Custom, Excise & Service Tax Tribunal
Mc Donalds India Pvt Ltd vs Commissioner, Service Tax-Delhi I on 1 March, 2023
Author: Dilip Gupta
Bench: Dilip Gupta
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO. 1
Service Tax Appeal No. 50590 of 2017
(Arising out of Order-in-Original No. DLISVTAX001COM0381617 dated December
30, 2016 passed by the Commissioner of Service Tax, Delhi-I, 17-B, I.A.E.A.
House, I.P. Estate, M.G. Marg, New Delhi-110002)
McDonald's India Pvt. Ltd. ...... Appellant
VERSUS
Commissioner of Service Tax- Delhi I ......Respondent
APPEARANCE:
Shri Murlidharan & Ms. Manali, Advocate for the Appellant Shri Gopi Raman kant, Authorized Representative of the Department CORAM : HON'BLE MR. JUSTICE DILIP GUPTA, PRESIDENT HON'BLE MS. HEMAMBIKA R. PRIYA, MEMBER (TECHNICAL) FINAL ORDER NO._50300/2023_ DATE OF HEARING: 01 March, 2023 JUSTICE DILIP GUPTA This appeal seeks to assail the order dated December 30, 2016 passed by the Commissioner of Service Tax, Delhi-I1 on the statement of demand dated 12.04.2016 issued under section 73(1)A of the Finance Act, 19942 for the period 2014-2015. The demand proposed in the said statement has been confirmed with penalty and interest.
2. The said statement of demand had been issued, as earlier three show cause notices dated 17.04.2013, 22.05.2014 and 20.04.2015 for
1. the Commissioner
2. the Finance Act 2 ST/50590/2017 the period 2009-2010 to 2013-2014 were issued. The issues raised in the said show cause notices are as follows:-
a. Non-payment of service tax on advertisement expenses incurred by the local franchisees on behalf of the appellant. b. Short payment of service tax due to wrong utilization of cenvat credit.
c. Non-payment of service tax on „management consultancy‟ services by wrongly claiming the same as „export service‟.
d. Interest on late payment of service tax on franchisee fees to McDonald‟s USA.
3. The demands raised in the aforesaid three show cause notices were confirmed by an order dated 02.11.2015, which order was assailed in Service Tax Appeal No. 50218 of 2016 that was decided on 25.09.2019. The decision is reported in 2019 (9) TMI 1141- CESTAT NEW DELHI (McDonalds India Private Limited V.s Principal Commissioner of Service Tax, Delhi-I).
4. The appellant (McDonald's India Private Limited3) was incorporated as a wholly owned subsidiary of McDonald's Corporation USA 4 with a view to facilitate development of the business of McDonald's in India. The appellant obtained service tax registration for 'franchisee service and management consultancy service' with effect from 24 November, 2005.
5. It is stated that McDonald's India does not operate any restaurant in India. It, however, entered into Franchisee Agreements with local
3. McDonald's India
4. McDonald's USA 3 ST/50590/2017 franchisees, namely, Hardcastle Restaurants Private Limited5 and Connaught Plaza Restaurants Private Limited6 who operate restaurants in India. As a consideration for its services, McDonald's India receives royalty equivalent to 5 % of the gross sales made by the local franchisees in addition to a fixed location fee of $22,500 to $45,000, each time a new restaurant is opened. The appellant claims that there is no other consideration flowing to the appellant, directly or indirectly, from the franchisees, except the said royalty amount and the location fee amount. It is not in dispute that service tax has been paid by the appellant on the said royalty and the location fee amount. The appellant is also providing 'management consultancy' services to McDonald's USA, in terms of a Service Agreement dated 1 April, 1999.
6. Till 27 February, 2010, appropriate service tax on the income earned by the appellant was discharged. With effect from 27 February, 2010, when an amendment was made in the erstwhile 'Export of Services Rules, 20057 by a Notification dated 27 February, 2010, such services were treated as exports. Similarly, with the introduction of the „Place of Provision of Services Rules, 2012‟, with effect from 1 July, 2012, these services were treated as 'exports', in conjunction with the Service Tax Rules, 1994 ('Service Tax Rules').
7. Out of the four issues raised in the earlier three show cause notices, only two issues namely the first issue and the third issue arise for consideration in this appeal. These two appeals were decided by the Tribunal in the decision rendered on 25.05.2019 in the following manner:-
5. Hardcastle
6. Connaught Plaza
7. the Export Rules 4 ST/50590/2017 First Issue Non-Payment of Service Tax on Advertisement Expenses Incurred by Franchisees " 37. The order has grossly erred in interpreting the franchise agreement, thereby, including the cost of advertisement in the franchise fee received by the appellant. The amount incurred by the franchisee towards advertisement expenses, cannot, therefore, be said to be „consideration‟ paid by the franchisee to the appellant, as it is the franchisee themselves who are benefitting out of such expenses and not the Appellant."
Third Issue Non-payment of Service Tax on 'Management Consultancy' services by wrongly claiming the same as export service.
60. The relevant Rule 3(2) of Export Rules is as follows:-
"3. Export of taxable service -
(1)............
(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-
(a) --------[omitted]
(b) payment for such service is received by the service provider in convertible foreign exchange."
61. Rule 3(2) of the Export of Service Rules 2005 states that provision of any taxable service to qualify as export has to satisfy the condition that payment for such services is received in convertible foreign exchange.
62. While examining the reply of the appellant, the Principal Commissioner has relied upon the requirement contained under the Reserve Bank of India Regulations that require the export proceeds to be realized within a period of one year from the date of export of services.
63. In the first instance, there is no time limit in Rule 3(2) of the Export Service Rules, 2005. Thus, any time limit prescribed by the Reserve Bank of India would not debar 5 ST/50590/2017 exporter from receiving remittances for the services even after one year. What has, therefore, to be examined is whether the appellant received any remittances thereafter. This has not been examined in the impugned order. The matter, therefore, needs to be remitted to the Principal Commissioner for examining this issue and thereafter recording a finding."
13. In the instant case it has been stated by the appellant that the appellant had filed an application with the Reserve Bank of India on 17 August, 2021 for granting permission for adjustment of the receivables. In response to the request made, the Reserve Bank of India accorded the approval and the appellant made the remittance of the net amount of Rs. 3,38,13,31,677/- to McDonald‟s Corporation USA on 30 March, 2022.
14. It is seen that the two issues involved in this appeal have been decided in the earlier decision of the Tribunal in the case of the appellant. Thus, the impugned order in so far as it seeks to confirm the demand of service tax in regard to the first issue, namely non-payment of service tax on advertisement expenses incurred by franchisees deserves to be set aside. With regard to the third issue, namely non- payment of service tax on „management consultancy‟ services by wrongly claiming the same as export service, the matter needs to be remitted to the Commissioner to pass a fresh reasoned order in the light of the observations made above and the additional facts brought to the notice of the Tribunal by the appellant.
15. In the result, the confirmation of demand on advertisement expenses is set aside and the issue relating to non-payment of service tax on „management consultancy‟ services is remitted to the Commissioner for a fresh decision in the light of the observations made 6 ST/50590/2017 above. The appeal is, accordingly, allowed to the extent indicated above.
(Order pronounced in the open Court) (JUSTICE DILIP GUPTA) PRESIDENT (HEMAMBIKA R. PRIYA) MEMBER (TECHNICAL) Rekha