Customs, Excise and Gold Tribunal - Tamil Nadu
Franch Express Network (P) Ltd. vs Cst on 23 July, 2008
ORDER P. Karthikeyan, Member (T)
1. Franch Express Network Pvt. Ltd. (FEN, appellants) is a courier agency with a wide network of above 45 hubs located at various stations in South India. Centered about these hubs its agents running to above 850 collect and deliver time-sensitive letters/articles to the consignees. FEN is headquartered in Chennai and acts as a courier agent with the aid of this network. Articles are transported between the hubs by FEN. All the agents and FEN are registered as courier agents with the Service Tax department. FEN administers and controls the agents in the network. Franchise service was introduced in the statute with effect from 01.07.2003. After due process of law, in the impugned order, the Commissioner demanded an amount of Rs. 3,64,86,934/- as tax towards the service rendered by FEN during 01.07.03 to 30.09.06 as franchisors and Rs. 6,26,850/- towards Education Cess under proviso to Section 73(1) of the Finance Act '94 (the Act). He also imposed a penalty of Rs. 4,00,00,000/- under Section 78 of the Act and demanded the interest due under Section 75 of the Act on the service tax yet to be paid. Demand is on the total income of FEN during the material period.
2. The appellants have taken the following main grounds among several others. FEN and each courier attached to the hubs have a relation as between principal and agent. The activities of the appointed agents are controlled by FEN with a standard agreement executed between each agent and FEN. These agents are not conferred any representational right by FEN. In the agreement they are referred to as franchisee. No single franchisee does the complete work of a courier agent. An agent centered about a hub distributes the articles to the consignees. FEN does transportation, sorting, distribution, general administration and back office management of the consignments. The local agents are required to display the brand name Franch Express at the place from where they operate in a prescribed manner and use stationery supplied by FEN. They should not undertake work for another courier agency. In a franchisor franchisee arrangement, the franchisee is independent and its activities are not regulated by the franchisor. The local couriers are authorized to represent FEN as an authorized agent in the agreement. There was no fee paid by the agents. The agents make a deposit with FEN called trade deposit. The agents pay service tax on the charges they collect from their clients, and return the balance after retaining their expenses and their remuneration. FEN does not impart any skill, technical know-how or managerial expertise to the agents. The work involved is like that of a post office. There is no service rendered by FEN to their agents to be taxed under franchise service. Service tax demand is on the corpus which is the net of the same tax and thus the demand is against the principle of taxation. The Commissioner went by the form rather than the substance of the agreement and treated the agreement as one of franchise. The local couriers are required to use consignment notes and stationery of FEN. The consignment notes will bear the name Franch Express. The individual registration certificates predominantly display the trade name 'Franch Express'. The agents are not doing business on their own account. In a franchise arrangement, the franchisee would not be under any obligation to pass on the amounts collected from its customers except the franchise fee or royalty. These are not the case with Franch Express and their agents. Ingredients of Section 65(47) of the Act arc absent in the transaction. The couriers are only given exclusive agency. The appellants had not accounted the income from courier agents as 'franchise'. The revenue was uncertain about the liability of the courier agents as simultaneously with the show cause notice, there was also a letter from the Dy. Commissioner alleging that they were engaged in co-loading which came under business support services. There was no suppression of information by Franch Express. They were registrants with the department and the jurisdictional range officer had addressed them in 2003 and advised to register the franchisees under courier service. Show Cause Notice is dated 12.03.07. The department was aware of the operations of FEN and its agents and the demand invoking larger period was not sustainable.
3. The learned SDR submits that the demand is on FEN and for a service other than courier agency. Courier agents pay tax on the taxable service they render and the impugned demand on FEN is for another activity subject to a different category of Service Tax. The demand is in order and deserves to be sustained. He cited the decision of the Tribunal in Jetking Information Ltd. v. CCE, Mumbai reported in 2007 (7) STR 314 (Tri.-Mum.). The facts of that case were that the assessee therein had rendered service under the category of commercial coaching and training and at the same time ran a network of similar coaching centres as a franchisor of the same service. The Tribunal upheld the demand of service tax under the category of "Franchise Service" from the appellant therein.
4. We have carefully considered the rival submissions. The Act defines "Franchise" in Section 65(47) as follows:
"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 provided 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;
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.
The above definition effective from 01.07.2003 was amended on 16.06.2005 as follows:
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.
On a perusal of the agreement entered into between FEN and its agents it is seen that the local agents are not conferred representational right by FEN. As per the agreement the persons with whom agreement is entered into is entitled to use the name of FEN only as "authorized agent". The law provided upto 16.06.2005 that a franchise provided for payment of a fee by the franchisee to the franchisor. The agents in this case pay the courier charges upfront at a flat rate while collecting consignment notes from the appellant. The agents retain their share of the income as per the tariff. They also get incentive as prescribed based on turnover. They retain their expenses and remuneration and return the balance of income from clients to FEN. No fee is paid to FEN by the agents as per the agreement. From 16.06.2005, the service involves provision of a service associated with a particular person by trade mark, service mark, trade name or logo. The registration certificates issued to the agents carry the endorsement that they are agents of Franch Express. The so called franchisees being agents who undertake the work of courier on behalf of FEN, it cannot be held that any other service is involved in the transactions or that there is a different person receiving the service. "Courier Agency" means any person engaged in door-to-door transportation of time-sensitive documents, goods or articles utilizing the services of a person, either directly or indirectly. Therefore FEN undertakes only courier service engaging several agents who do not operate as principals in the arrangement. Therefore the agents are not franchisees and FEN franchisor in a franchise. From the accounts furnished for the year 2004-05, FEN made a profit of above Rs. 52 lakhs on a turnover of above Rs. 12 crores. The accounts do not show any income under a head 'franchise'.
5. We find that in the case law cited by the Ld SDR, the assessee had equipped its franchisees with course material, stationary and also trained them in coaching. In that case the assessee's activities conformed to the definition of franchise as defined in the Act. We find that the persons whom the Commissioner found to be franchisees are only agents of Franch Express carrying out part of the operations of FEN which constitute courier agency service. FEN cannot be held to be imparting any know-how or skill to these agents and the agents do not carryout any branded service with the autonomy of a franchisee. Accordingly, we hold the impugned order finding FEN as rendering franchise service to be not sustainable. The impugned order is set aside and the appeal filed by the Franch Express Network (P) Ltd., allowed.
(Older Pronounced in Open Court on 23.7.08)