion, or to put in politely, negligence on the part of certain officers. It is further surprising that an officer of the rank of Additional Commissioner, was not aware that he is required to append all relevant documents with the show cause notice, and if not appended, to provide copies to the noticee within reasonable time, before proceeding to adjudicate the show cause notice. Admittedly, documents were not supplied to the respondent. The negligence does not end here. The appellant authority granted time to the Department to furnish documents to the respondent so that it could reply to the show cause notice but this opportunity also did not elicit any response , compelling the appellate authority to reverse the order passed by the adjudicating officer for violation of principles of natural justice.The Tribunal has dismissed the appeal and the application for restoration , on the ground of violation of principles of natural justice.
9. While we find no error in the impugned orders as far as the violation of principles of natural justice are concerned, we cannot ignore the fact that negligence or collusion by officers, enjoined with duty to collect taxes, detect evasion and/or to impose penalties, etc., cannot be a ground to allow a delinquent to go scot-free. Where an order discloses violation of principles of natural justice, it is incumbent, while setting aside such an order, to remand the matter instead of allowing defaulting party to go scot-free.The appellant authority as well as the Tribunal, while holding that principles of natural justice have been violated, should have remanded the matter to the adjudicating officer after serving all relevant documents upon the respondent to decide the matter afresh. (emphasis added)
10. Thus in the light of the foregoing discussions and especially in the wake of judicial pronouncements in the cases of Gajanan Fabrics, Musashi Auto Parts and Gulab Industries (all mentioned/referred to in the preceding paragraph), we are of the view that the impugned order to the extent it relates to the impugned demand under intellectual property service is required to be set aside and remanded to the primary adjudicating authority with a direction to pass a speaking order after adverting to submissions of the appellants.
11. As regards franchise service, the contentions that no word in a statute is to be treated as redundant, that legislature is deemed not to waste its words and that each word in a statute has to be given proper meaning is unexceptionable and accepted. Consequently, we are not making any reference to various judicial pronouncements cited by the appellant in support of the said contentions. The appellant also tried to explain to us as to how the word franchise is understood in some other countries. These sources may be useful for interpretational purposes in case of ambiguity in the statue, However, the word franchise is defined in Section 65 (47) of Finance Act 1994 and therefore any reference to the meaning of the said word in other countries is of no direct relevance, because for the purpose of this case, we have to go only and only by the definition of franchise given in Section 65 (47) ibid. Therefore, it will be pointless to indulge in any analysis with regard to the meaning of the word franchise in other countries (and in relation to any other Indian law for that matter). In this regard it is useful to extract below the portion of para 9 from the judgment in the case of UOI and Another vs. Hansoli Devi and Others (supra):
A provision is not ambiguous merely because it contains a word which in different contexts is capable of different meanings. It would be hard to find anywhere a sentence of any length which does not contain such a word. A provision is, in my judgment, ambiguous only if it contains a word or phrase which in that particular context is capable of having more than one meaning.
12. It is evident that the only issue involved in the present case to the extent it relates to the impugned demand under franchise service is whether the appellant gave to the distributors representational right to sell its products i.e. products identified with it; the appellant does not dispute that it gave right to sell products identified with it to the distributors. To decide this issue, one necessarily has to refer to Amways Business Starter Guide and Distributor Application and Terms and Conditions. As per the terms and conditions of distributors, an Amway distributor is also governed by Rules of Conduct. According to the Business Starter Guide, a distributor is also known as an Amway Business Owner (ABO). Top 10 Rules prescribed for ABOs inter alia stipulate that the ABO is to be truthful and accurate in offering Amway business opportunity or selling Amway products. In other words, an ABO does not merely sell Amway product but also offers Amway business opportunity. In terms of Code of Ethics of Amway distributors, the ABO inter alia agrees to
(i) present Amway products and Amway Sales and Marketing Plan to all prospective distributors. Amway Sales and Marketing Plan as defined in para 2.1.5 of Business Starter Guide means the plan provided in the Amway Business Starter Guide detailing Amways performance incentive systems, sponsoring procedures and guidelines, requirements, systems, procedures, and policies regarding the presentation of Amway products, the Amway business and the management of an Amway organization, as amended from time to time by Amway and of which these Rules are a part.
(ii) be courteous and prompt in handling of any and all claims for exchange and return
(iii) conduct himself in such a manner as to reflect only the highest standards of integrity, frankness and responsibility because he recognizes that his conduct as an Amway Distributor has far reaching effects.
As per para 4.1 of the said Guide, a Distributor must adhere strictly to the guidelines, systems, procedures and policies mentioned in the Amway literature, the Amway Business Starter Guide of which these Code of Ethics and Rules of Conduct and Amway Sales & Marketing Plan are a part. Para 4.8 of the Guide, inter alia, stipulates that Distributor shall comply with all law, regulations and codes that apply to the operation of their Amway business wherever said Amway business may be conducted within the market and they must not conduct any activity that could jeopardize the reputation of the Distributor and/or Amway. Thus the ABO is not merely having right to sell Amway product; he also does presentation of Amways Sales & Marketing Plan which inter alia also includes Amways system, procedures and policies regarding presentation of Amways products, the Amways business and Amways organization. The ABO is also required to conduct and behave in the manner prescribed so as not to jeopardize the reputation of Amway.
As per para 4.13 of the Guide, no distributor shall represent to anyone that there are exclusive franchises or territories available under the Amway Sales and Marketing Plan. No distributor shall represent that he or she or anyone else has the authority to grant, sell , assign or transfer such franchises or to assign or designate territories. Thus the Business Starter Guide clearly delineates as to in what respects/aspects the ABO can not represent. In other words, it follows that it is incorrect to claim that a distributor has not been granted representational rights to sell products identified with Amway It becomes further evident from para 8.2 of the said Guide which states that. At the first contact with prospective customers and Distributors, a Distributor should (8.2.1) Introduce himself by name; (8.2.3) As soon as practicable, he should make himself known in a suitable fashion as an Amway Distributor and should provide information concerning his name and address as well as concerning Amway; (8.2.3) Indicate purpose of contact, namely the sale of Amway Products and/or the introduction of the prospect to the Amway business(emphasis added).
Thus, at the first contact, the distributor is expected to make himself known is a suitable fashion as an Amway distributor and provide information concerning his name and address as well as concerning Amway and the purpose of contact, including introduction of the prospect to the Amway business. Thus it again becomes evident that the ABO has been given right to represent Amway business. Para 12.12 of the Guide also clearly states that if the distributor makes a serious misrepresentation of Amway or the Amway business which in Amways opinion, is not likely to be satisfactorily remedied by corrective actions, then Amway can terminate the authorization to operate as a distributor. Thus only serious misrepresentation of Amway or Amway business can lead to termination of distributorship. In other words, he can, indeed should/ is expected to, represent Amway in accordance with and to the extent allowed as per the Amways Business Starter Guide and Distributor Application and Terms and Conditions. In the Sections of the Starter Guide dealing with Social Media Policy, it is stated (referring to the ABOs) that Remember , what you say reflects upon your and Amways reputation. Now Amways reputation can be affected by what the ABOs says only when he is taken to represent Amway in some (however limited) capacity.
From the aforesaid analysis of the Amway Business Starter Guide and Distributor Application and Terms and Conditions, it becomes evident that ABO/distributor is not merely granted right to sell Amway products but he has the representational rights to sell such products.
13. Reference by the appellant to the judgment in the case of New Mangalore Port Trust Ltd. vs. C.S.T., Mangalore 2012 (26) STR 155 (Tri-Bang.) is hardly of any avail as that judgment is only an interim order regarding stay/dispensation of pre-deposit. Reference to the judgment of Mysore High Court in the case of the State vs. Gangamma (A-4 ) and others 1964 SCC Online Kar 148 to elucidate the scope of the words on behalf of is also not of much relevance because these words nowhere appear in the definition of franchise. Reference to the meaning of the words Represent and Representational given in Oxford English Reference Dictionary and the Law Lexicon have been perused. Some of the meanings of represent in Oxford Dictionary are stand for, corresponds to, be example of, symbolize, make out, portray be entitled to act or speak for etc. Meanings of the word represent in Law Lexicon are same/similar to those given in Oxford Dictionary. The aforesaid meanings of the word represent are in fact far wider (in scope) than required to hold on the basis of aforesaid analysis that ABOs clearly had representational right to sell goods indentified with Amway. The impugned order therefore, cannot be faulted for concluding accordingly on the basis of the Amway Business Starter Guide, Distributor Application and Terms and Conditions etc.
14. In para 44 of the impugned order, the adjudicating authority has held that extended period of limitation is applicable in terms of proviso to Section 73 (1) of Finance Act, 1994. However, we find that the adjudicating authority in para 49 of the impugned order has observed as under:
49. The penalty under Section 78 is not leviable as the earlier SCN has been adjudicated vide Order-in-Original No.01-ST/PKJ/CCE/ADJ/2011 dated 31.01.2011 wherein penalty under Section 78 has been imposed an account of fraud, suppression and willful misstatement, since these SCNs are for the subsequent period penalty cannot be imposed under Section 78.
In the wake of the said para 49, the adjudicating authority did not impose penalty under Section 78 of the Finance Act, 1994. As the ingredient for invoking extended period under proviso to Section 73 (1) ibid are identical to those required for imposing penalty under Section 78 ibid., it follows that the extended period is not invocable in this case and the finding of the primary adjudicating authority in para 44 of the impugned order (referred to above) is totally inconsistent with his finding that penalty under Section 78 is not imposable. It is also pertinent to note that Revenue has not filed any appeal against the non-imposition of penalty under Section 78 ibid. Also the impugned demands do not involve extended period in any case and therefore, the finding in para 44 of the impugned order that extended period of limitation is applicable in terms of proviso to Section 73(1) of Finance Act is of no relevance/consequence.
15. In the light of the foregoing (i) we uphold the impugned order to the extent it relates to the demand under franchise service.
(ii) We set aside the impugned order to the extent it relates to the demand under IPR service and remand the case to the primary adjudicating authority for de novo adjudication and passing a speaking order on this aspect after giving the appellant an opportunity of being heard.
(Pronounced in the open Court on 14/05/2015) (Justice G. Raghuram) President (R.K. Singh) Technical Member scd/ 16