Custom, Excise & Service Tax Tribunal
Siti Cable Network Ltd vs Delhi Iii on 5 August, 2020
Author: Dilip Gupta
Bench: Dilip Gupta
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO. 1
SERVICE TAX APPEAL No. 50223 of 2016
(Arising out of Order-in-Original No. 26/ST/SVS/DL-III/2015 dated 30.07.2015
passed by Principal Commissioner of Service Tax, Delhi-III, New Delhi)
M/s. Siti Cable Network Ltd. ...Appellant
(formerly known as Wire & Wireless (I) Ltd.)
Essel House, B-10, Lawrence Road,
Industrial Area, New Delhi-110052
Versus
Commissioner of Service Tax, ....Respondent
Delhi-III
Block-11, 7th Floor, CGO Complex,
New Delhi-110003
AND
SERVICE TAX APPEAL No. 54514 of 2015
With
SERVICE TAX CROSS OBJECTION No. 50424 of 2016
(Arising out of Order-in-Original No. 26/ST/SVS/DL-III/2015 dated 30.07.2015
passed by Principal Commissioner of Service Tax, Delhi-III, New Delhi)
Commissioner of Service Tax, ....Appellant
Delhi-III
Block-11, 7th Floor, CGO Complex,
New Delhi-110003
Versus
M/s. Siti Cable Network Ltd. ...Respondent
(formerly known as Wire & Wireless (I) Ltd.)
Essel House, B-10, Lawrence Road,
Industrial Area, New Delhi-110052
APPEARANCE:
Mr. Vivek Pandey, Authorised Representative for the Appellant
Mr. B.L.Narasimhan and Mr. Tarun Trehan, Advocates for the Respondent
CORAM : HON'BLE MR.JUSTICE DILIP GUPTA, PRESIDENT
HON'BLE MR. C.L. MAHAR, MEMBER (TECHNICAL)
Date of Hearing: 05.03.2020
Date of Decision: 05.08.2020
FINAL ORDER No.: 50738-50739 /2020
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ST/50223/2016 &
ST/54514/2015
JUSTICE DILIP GUPTA
A demand of Rs.1,34,79,398/- towards service tax
with interest under section 75 of the Finance Act 19941 and
penalty under sections 76 and 78 of the Finance Act for the period
commencing July 1, 2003 upto March 31, 2008 under "franchise"
service has been confirmed by the Principal Commissioner of
Service Tax, Delhi2 by order dated July 30, 2015 for the period
commencing June 16, 2005 upto March 31, 2008 to the extent of
Rs.89,99,528/-with interest under section 75 and penalty under
section 76 of the Finance Act. The Principal Commissioner has,
therefore, dropped the demand of Rs.42,79,870/- towards service
tax for the period July1, 2003 upto June 15, 2005 as also penalty
under section 78 of the Finance Act.
2. This grant of partial relief to the assessee by the
Principal Commissioner has resulted in the filing of two appeals.
3. Service Tax Appeal No. 50223 of 2016 has been
filed by M/s. Siti Cable Network Ltd.3 for setting aside that part of
the order dated July 30, 2015 passed by the Principal
Commissioner that confirms the service tax demand of
Rs.89,99,528/- and also demands interest under section 75 of the
Finance Act and penalty amount under section 76 of the Finance
Act.
4. Service Tax Appeal No. 54514 of 2015 has been
filed by the Department with a prayer that penalty under section
78 of the Finance Act should also be imposed upon Siti Cable.
1. the Finance Act
2. the Principal Commissioner
3. Siti Cable
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ST/50223/2016 &
ST/54514/2015
Cross-Objection No. 50424 of 2016 has been filed by Siti
Cable in this Service Tax Appeal No. 54514 of 2015 with a prayer
that the demand confirmed by the Principal Commissioner against
Siti Cable to the extent of Rs.89,99,528/- may set aside and
neither should interest be charged under section 75 nor penalty
should be imposed under section 76 of the Finance Act.
5. The amendment made in the definition of "franchise"
under section 65(47) of the Finance Act with effect from June 16,
2005 is the reason that has persuaded the Principal Commissioner
to drop the demand of service tax for the period from July 1, 2003
up to June 16, 2005.
6. It would, therefore, be necessary to reproduce the
definition of "franchise" before and after the amendment. Prior to
June 16, 2015, the definition of "franchise" was as follows:
"65(47) "franchise" means an agreement by which-
(i) 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;
(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. With effect from June 16, 2005, the definition of
"franchise" under section 65(47) is as follows:
"65(47) "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,
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ST/54514/2015
service mark, trade name or logo or any such symbol, as the
case may be, is involved.
8. A "franchisor" has been defined under section 65(48)
of the Finance Act as follows:-
"65(48) "franchisor" means any person who enters into
franchisee with a franchisee and includes any associate of
franchisor or a person designated by franchisee to enter into
franchisee on his behalf and the term "franchisee" shall be
construed accordingly."
9. The taxable service under section 65(105)(zze) of
the Finance Act means a service provided or to be provided to a
franchisee, by the franchisor in relation to franchise.
10. It would be seen from a perusal of the unamended
and the amended definition of "franchise" that the amended
definition contains only the first condition contained in the
definition of "franchise", as it stood prior to June 16, 2005, and
the other three conditions have been omitted.
11. The Principal Commissioner realised that the issue
that was to be decided was whether any "franchise" service was
rendered by Siti Cable to the cable operators under the
agreement entered into between them. The Principal
Commissioner noted that the period involved was from July 1,
2003 up to March 31, 2008 and the definition of "franchise"
underwent an amendment with effect from June 16, 2005. The
Principal Commissioner, in view of the Circular dated June 20,
2003 issued by the Board that clarified that for an agreement to
be called a "franchise" agreement all the ingredients mentioned at
(i) to (iv) in the definition of "franchise" as it stood prior to June
16, 2005 had to satisfied, observed that since all the four
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ingredients were not satisfied in the agreement, the service
rendered by Siti Cable to the cable operators prior to June 16,
2005 would not fall within the definition of "franchise" and
therefore, dropped the demand. The relevant portion of the order
passed by the Principal Commissioner on this aspect is reproduced
below:
"1. It would be of interest to note that under franchise services the
franchisee is obliged to create and identical environment and also the
product and services which otherwise provided by the franchisor. It
must give an impression as if the goods or services being supplied by
the franchisor. In the present case the franchisor is engaged in
transmitting the television signals obtained from various channels to the
customers through cable network. The cable operator is also engaged
almost similar activity as much as that they are also obtaining various
television signals from various channels and transfer it to the ultimate
customers. However the cable operators are liberty to negotiate
the number of channels, type of channels. There is no restriction
put by the franchisor by the party on the cable operator as to the
content quality or any other material particular which could be
download by the cable operator and further supplied to the
customers. The only agreement between the party and cable
operator is renting of the infrastructure laid by the party
necessary to receive and transmit television signals. There is no
other instruction or control by the party over the cable operators
except that they are obliged to pay them monthly rent which has
nothing to do with the business of the cable operator.
Putting to the test the facts of the present case to that of
the definition and clarification as mentioned above, I find that all
the ingredients are not fulfilled in case of the party and therefore
for the period up to 16.05.2005 the activities undertaken by the
party do not fall within the parameters of franchise services and
accordingly, to that extent demand made in the show cause
notice is not sustainable."
(emphasis supplied)
12. The Principal Commissioner then examined whether
the services rendered by Siti Cable to the cable operators after
the definition of "franchisee" had undergone an amendment with
effect from June 16, 2005 would be leviable to service tax. In this
context, the Principal Commissioner observed that since the cable
operator were providing identical service as provided by Siti Cable
and the cable operators were also using the logo of Siti Cable
while transmitting the signals, the ultimate consumer would get
an impression through display of logo on the channels that the
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ST/54514/2015
services were being provided by Siti Cable. This would amount to
exercising representational rights, making it a "franchise" service
leviable to service tax. The relevant portion of the order passed
by the Principal Commissioner on this aspect is reproduced below:
" In view of the amended definition the requirement as contained
in the previous definitions are no more relevant. From the agreement
entered between the party and the cable operators, which is
extracted above it would be clear that the cable operators are
providing identical service which was being performed by the
party. The operators are also using the logo of Siti Cable while
transmitting the signals cable network belonging to the party which
has been hired out to the cable operators. The ultimate consumers
are being given an impression through display of logo of party
on the channels, as if the services are still being provided by siti
cables. Therefore it amount, to exercising of representation
rights of the party by the cable operators, though in the
agreement there is no separate charge mentioned for using the
logo of the party by the cable operators. However the rental
being charged by the party from the cable operators also does
not speak categorically that no amount is being charged in
respect of the use of the logo of the party by the cable operators.
Further the cable operators have been debarred from transmitting any
other channel except the ones which were being transmitted by the
party and they are also debarred from entering into any contract with
any other operator during the currency of this agreement comedy.
Therefore, the agreement entered between the party and the cable
operators indicates that during the currency of the agreement the cable
operators cannot obtain representational rights of any other person. All
these facts definitely fall within the amended definition of
franchise services with effect from 16.06.2005 and accordingly I
hold that the demand raised in the show cause notice for the
period from 16.06.2005 to 31.03.2008 is sustainable."
(emphasis supplied)
13. In regard to the liability to pay interest under section
75 of the Finance Act and penalties under sections 76 and 78 of
the Finance Act, the Principal Commissioner observed as follows;
" Once short levy is sustained under Section 73 of the
Finance Act, 1994 the liability of interest under section 75 is
imperative. However as regards the penalty preposition under
section 78 of the Finance Act, 1994, I find that in view of the pre-
amended definition of franchise services and also in view of the fact
that the department did not raise any demand under this category for
the period subsequent to 31.03.2008, where the party was discharging
service tax liability under the services of "supply of tangible goods",
penalty under section 78 of ibid cannot be imposed. However,
penalty under section 76 of the Finance Act, 1994 is imposable
on the party."
(emphasis supplied)
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ST/54514/2015
14. Accordingly, the Principal Commissioner passed the
following order:
" In view of the aforesaid discussion & findings I pass the following
orders:
ORDER
1. I confirm the demand of Rs.89,99,528/- of Service Tax under Section 73 of the Finance Act, 1994 for the period from 16.06.2005 to 31.03.2008.
2. The interest on the aforesaid confirmed demand is also demanded under Section 75 of the Finance Act, 1994.
3. I also confirm and impose a penalty of Rs.100 per day or 1% of such amount confirmed at S.No.1 above whichever is higher on the party under Section 76 of the Finance Act, 1994 till the deposition of the entire Service Tax, demanded, subject to that the said penalty so determined shall not exceed 50% of the total tax demanded."
15. Shri B.L.Narasimhan assisted by Shri Tarun Trehan learned counsel appearing for Siti Cable made the following submission;
i) The activities undertaken by Siti Cable are not liable to service tax under "franchise" service. In support of this contention, learned counsel placed reliance upon the following decisions:
1)Delhi International Airport Pvt. Ltd. vs. Union of India &Ors.4
2) National Internet Exchange of India vs. C.S.T.- Service Tax, Delhi5
3) M/s. Easy Bill Limited versus Commissioner of Central Excise and Additional Commissioner of Service Tax, Delhi 6
4) M/s. Rackitt Benckiser (India) Ltd. versus CCE & ST, Panchkula7
ii) The service rendered by Siti Cable is classifiable under the category of "supply of tangible goods for use", which was made leviable to service tax with effect from May 16, 2008 under
4. 2017(2) TMI 775
5. 2018 (8) TMI 30
6. 2020(1) TMI 274- CESTAT New Delhi
7. ST/50223/2016 decided on 27.11.2019 8 ST/50223/2016 & ST/54514/2015 section 65(105) (zzzzj) of the Finance Act and Siti Cable has been paying service tax under the said category post May 16, 2008;
iii) Once the Department has accepted payment of service tax under one category, which was introduced subsequently, it cannot demand service tax under a different category for the previous period. In support of this contention reliance has been placed upon the following decisions:
1) Aravali Construction Company Pvt. Ltd. vs. Commissioner of C.EX., Jaipur-II8
2) M/s. Malviya National Institute of Technology versus Commissioner, Service Tax, Jaipur9
3) The Commissioner of Central Excise, Customs & Service Tax versus Indian Oil Corporation Ltd.10
iv) Once a service has been identified as a service of "supply of tangible goods for use", which was made taxable only w.e.f. May 16, 2008, the same service cannot be taxed under any other category prior to the introduction of such levy. In support of this contention, reliance has been placed upon the following decisions:
i. Indian National Shipowners Association vs. Union of India11 ii. Kanak Khaniz Udyog vs. Commissioner of Central Excise, Jaipur12 iii. Commissioner of C.Ex., Chennai vs. M/s. MRF Ltd13. iv. Roots Multiclean Ltd. vs. Commissioner of C.Ex., Coimbatore14
v) Without prejudice to the aforesaid submissions, Siti Cable is providing "cable services" as defined under section 65(105) (zs)
8. 2017(6) G.S.T.L 347 (Tri.-Del.)
9. 2019(6) TMI 127 - CESTAT New Delhi
10. 2019 (11) TMI 382 -CESTAT Hyderabad
11. 2009 (14) S.T.R. 289 (Bom.)
12. 2017 (52) STR 46 (Tribunal-Delhi)
13. 2006 (3) STR 434 (Tri.-Che.)
14. 2006 (1) STR 17 (Tri.-Che.) 9 ST/50223/2016 & ST/54514/2015 of the Finance Act to the cable operators w.e.f. September 10, 2004;
vi) In any view of the matter, the extended period for issue of the notice contemplated under the proviso of section 73 of the Finance Act could not have been invoked in the facts and circumstances of the present case.
16. Shri Vivek Pandey, learned Authorised Representative appearing for the Department made the following submissions;
i) It cannot be doubted that Siti Cable was providing "franchise" service to the cable operators in terms of the definition of the "franchise" as amended w.e.f. June 16, 2005. In support of this contention, learned Authorised Representative placed reliance upon the following decisions:
1)Amway India Enterprises Pvt. Ltd. Vs. Commissioner of S.T., Delhi15
2)Punjab Technical UniverSitivs. Commissioner of C. Ex. & S.T., Ludhiana16
3)Board of Control for Cricket in India vs. Commissioner of Service Tax-II, Mumbai17
ii) The Principal Commissioner committed an error in not imposing penalty under section 78 of the Finance Act; and
iii) The extended period of limitation for issuance of the show cause notice was correctly invoked.
17. The submissions advanced by learned counsel appearing for Siti Cable and the learned Authorised Representative of the Department have been considered.
15. 2015 (39) STR 1006 (Tri.-Del.)
16. 2016 (42) STR 474 (Tri.-Del.)
17. 2019-TIOL-49-CESTAT-MUM 10 ST/50223/2016 & ST/54514/2015
18. Siti Cable is a Multi System Operator and is also engaged in providing services of broadcasting channels/ advertisement in the local cable network. This service is spread across India. Siti Cable also entered into agreement with local cable operators. According to Siti Cable, necessary hardware and network access was provided to the cable operators to enable them to render cable operator services to home customers.
19. The issue that arises for consideration in these Appeals is whether the service contemplated under the agreements is a "franchise" service as contended by the Department or a service in the nature of "supply of tangible goods for use" w.e.f. May 16, 2008, as contended by Siti Cable.
20. To appreciate this issue, it would be pertinent to examine the agreements. On record there are two agreements. One is an agreement dated April 1, 2003 between Siti Cable and the proprietor of Ashirwad Cable TV Network18. The other is an agreement titled "right to use agreement" dated April 1, 2004 between Siti Cable and Direct Home Services Pvt Ltd.
21. The relevant terms of the first agreement dated April 1, 2003 between Siti Cable and Ashirwad Cable require examination. The First Party is Siti Cable and the Second party is Ashirwad Cable. The relevant clauses are reproduced below;
"WHEREAS First Party is in the business of running a cable networking business and is also in the business of running a Cable Channel (s) under the brand name SITI CABLE/SITI CHANNEL in various Cities/ Towns by establishing Cable Networking Business to receive and distribute communication signals to various Cable Franchisee and household customers and to produce/ procure software, to encourage the local talent and to collect the subscription and advertisement charges.
18. Ashirwad Cable 11 ST/50223/2016 & ST/54514/2015 AND WHEREAS First Party has established a Cable Networking Business in the town of Panipat and having its master Control Room/ Head end at 8, Marla Colony, Behind Power House, Panipat, Haryana.
AND WHEREAS First Party has invested in establishing the Network consisting of Studio and Recording Equipment, Head end, Cable, Dishes, Poles, Computers, Modem and Other technical machines, accessories, plants for receiving and distribution of communication signals by the first party.
AND WHEREAS it is expressly understood by both the parties that all assets and materials used in establish the Network as above said are purchased/ procured and owned by the First Party and Second Party has shown his willingness to run the Cable TV Networking Business of the First Party on the terms and conditions mentioned below:
BOTH THE PARTIES HAVE DECIDED TO PUT THE FOLLOWING TERMS AND CONDITION IN WRITING: xxxxxxxx
2. CONSIDERATION FOR RIGHT TO USE THE NETWORK: As a consideration towards right to use the assets of the First Party, the Second Party has agreed to pay 20% of net revenue to the First Party.
Net revenue being defined as gross receipts less pay channel cost and operative expenses of the network. The gross receipt includes the receipts from all sources relating to cable network business in Panipat and its surrounding areas. The net revenue shall be calculated at the end of every quarter and in no case can be less than 1.50 lacs per month. The Second party shall pay the above amount to the First Party every month being the minimum amount of consideration on right to use. The said amount is to be paid by the 7 th day of the succeeding month for the month. The Second Party shall send a detailed statement of affairs to the First Party showing total receipts received and operational expense incurred, every quarter, on the basis of which the surplus as mentioned above has been calculated. Any adjustments to amount receivable in excess of minimum amount are to be carried out every quarter.
xxxxxxxx
4. ELECTRICITY POLE RENTALS: That it is understood by the Second Party that the permission for using the electricity poles for laying the cable has been granted by Haryana State Electricity Board (hereinafter referred to HSEB) in favour of the First Party. The Second Party has agreed to deposit the annual pole rentals to the concerned department on behalf of the First Party during the period of this agreement alongwith the arrears accrued from time to time and the Second Party shall submit a proper receipt issued by the concerned department showing the payments deposited on behalf of the First Party. The Second Party hereby undertake to indemnify the First Party against all claims, demands, recovery, charges, penalties be made or brought by HSEB against First Party on or after execution of this agreement.
5. PAY CHANNELS: The Second Party shall deal/ negotiate with all pay channels companies including Zee pay channels and he would be liable to pay the pay channel charges to all the broadcasting companies/ distributors/franchisees from time to time. Any activation/ de-activation of any pay channel is the sole responsibility of the Second Party and for this the Second Party shall indemnify the First party after execution of this agreement from any third party. It is agreed by the Second Party that Zee Bouquet of Channels should be run/telecast on prime band/tunable band.
6. LIST OF ASSETS: The First Party shall have access at all times to its material/ equipments installed/ used at the control room 12 ST/50223/2016 & ST/54514/2015 and in the network including material/ equipments supplied by it from time to time as per records maintained by the First Party. The lists of Materials/ Equipments installed/ used have been prepared as on date 7th July 2003 attached herewith as ANNEXURE-1. xxxxxxx
11. PERMISSION/LICENSE: It understood by the Second Party that the permission to use HSEB's pole is in the name of the first party. Other than the said permission, the Second Party shall obtain in his own name permission/license, if any, required to carry on the cable TV networking business, however, taking/obtaining such permission/license in his name and shall not provide any entitlement contrary to the agreed terms of this agreement.
12. MAINTENANCE, REPAIR AND UPKEEP OF MATERIAL AND EQUIPMENTS: The Second Party shall use and operate the equipment carefully and in workmanship manner and shall keep the equipments always in good and serviceable condition and shall also be responsible to repair, replace the damaged or broken parts or accessories with parts or accessories of equal value of the materials, equipments and other accessories installed in the network by the First Party. xxxxxxx
14. TRANSFER/SUB-LEASE OF NETWORK: The Second Party shall not remove or shift the control room/ Head end from the said premises at 8, Marla Colony, Behind Power House, Panipat, Haryana. Further, Second Party shall not sell, assign, mortgage, transfer/sub- let, encumber or any part of the running network of the First Party to any third person, firm, company or any other agency. If the Second Party does any of the above acts, deeds, transactions, the act, deed/ transactions shall be null and void ab initio and Second Party shall be liable for criminal breach of trust. Further, if Second Party is found doing the above act, deed or transaction, this agreement shall stand automatically terminated.
15. INSPECTION: The first party's authorised officer/ representative shall inspect the running network at any time with prior notice, during the term of this agreement. The Second Party shall provide all facilities and assistance during such inspection, which the Second Party may be reasonably expected to give. xxxxxxx
18. OWNERSHIP: It is understood by Second Party that all the assets, equipments and materials used in establishing and running the network as mentioned in the Annexure-A exclusively belong to First Party and the Second Party shall not have any right/claim, of whatsoever nature, over the assets or cable TV networking business except as provided in the agreement.
19. USE OF LOGO: It is expressly understood by the parties that the "Siti Cable"/ "Siti Channel" logo is a Registered Trade Mark and property of the first party, and the First Party authorizes the Second Party to use its logo during the currency of this agreement only for business under this agreement. It has been understood and accepted by the Second Party that he shall stand prohibited from using the logo in any manner upon the consent having been withdrawn by the first party."
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22. There is no material change in the second agreement dated April 1, 2004 between Siti Cable and Direct Home Services Pvt. Ltd. and therefore, the relevant terms of the agreement are not being reproduced.
23. It is clear from the aforesaid agreement that Siti Cable is in the business of running cable networking and channels under the brand name 'Siti Cable' in various cities. It invested in establishing the Network consisting of Studio and Recording Equipment, Head end, Cable, Dishes, Poles, Computers, Modem and other technical machines, accessories, plants for receiving and distribution of communication signals. Clause 2 of the 'terms and conditions' of the agreement is titled as "consideration for right to use the network". It provides that as a consideration towards the right to use the assets of Siti Cable, Ashirwad Cable TV Network agrees to pay 20% of the net revenue to Siti Cable every month. Clause 4 of the agreement takes note of the fact that Haryana State Electricity Board had granted permission to Siti Cable for using the electricity poles for laying the cables and that Ashirwad Cable has agreed to deposit the annual pole rentals to the Board on behalf of Siti Cable during the period of the agreement. Clause 5 specifically provides that Ashirwad Cable shall deal/negotiate with all pay channel companies, including Zee Pay Channel and would pay the channels charges. Clause 6 of the agreement specifies that Siti Cable shall have access at all times to its material/equipment installed/used at the control room and in the networking including materials/equipment supplied by it from time to time as per the records maintained by Siti Cable. 14
ST/50223/2016 & ST/54514/2015 The lists of the materials/ equipment installed/used as on July 7, 2003 forms part of Annexure 1 to the Agreement. Clause 12 of the agreement provides that Ashirwad Cable shall use and operate the equipments carefully and in workmanship manner and shall keep the equipments in good and serviceable condition. It shall also be responsible for repair, replacement of the damaged or broken parts installed in the network by Siti Cable. Clause 15 permits the authorized officers of Siti Cable to inspect the running network at any time. Clause 18 makes it clear that all the assets, equipments and materials used in establishing and running the network exclusively belong to Siti Cable and Ashirwad Cable shall not have any right/ claim. Clause 19 notes that Siti Cable logo is a registered trademark and provides that Siti Cable has authorized Ashirwad Cable to use its logo during the currency of the agreement only for business under the agreement.
24. The dispute in the present appeal is with regard to the levy of service tax on Siti Cable with effect from June 16, 2005 under the amended definition of "franchise". It has been defined under section 65(47) of the Finance Act to mean an agreement by which the franchisee is granted a representational right to provide service or undertake any process identified with the franchisor, whether or not a trademark, service mark, trade name or logo or such symbol, as the case may be, is involved.
25. Thus, what is important to note is that the party should be granted a representational right to provide service or undertake any process identified with the franchisor. In other 15 ST/50223/2016 & ST/54514/2015 words, if the condition relating to "representational right" is not satisfied, there can be no "franchise" service.
26. "Representational right" means a right that is available with the "franchisee" to represent the "franchisor" and in that case the "franchisee" loses its individual identity and is known only by the identity of the "franchisor".
27. The Delhi High Court in Delhi International Airport laid down the requirements for an agreement to be considered as "franchise" agreement and the observations are as follows:-
"55. For OMDA to constitute a franchise, it would have to satisfy the requirements of Section 65(47) of the Finance Act, which inter alia requires that the franchisees (Petitioners) should have been granted representational right by franchisor (AAI).
56. Merely because, by an agreement, a right is conferred on a party to sell or manufacture goods or provide services or undertake a process, would not ipso facto bring the agreement within the ambit of a franchise. What is also required is to establish that the right conferred is a "representational right".
57. The term "representational right" would necessarily qualify all the three possibilities i.e., (i) to sell or manufacture goods, (ii) to provide service, and (iii) undertake any process identified with the franchisor.
58. A representational right would mean that a right is available with the franchisee to represent the franchisor. When the Franchisee represents the franchisor, for all practical purposes, the franchisee loses its individual identity and would be known by the identity of the franchisor. The individual identity of the franchisee is subsumed in the identity of the franchisor. In the case of a franchise, anyone dealing with the franchisee would get an impression as if he were dealing with the franchisor."
(emphasis supplied)
28. The Mumbai Tribunal in Global Transgene Limited also observed that the foremost requisite for a service to qualify as a taxable "franchise‟ service is that the franchisee should have been granted a representational right and that in a franchise transaction, the franchisee loses its individual identity and represents the identity of the "franchisor" to the outside world. 16
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29. In Tata Consultancy Services Ltd., the Mumbai Tribunal observed that the grant of a representational right would imply that the person to whom such a right has been granted undertakes the entire activity as if it had been undertaken by the person granting such rights.
30. In National Internet Exchange of India, the Principal Bench of the Tribunal at Delhi, after examining the definition of "franchise", observed as follows:-
"Representational right permits the person to represent himself as someone else to the external world such that the external world feels that he is procuring goods or services from the brand owner 19 Service Tax Appeal No.55357 of 2013 which can be termed as franchise rights. For the purpose franchise must surrender his own identity and in addition must step into the shoes of the franchisor."
(emphasis supplied)
31. The same view has been expressed by the Tribunal in National Internet Exchange and M/s. Easy Bill Ltd.
32. In the decision of the United States District Court, D. South Carolina, Florence Division in Englert, Inc. v. Leafguard USA19 decided on December 14, 2009, the Court emphasised that there must be a significant control over the method of operation of the party for the agreement to be called a "franchise" agreement.
33. An analysis of the agreement between Siti Cable and Ashirwad Cable clearly establishes that no "franchise" service has been rendered by Siti Cable to Ashirwad Cable for the following reasons:
19. Civil Action No. 4:09-cv-00253-TLW. (D.S.C Dec 14, 2009) 17 ST/50223/2016 & ST/54514/2015
i) The agreement is for the 'right to use" assets. Siti Cable provides equipment to the cable operators for rendition of cable operator services to their end customers. The consideration received by Siti Cable from the cable operator is also only in lieu of provision of such equipment/assets. The relevant clause of the agreement states that the cable operator would pay a certain sum for use of the 'assets'. There is no explicit or implied intention to grant representational rights in the agreement. There is also no identified consideration for the right to use of logo. This right to use the logo is only an incidental aspect to the business of broadcasting of channels, and not the purpose of the agreement.
ii) Siti Cable does not have any significant degree of control over the method of operation of the cable operators. The cable operators are free to negotiate contracts at their own end in respect of pay-channels, advertisements, etc. This deviation itself evidences that the agreement between Siti Cable and the cable operators does not grant any representational right and that Siti Cable only to provide the hardware necessary for the cable operators to render cable network services. 34 The decisions cited by the learned Authorised Representative of the Department now need to be considered.
35. In Punjab Technical University, the agreement entered into between Punjab Technical University and the Learning Centers explicitly provided that the Learning Centers were authorized to take students by claiming and making it clear that the education they were providing was on behalf of Punjab Technical University. The Learning Centers were also allowed to 18 ST/50223/2016 & ST/54514/2015 advertise to that effect. It is in this context that the Tribunal observed:
"4...........
From the foregoing there remains no doubt that LCs were authorized to take students by claiming and making it clear that the education they were providing was on behalf of the appellant. They were allowed even to advertise to that effect. It was because Learning Centers were representing the Appellant with regard to providing education, that the MOU cast strict obligations on learning Centers to ensure that the quality of education remained as per the standards of the Appellant. It also comes out from the MOU that RCs framed marketing strategies to be implemented by Learning Centers in consultation with the Appellant. As per the MOU, the format and style of any advertisement or hoarding to be placed by RCs/ Learning Centers had to be done with the prior written approval of the Appellant lest these bring down or cast aspersions on or discredit the Appellant. Owing to the fact that Learning Centers represented the Appellant with regard to providing education, MOU laid down strict requirements of infrastructure, processes, qualifications of staff, etc. as elaborated in the MOU. Though the MOU states that it is not a franchise arrangement and is a model of public-private partnership for deciding classification of the service rendered thereunder, we have to see the nature, terms and conditions thereof; it is immaterial as to what nomenclature is assigned to it. Thus, notwithstanding that the MOU states that it is not a franchise agreement, the aforesaid analysis leaves no doubt that it satisfies all ingredients of franchise as defined in section 65(47) of the Finance Act, 1994 in as much as Learning Centers were granted representational rights to provide service and to undertake various activities identified with the Appellant."
(emphasis supplied)
36. It is for the aforesaid reasons that the Tribunal held that the arrangement between Punjab Technical University and the Learning Centers was a "franchise" arrangement. This decision, therefore, does not help the Department.
37. In Amway India Enterprises, the Tribunal observed that the distributors/ABOs have not only been granted right to sell Amway products, but they have the representational rights to sell such products. This was for the following reason:
12...........
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 19 ST/50223/2016 & ST/54514/2015 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 Amway's 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 Amway's 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 Amway's reputation". Now Amway's reputation can be effected by what the ABOs says only when he is taken to represent Amway in some (however limited) capacity.
(emphasis supplied)
38. The said decision is distinguishable for the factual aspect itself as neither does Siti Cable grant any representational right to the cable operators nor the cable operators are required make themselves known as Siti Cable franchisee/distributor.
39. In Board of Control for Cricket in India, the Tribunal interpreted the meaning of term 'representational right', in the context of "franchise" services and observed:
"In light of the above observations, the phrase representational right would not mean, extinguishing the identity of the franchisee, but is only to grant representational right in respect of the transaction in relation to the services that is being provided by the franchisor."
40. The principle laid down by the Tribunal in Board of Control for Cricket in India is in direct conflict with the principle laid down by the Delhi High Court in Delhi International Airport. The relevant portion of the judgment of the Delhi High Court has been reproduced above. The decision of the Tribunal in Board of Control for Cricket India, thus, does not help the Department.
20
ST/50223/2016 & ST/54514/2015
41. Learned counsel for Siti Cable also submitted the objective of the agreement entered into between Siti Cable and the cable operators is to grant the right to use the "Head-end"
and other hardware, which was required by the cable operators for rendering services to their end customers. The hardware was always owned and controlled by Siti Cable and against such right to use, Siti Cable was recovering periodical payments from the cable operators. Such service would, according to the learned counsel be classifiable under the category of 'supply of tangible goods for use', which was introduced by Finance Act, 2008 and made leviable to service tax w.e.f May 16, 2008. Learned counsel submitted that the agreement between Siti Cable and the cable operators stipulates that Siti Cable would allow the cable operators to use the hardware without transfer of possession and therefore, after May 16, 2005 Siti Cable has been duly paying service tax on such supply of hardware under the said category of service. Thus, when payment of service tax under the category of supply of tangible goods for use has never been contested by the Department, the confirmation of demand under the category of "franchise" service on the same transaction is not sustainable as once the Department has accepted payment of service tax under one category, which was introduced subsequently, it cannot demand service tax under a different category for the previous period. In support of this contention reliance has been placed on the following decisions of the Tribunal:21
ST/50223/2016 & ST/54514/2015 a. Aravali Construction Company Private Limited vs. Commissioner of Central Excise, Jaipur-II20 b. Malviya National Institute of Technology v. Commissioner, Service Tax, Jaipur21 c. CCE, Customs and Central Excise vs. IOCL22
42. Learned counsel for Siti Cable also submitted that once the impugned transaction has been identified as a service of supply of tangible goods for use, which was made taxable only w.e.f May 16, 2008, the same cannot be taxed under any other category prior to the introduction of such levy.
43. It will not be necessary to examine these contentions advanced by the learned counsel for Siti Cable, as the demand in the present case was made in the show cause notice under "franchise" service.
44. Thus, for all the reasons stated above, it is not possible to hold that the service contemplated under the agreement is a "franchise" service. The confirmation of demand for the period commencing June 16, 2005 upto March 31, 2008 cannot, therefore, be sustained. It is, accordingly, set aside. The confirmation of demand for interest under section 75 and penalty under section 76 of the Finance Act has also to be set aside and is set aside. The Appeal filed by Siti Cable is, accordingly, allowed.
45. The Appeal filed by the Department would have to be dismissed, as penalty under section 78 of the Finance Act cannot be imposed once the demand itself has been set aside.
20. 2017 (6) GSTL 347(Tribunal-Delhi)
21. 2019 (6) TMI 127- CESTAT New Delhi
22. 2019 (11) TMI 382- CESTAT Hyderabad 22 ST/50223/2016 & ST/54514/2015
46. Cross objections filed by Siti Cable seek the same reliefs as have been claimed in the Appeal filed by Siti Cable. They are decided in terms of the decision rendered in the Appeal filed by Siti Cable.
(Pronounced in the open Court on August 5, 2020) (JUSTICE DILIP GUPTA) PRESIDENT (C.L. MAHAR) MEMBER (TECHNICAL) ARCHANA