Custom, Excise & Service Tax Tribunal
Maruti Suzuki India Ltd vs Delhi on 16 July, 2019
1
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
CHANDIGARH
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REGIONAL BENCH - COURT NO. 1
Appeal No. ST/1138/2010
[Arising out of OIA-229-MA-GGN-2010 dated 10.05.2010 passed by the
Commissioner (Appeals) of Service Tax - DELHI]
M/s Maruti Suzuki India Ltd. : Appellant (s)
Finance Division, Palam Gurgaon Road
GURGAON, HARYANA
Vs
Commissioner of Service Tax, Delhi : Respondent (s)
17-B, I.A.E.A.House, M.G.Road, I.P.Estate, New Delhi,Delhi, 110002 WITH Appeal No. ST/58122/2013 [Arising out of OIO-11-13-sa-cce-st-2013 dated 11.03.2013 passed by the Commissioner (Appeals) of Service Tax - DELHI] M/s Maruti Suzuki India Ltd. : Appellant (s) Finance Division, Palam Gurgaon Road GURGAON, HARYANA Vs Commissioner of Service Tax, Delhi : Respondent (s) 17-B, I.A.E.A.House, M.G.Road, I.P.Estate, New Delhi,Delhi, 110002 AND Appeal No. ST/51625/2014, ST/60511/2016 [Arising out of OIO-55-SA-CCE-ST-2013 dated 17/12/2013, OIO-DL-IV-STAX-004- COM-018-16-17 DATED 26.07.2016 passed by the Commissioner (Appeals) of Service Tax - DELHI] M/s Maruti Suzuki India Ltd. : Appellant (s) Finance Division, Palam Gurgaon Road GURGAON, HARYANA Vs Commissioner of Service Tax, Delhi : Respondent (s) 17-B, I.A.E.A.House, M.G.Road, I.P.Estate, New Delhi,Delhi, 110002 2 APPEARANCE:
Shri B. L. Narsimhan, Shri Amrinder Singh, Advocates for the Appellant Shri G. M. Sharma, Shri Tarun Kumar, Shri H. Singh ARs for the Respondent CORAM : HON'BLE Mr. ASHOK JINDAL, MEMBER (JUDICIAL) HON'BLE Mr. BIJAY KUMAR, MEMBER (TECHNICAL) ORDER No.A/60706-60709 / 2019 Date of Hearing21.05.2019 Date of Decision: 16.07.2019 Per : ASHOK JINDAL The appellant is in appeal against the impugned orders wherein the demand of service tax has been confirmed against the appellant under the category of „Franchise Service‟.
2. The facts of the case are that the appellant is engaged in the business of manufacture and sale of motor vehicles though its dealer network across the country. The appellant has developed a system in respect of sale and purchase of old/pre-owned Maruti vehicles under the brand name „Maruti True Value‟ (MTV). The appellant has entered into agreements with its dealers for setting up a business venture for purchase, exchange, refurbishing and sale of pre-owned Maruti vehicles. As per the agreement, various obligations are cast upon a dealer and the appellant as per the agreement earns two types of fee
(a) Management Fee and (b) Warranty Fee. Management fee received by the appellant on profit sharing basis earned by the appellant on each car i.e. 25% of the profit earned on sale of vehicle will be remitted to the appellant. The appellant also charged fix warrantee fee. The Revenue entertained a view that the Management fee and Warrantee fee are chargeable to service tax under the category of „Franchise Service‟. Therefore, various show cause notices were issued to the appellant and demand was confirmed under the category of „Franchise Service‟ for management fee or warrantee fee. Consequently, the penalties were also imposed. Against the said orders, the appellant is before us.
33. The Ld. Counsel for the appellant submits that the licensing agreement between the appellant and the dealers is for sharing of profit in a Co-Venture. It is his submission that the dealers and the appellant have come together to share their resources to run the business of joint venture under the brand name of „Maruti True Value‟ (MTV). Both the parties to the agreement have pre-defined roles and have agreed to pool in their resources for a common purpose. The appellant has developed the trademark „Maruti True Value‟ for pre- owned cars. The dealer provides the infrastructure and manpower for refurbishing the cars and also provides facilities to the appellant‟s employees. The dealer also puts in efforts towards marketing of the MTV cars on the basis of the market support and guidance provided by the appellant. The dealer takes the ultimate decision in so far as buying old cars, subject to the terms and conditions of the agreement. The appellant provides a detailed guide on how to ascertain the value of the car. After following the guidelines the „true value‟ of the refurbished car is ascertained. This value is certified by the appellant. Depending on market forces, sometimes the cars are sold at a price which may be higher or lower than the true value ascertained by the appellant. Therefore, the dealer provides the necessary infrastructure for the sale of the vehicles pursuant to the refurbishment based on the know-how of the appellant. Thereafter, the appellant assumes the risk in so far as the assurance that the MTV car will run defect free for the stipulated period. For sale of refurbished cars, the appellant receives a management fee which is nothing but a share in the profits which fluctuates over a period of time and sometimes even results in losses on the sale of the car. The appellant also receives a warranty fee towards the warranty that is provided with respect to the refurbished car. The arrangement between the appellant and the dealers involves sharing of expenses and the same falls within the ambit of co-venture as both the parties are actively involved in running the Maruti True Value Outlets. Admittedly, the profit is shared between the dealer and the appellant in the ratio of 75% and 25% respectively. The amount received by the appellant is management fee, however, the nature of such amount is share of profit. The profit sharing model adopted by the parties clearly shows 4 that the risk is assumed by both parties. The management fee is not in the nature of fixed fee, which is typical to most franchise arrangements. In the present case whether a fee is payable or not fluctuates and in some cases the appellant make a loss as no amount is paid by the dealer. Further, unlike the arrangement of franchise, in the present scenario, the dealers are asked to represent itself separate from the appellant and therefore it is submitted that it is a co-venture and not a franchise agreement. To support this contention, he relief on the decision of this Tribunal in the case of Mormugao Port Trust v. Commissioner, 2017 (48) STR 69 (Tri.-Mum.) which has been affirmed by the Hon‟ble Supreme Court reported in 2018 (19) GSTL J118 (S.C.). He also relied on the decision of Gujarat State Fertilisers and Chemicals vs. CCE, 2016-TIOL- 198-SC-ST, Sir Ganga Ram Hospital vs. CCE- 2018-TIOL-352- CESTAT-DEL and M/s PVS Multiplex India Pvt. Ltd. vs. Commissioner of Central Excise, Meerut-I-2017-VIL-961- CESTAT-ALH-ST.
4. He further submitted that in this case, no consideration has been agreed as a fixed fee which is payable to the appellant by the dealer for the purposes of the franchise. Therefore, the appellant are not entitled to pay service tax under the category of Franchise Service. As it is an agreement of profit sharing and it is a joint venture. He further submitted that as per Section 65(47) of the Finance Act, 1994, the franchisee must be granted a representational right to sell or manufacture goods or provide services or undertake any process identified with the franchisor. Therefore, it is to be seen whether the agreement in the present case grants a representational right to the franchisee. The phrase „representational right‟ was defined by the Hon‟ble Delhi High Court in Delhi International Airport P. Ltd. vs. UOI - 2017 (5) STR 275 (Del.). As the appellant has not provided any service to the dealers, therefore, the same cannot be qualified as „Franchise Service‟. He also submits that the appellant role in the said business is not restricted to merely providing proprietary system, technical inputs, trademark etc. but the appellant also plays a significant role in determining the price of 5 vehicle to be sold, standards of refurbishment, appointing an engineer at the dealer‟s workshop for supervision, providing warranty in respect of such vehicles etc. Therefore, the said management fee is not qualified as „Franchise Service‟. He further submits that the amount received by the appellant as „warrantee fee‟ is not liable to pay service under „Franchise Service‟. It is his submission that the appellant have undertaken to provide warranty service to customer. For providing such services, the dealer passes on the warranty fee to the appellant and the appellant submits that the warranty fee received from the dealer is entirely on account of warranty provided under the agreement and it cannot be the subject matter of service tax under „Franchisee Service‟. Further, it is an amount charged for a warranty agreement between the customer and the appellant. Warranty is one of the expenses to be borne by the appellants. Hence, the amount attributable toward warranty is one of the costs which is being received from the dealers. Hence, recovery of amount attributable to warranty is not the consideration for providing any service more than a warranty to the purchaser of the car. It is further submitted that the appellant is merely providing the assurance to the customers that the vehicles of the customers will run free of defects, and if defect arise during the period of warranty coverage the same will be made good. The appellant only provides an assurance that in case of any defect, the repair will be undertaken by its dealers. The appellant relief on the decision of Digital Satelite Warranty Cover Ltd. vs. Financial Service Authority, 2013 UK 7.
5. He further submitted that the dealers of the appellant after providing repair and replacement of the faulty parts of the vehicle, raises an invoice on the appellant wherein VAT is charged on the part cast and service tax on the labour charges. Therefore, the same do qualified as „Work Contract Service‟ as per the decision of Larsen & Toubro Ltd - 2015 -TIOL-187-SC-ST.
6. On the other hand, the Ld. AR supported the impugned orders and submitted that the management fee and warranty fee recovered by the appellant do qualify as „franchise service‟ as the appellant has granted representation of right to the franchise and franchise is paying 6 fee to the appellant, therefore, their activity do qualify as „Franchise Service‟. Therefore, they are liable to pay service tax. He further submits that the module adopted by the appellant is very much clear that they are receiving fixed fee from the franchisee, therefore, they are liable to pay service tax.
7. Heard the parties and considered the submissions.
8. The issue involved in the matter is whether the management fee and warranty fee recovered by the appellant is liable to be service tax in terms of Section 65, (105), (zze) of the Finance Act, 1994 under the category of „Franchise Service‟ or not?
Therefore, we have to see the various terms of the agreement entered between the appellant and the licensing which are relevant to decide the issue. The same are extracted herein below:-
7 8 9 10Now, we have to see the provision of Finance Act, 1994 wherein as per Section 65, (47) the Franchise has been defined and sub-section 48 also defined the franchiser which are as under:-
"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.
"Franchisor" means any person who enters into frandhise with a franchisee and includes any associate of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly.
On going through the said definition of franchise which means:-
"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 franchise.11
(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.
On going through the agreement as well as the definition provided before us, we find that in this case the franchise is providing infrastructure for refurbished the car and also provide facility to the employees and franchise also making efforts to marketing to MTV cars on the basis of market support and guidance provided by the appellant. The appellant only provide guideline how to ascertain the value of car and how to refurbish the car and after the sale of car, the appellant share the profit with the licensee 25% and 75% respectively. Therefore, in the light of the above, it is to be seen that the agreement between the appellant and the licensee is in the nature of franchisee/ franchisor or not?
The similar issue has been examined by this Tribunal in the case of Mormugao Port Trust (supra) is joint venture or not?
"17. The question that arises for consideration is whether the activity undertaken by a co-venture (partner) for the furtherance of the joint venture (partnership) can be said to be a service rendered by such co-venturer (partner) to the Joint Venture (Partnership). In our view, the answer to this question has to be in the negative inasmuch as whatever the partner does for the furtherance of the business of the partnership, he does so only for advancing his own interest as he has a stake in the success of the venture. There is neither an intention to render a service to the other partners nor is there any consideration fixed as a quid pro quo for any particular service of a partner. All the resources and contribution of a partner enter into a common pool of resource required for running the joint enterprise and if such an enterprise is successful the partners become entitled to profits as a reward for the risks taken by them for investing their resources in the venture. A contractor-contractee or the principal-client relationship which is an essential element of any taxable service is absent in the relationship amongst the partners/co-venturers or between the co-venturers and joint venture. In such an arrangement of joint venture/partnership, the element of consideration i.e. the quid pro quo for services, which is a necessary ingredient of any taxable service is absent.
18. In our view, in order to render a transaction liable for service tax, the nexus between the consideration agreed and the service activity to be undertaken should be direct and clear. Unless it can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity by a partner, it cannot be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service. In Cricket Club of India v. Commissioner of Service Tax, reported in 2015 (40) S.T.R. 973 it was held that mere money flow from one person to another 12 cannot be considered as a consideration for a service. The relevant observations of the Tribunal in this regard are extracted below :
"11. ...Consideration is, undoubtedly, an essential ingredient of all economic transactions and it is certainly consideration that forms the basis for computation of service tax. However, existence of consideration cannot be presumed in every money flow. ... The factual matrix of the existence of a monetary flow combined with convergence of two entities for such flow cannot be moulded by tax authorities into a taxable event without identifying the specific activity that links the provider to the recipient.
12. ... Unless the existence of provision of a service can be established, the question of taxing an attendant monetary transaction will not arise. Contributions for the discharge of liabilities or for meeting common expenses of a group of persons aggregating for identified common objectives will not meet the criteria of taxation under Finance Act, 1994 in the absence of identifiable service that benefits an identified individual or individuals who make the contribution in return for the benefit so derived.
13. ... Neither can monetary contribution of the individuals that is not attributable to an identifiable activity be deemed to be a consideration that is liable to be taxed merely because a "club or association" is the recipient of that contribution.
14. ... To the extent that any of these collections are directly attributable to an identified activity, such fees or charges will conform to the charging section for taxability and, to the extent that they are not so attributable, provision of a taxable service cannot be imagined or presumed. Recovery of service tax should hang on that very nail. Each category of fee or charge, therefore, needs to be examined severally to determine whether the payments are indeed recompense for a service before ascertaining whether that identified service is taxable."
19. We are accordingly of the view that activities undertaken by a partner/co-venturer for the mutual benefit of the partnership/joint venture cannot be regarded as a service rendered by one person to another for consideration and therefore cannot be taxed."
The said order has been confirmed by the Hon‟ble Apex Court.
9. Further, we find that the issue was also examined by the Hon‟ble Apex Court in the case of Gujarat State Fertilisers and Chemicals (supra) wherein the Hon‟ble Apex Court observed as under:-
"15. We have considered the aforesaid submissions in the light of the material placed on record. We shall advert to the second aspect namely, as to whether the arrangement between GSFC and GACL amounts to providing any services by GSFC to GACL and 50% incineration expenses incurred would constitute charges for providing 13 such services. There is no dispute about the manner in which HCN is received through pipeline from M/S. Reliance Industries Ltd. by GSFC and GACL and then shared in the ratio of 60:40 respectively. GSFC and GACL are public sector undertakings, as already mentioned above. Since GCN is to be received through pipeline, it is abundantly clear that in order to save the expenditure, both the parties agreed that there should be a common pipeline. Once HCN is received through the said common pipeline, it comes first to GSFC‟s premises and from there it is diverted in the ratio of 60:40, meaning thereby GSFC receives 60% of the HCN whereas GACL receives 40% of the supply in accordance with their respective requirement. To enable GACL to receive this HCN through common pipeline, arrangement/agreement was entered into between these two parties. For this purpose, handling facilities were installed in the premises of GSFC. However, fact remains, for which there is no dispute, that for installation of these facilities both the parties had contributed towards the investment. Since, the said handling facilities are in the premises of GSFC, incineration also takes place at the said premises. Handling facilities expenditure thereof is shared equally by both the parties. That is clearly provided in the agreement/arrangement that was agreed to between the parties and is reflected in the minutes dated 06.07.1980. Once these facts are accepted, we find that handling portion and maintenance including incineration facilities is in the nature of joint venture between two of them and the parties have simply agreed to share that expenditure. The payment which is made by GACL to GSFC is the share of GACL which is payable to GSFC. By no stretch of imagination, it can be treated as common „service‟ provided by GSFC to GACL for which it is charging GACL.
16. We are, thus, of the opinion that the second ingredient has not been established in the present case and the question of service tax does not arise. In view thereof, it is not necessary to go into the question as to whether receiving of HCN through the said common pipeline in the tank which is setup by the GFSC to GACL amounts to „storage‟ or not and we leave the said question open."
Thereafter, the demand was set-aside.
10. As the agreement between the appellant and the licensee/dealer is in nature of share of profit in the ratio of 25% and 75% and in cases where there is a loss, the appellant does not received any amount towards the activity, in that circumstances, we categorically held that the agreement between the appellant and the dealer is in nature of joint venture for which no service tax is payable by the appellant.
11. Further, we find that a demand of service tax sought to be confirmed on warranty service under the „Franchise Service‟.
12. We find that the appellant has undertaken to provide warrantee service to the customers and receiving the payment through dealers for warranty during the period of warranty. It is like an assurance given by the appellant to the customers that during the period of 14 warranty, if any, defect arises the same will be make good without any fees. The said activity cannot be termed as "Franchise Service‟ and same is not liable to pay service tax under „Franchise Service‟.
12. Further, the issue has been examined in the case of Delhi International Airport P. Ltd. vs. UOI (supra) wherein the Hon‟ble High Court of Delhi observed as under:-
"49. Since the stand of the respondent Revenue is that the Upfront Fee and Annual Fee is exigible under the taxing entry "Franchise Services" and not under the taxing entry "Renting of Immovable Property Services", we are limiting the examination to the taxing entry "Franchise Services".
50. Section 65(47) of the Finance Act, 1994 reads as under :
"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.
51. To constitute a franchise, an agreement has to satisfy the following conditions :
(i) the franchisee must be granted a representational right to :
(a) sell or manufacture goods, or
(b) provide services, or
(c) undertake any process identified with franchisor,
(ii) whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved?
52. Section 65(105) of the "Finance Act lays down that :
"taxable service" means any service provided or to be provided :-
(a)...........
(zze) to a franchisee, by the franchisor in relation to franchise."
53. For a service to be taxable, it should be a service provided or to be provided by the franchisor to the franchisee in relation to the franchise. As per the Revenue, AAI is the franchisor and petitioners are the franchisees and AAI is providing service to the petitioners.
54. The question that arises for consideration is: whether the OMDA constitutes a franchise and if so, whether any service is being provided by AAI to the petitioners?
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).
1556. 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.
68. Further, the taxable service is not mere granting of a franchise but is where the franchisor provides service to a franchisee. For the transaction to be taxable, it is necessary that the service should be provided by the AAI to the petitioners. It is not pointed out by the Revenue as to how and in what form service is being provided by AAI to the petitioners. The Annual Fees paid is not because of any service rendered by AAI to the petitioner. AAI has entrusted the petitioners with some of its functions under Section 12 of the Airports Authority of India Act and no service is being rendered by the AAI to the petitioners in performance of those functions. Perusal of clauses of OMDA clearly shows that AAI does not render any service to the petitioners."
13. Therefore, we hold that the management service and warrantee fee recovered by the appellant from the dealers is not taxable under the category of „Franchise Service‟. Accordingly, the demand against the appellant are set-aside. Consequently, no penalty is imposable.
14. In result, the impugned orders are set-aside and allow the appeals filed by the appellants with consequential relief, if any.
(Order pronounced on 16.07.2019) (ASHOK JINDAL) MEMBER (JUDICIAL) (BIJAY KUMAR) MEMBER (TECHNICAL) G.Y.