Custom, Excise & Service Tax Tribunal
M/S. Nirulas Corner House Pvt. Ltd vs Commissioner Of Service Tax on 3 December, 2008
IN THE CUSTOMS, EXCISE AND SERVICE TAX
APPELLATE TRIBUNAL, NEW DELHI
PRINCIPAL BENCH, COURT NO. III
Service Tax Appeal Nos. 521-522 of 2006
[Arising out of Order-in-Original No. 30-31/RK/2006 dated 7.8.2006 passed by Commissioner of service Tax, Delhi]
For approval and signature:
Hon'ble Mr. M. Veeraiyan, Member (Technical)
Hon'ble Mr. P.K.Das, Member (Judicial)
1. Whether Press Reporters may be allowed to see :
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 :
of the 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?
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M/s. Nirulas Corner House Pvt. Ltd.. Appellants Vs. Commissioner of Service Tax Respondent New Delhi Appearance: Mr. A.R. Madhav Rao, Advocate for the Appellants Mr. Sunil Kumar, DR for the Respondent CORAM: Hon'ble Mr. M. Veeraiyan, Member (Technical) Hon'ble Mr. P.K.Das, Member (Judicial) Date of Hearing /Decision: 3.12.2008 ORDER NO . ________________________ Per M. Veeraiyan (for the Bench): These appeals are against the order of the Commissioner No. 30-31/RK/2006 dated 7.8.2006 . 2. Heard both sides. 3. Relevant facts, in brief, are as follows: a) The appellants M/s. Nirulas Corner House Ltd.( Nirulas, for short) are engaged in the manufacture of sugar confectionery, assorted chocolate, cake, pastry etc. They have entered into an agreement with M/s Sagar allowing them to run restaurants in the name of Nirulas. The agreement is very comprehensive and covers plan for the restaurant area, location of various facilities, the specification for the furniture, interiors, menu cards, napkins, cutlery etc and all these are as decided by Nirulas. As per the agreement, the items which can be sold by the restaurant, the method of preparation of the said items, the quality of the product to be sold, the quantity to be sold in individual portions and the prices at which they are to be sold and the life period of any items to be sold are decided by Nirulas. If any item is held to be unfit for consumption as per the standards laid down by Nirulas, the same has to be destroyed and the loss has to be borne by Sagar.
b) For enforcing all these conditions arising out of the agreement, Nirulas have placed their own employees in the cadre of restaurants advisor, manager and other skilled staff in the premises of Sagar and the salary and other allowances for these officers and staff of Nirulas, are to be reimbursed to Nirulas by the Sagar.
c) For having allowed the use of their brand name, good will and reputation, the expertise, Nirulas are getting one time payment of a sum of Rs. 3 lakhs as technical assistance fee, and in addition 8 = % of gross sale amount on a monthly basis.
d) The Commissioner, relying on various clauses of agreement, held that M/s. Nirulas were rendering services as management consultant to Sagar and accordingly confirmed demand of service tax Rs.38,58,312/- in the case in appeal No. ST/521/06 and a sum of Rs.18,38,953/- in the case in appeal No. ST/522/06, and also imposed penalties under various sections.
4.1. Learned advocate submits the following:
a) Though the agreement has referred Nirulas as management consultant and advisor, their status should be determined not merely by such reference but based on actual roles played and responsibilities undertaken in terms of the agreement.
b) Since the reputation of their popular brand name requires to be protected, they had entered into a detailed agreement which also provided many clauses to ensure that there was total control of entire business of Sagar by Nirulas starting from ambience of the premises to the products served, the formulae of preparations and the prices etc. There is substantial involvement in day-to-day running of the restaurant in their name and same is ensured by deploying their own personnel in the restaurants.
c) Such an arrangement cannot be considered as rendering the service of a management consultant. The roles of any management consultant are limited to providing of advice, consultancy and technical assistance and the appellants have played roles which are much beyond the roles of any such management consultant.
d) The Commissioner in para 16.8 has clearly held that Sagar, as an organisation is being managed by Nirulas for a monetary consideration. In fact he has held that Nirulas were engaged/ appointed by Sagar to establish, run, and manage the restaurant outlet belonging to Sagar by providing technical assistance, advice, consultancy. This role of establishing, running the restaurant in the manner prescribed and approved can fall only in the category of franchise agreement. He also incidentally submits that department has been collecting service tax from them under the heading of Franchise service with effect from 1.7.2003.
4.2. He relies on the decision of Tribunal in the case of Basti Sugar Mills Co. Ltd. vs. CCE Allahabad [2007 (7) STR 431 (Tri-Del)]
5. Learned DR reiterates the findings of the Commissioner and draws our attention to relevant clauses of the agreement wherein the role of Nirulas has been described as that management consultant and advisor.
6.1. We have carefully considered the statement of both sides. The definition of management consultant under section 65 (65) of the Finance Act reads as follows.
65(65) management consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organisation in any manner and includes any person who renders any advice, consultancy or technical assistance, relating to conceptualising, devising, development, modification, rectification or up gradation of any working system of any organisation 6.2. The definition of franchise service, introduced with effect from 1.7.03, under section 65 (47) reads as follows:
65(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.
7. We would like to reproduce certain relevant portions of the agreement between the appellant (referred to as second party in the agreement) and Sagar:
1.5 That the First Party has appointed the Second Party to manage, sale and supervise preparation of items in accordance with the policies of Second Party through their agents, supervisors, employees and representatives. 1.10 Further, it is unequivocally agreed to by the First Party that a Restaurant Advisor / Manager and some other skilled staff, if thought fit by the Second Party trained and appointed by the Second Party, shall be placed from supervising and operating the Restaurant. The said Restaurant Advisor / Manager and the other skilled staff will be employees of the Second Party in that all emoluments and conditions of service applicable to like Advisor / Manager and other employees on the pay roll of the Second Party shall be applicable to them. That in the event of the First Party having any complaint regarding the performance or modus operandi of the said Restaurant Advisor/ Manager or other staff the First Party shall report any deficiency or complaint to the Second Party, in writing and on receipt of which the Second Party may take any action which it deems appropriate. Further, the First party shall both verbally and in writing inform all the employees of the First Party working in the restaurant that all orders given by the said Restaurant Advisor / Manager etc. in the course of their work whether given is to be referred to the First Party who may countermand such instructions provided they feel it is in the interest of the functioning of the restaurant, but the First Party shall at the earliest opportunity, but not later than forty eight hours, inform the Second Party in writing the details and their reasons for countermanding the instructions of the said Restaurant Advisor/ Manger. The second Party on receipt of such information and representation from the Restaurant Advisor / Manager or First Party, if any, shall decide whether such instructions issued by the restaurant Advisor/ Manager are in the interest of better functioning of the restaurant or not, and which decision shall be binding on both the First party and restaurant Advisor / Manager. The Second Party shall not be responsible for any act of omission or commission of the staff working at the First Partys restaurant. The First Party shall reimburse the expenses of the Second Party for the Restaurant Advisor / Manager / skilled staff as clarified vide para 4.2. 4.2 The First Party further agrees to pay every month a sum determined by the Second Party depending on the number of persons appointed, as a compensation for the service of the Restaurant Advisor/ Manager /Skilled Staff appointed by the Second Party as mentioned in Para 1.10 of this agreement 5.7 The First Party shall within 15 days of signing the agreement execute and deliver to the Management Consultants and Technical Advisors the appropriation instruments containing full and correct description of the property and access thereto. 5.8 The First Party is to provide the Second Party within twenty one days of signing of this agreement, detailed structural and floor plants of the purposed restaurant site so as to enable the Second Party to plan the location of equipment, design of interiors and make architectural drawing, failing which the First Party shall pay to the Second Party a sum of Rs.1000/- per day as damages from the expiry of the aforementioned twenty one days to the day of requisite documents are handed over to the Second Party. 5.9 The First Party covenants that it will within one year build on the site a Restaurant as per the specifications of the Second Party or its consultants and Technical Advisors, failing which the deposit or bank guarantee shall stand forfeited.
8.1 As compensation for the services rendered by the Second Party as set forth in this agreement, except to the extent provided therein, the First Party agrees to pay the Second Party.
(a) A Technical Assistant fee of Rs.3,00,000/- for advice on putting the restaurant in a benefitting running condition, which will include the following:
Appointment of architects and other consultants and their remuneration.
Designing of food facilities.
Advice on the functional design of the food units, overall area allocations, interiors, HVAC design etc. Advice on setting up of all the control systems for the food unit.
Selection and training of staff.
Architects and consultants design and consultancy fees are to be paid by the First Party directly to the architects and consultants on the approval of the Second Party.
(b) A monthly fee consisting of eight and a half percent of the Gross Sales per month, excluding sales tax and any other taxes, as defined in the agreement, and which sum shall be payable in advance by the last day of the previous month for the current month. However, for the first six months of the operation this sum shall be payable by 10th of the preceding month to Second Party for the purpose of sales promotion and specialized facilities incurred to further the interests and sales of the restaurants. Article 17 Termination of the contract otherwise than provided.
17.1 If the First Party carries out or knowingly permits to be carried out any activity at the Nirulas Restaurants which would in the unfettered opinion of the Second Party bring the Second Party or the agent into bad repute. 8.1 A reading of the above clauses of the agreement would suggest that the role of the appellant is much beyond the scope of management consultant. M/s Sagar is required to build on the site a Restaurant as per specifications of the appellant. The appellant is required to manage, sale and supervise preparation of items in accordance with the policies of Second Party( i.e. the appellant). We also find that the appellants had placed their man power for supervising and operating the restaurant and to ensure that the various conditions in the agreement are fulfilled. Any violation to fulfil the conditions envisages unilateral revocation of the agreement by Nirulas. It would be farfetched to consider a prominent role for implementation to the consultant and that too with power to impose penal consequences for not following his advice on the person to whom the advice is rendered. In other words, the consultants are not empowered to impose their advice. This type of arrangement, in our opinion, cannot be considered as relating to a consultant and the person who consults.
8.2. The definition of management consultant makes it clear that what is envisaged from a consultant is advisory service and not the actual performance of the management function. Any other meaning to the term management consultant would render the entries relating to many other services which are rendered in connection with the management of any organisation such as manpower recruitment or supply agency service, business auxiliary service as redundant. In the common parlance also, the role of a consultant is to render advice, consultancy and technical assistance in the matters on which he has the expertise. However, the decision on acceptance or otherwise of such advice is left to the management and the consultant does not have right to impose his advice. In such a situation, it ceases to be an advice and becomes an order or direction.
8.3. The Tribunal in the case of Basti Sugar Mills Ltd. has held as under:
6. The definition of management consultant under the taxing statute may be noted :-
Management Consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person who renders any advice, consultancy, devising, development, modification, rectification or upgradation of any working system of any organization.
7. The above definition makes it clear that what is envisaged from a consultant is advisory service and not the actual performance of the management function. In the present case, the appellant was in-charge of the operation of the factory and thus was performing the management function.
8. An ocean separates a manager from a management consultant, a performer from an advisor or a coach. That ocean exists in the present case also. We dealt with a similar case in Rolls Royce Industries Power (I) Ltd. (Supra) and held that where the agreement conferred operational autonomy and responsibility on the contracted party, the relationship is not one of consultancy. The ratio of that decision covers the present dispute also. There is no management consultancy in the facts of the present case and the demand is clearly beyond the scope of the statute.
9. In view of the above, we hold that the appellant is not rendering the management consultancy Service. We take note of the submission that from 1.7.2003, Nirulas are paying service tax for the same activities as franchise services. The Commissioner has also noted this submission in his order in para 16.14. The classification of their activities as franchise services appears to be more appropriate.
10. In the light of above, we allow the appeals with consequential relief.
(Dictated & Pronounced in the open Court) ( M. Veeraiyan ) Member(Technical) ( P.K.Das ) Member(Judicial) ss