Custom, Excise & Service Tax Tribunal
M/S. Cmc Ltd vs Cce, Hyderabad on 19 April, 2011
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT BANGALORE
Bench Division Bench
Court I
Date of Hearing: 06/04/2011
Date of decision:..
Appeal No.ST/70/06; ST/332/07
(Arising out of Order-in-Appeal No.32/2005(H-II) S.Tax dt. 29/12/2005 passed by CC&CE(Appeals-II), Hyderabad & Order-in-Revision No.01/2007-Service Tax dt. 29/5/2007 passed by CCE,C&ST, Hyderabad)
For approval and signature:
Honble Mr. M.V.Ravindran, Member(Judicial)
Honble Mr. P.Karthikeyan, Member(Technical)
1.
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
No
2.
Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
No
3.
Whether their Lordship wish to see the fair copy of the Order?
Seen
4.
Whether Order is to be circulated to the Departmental authorities?
Yes
M/s. CMC Ltd.
..Appellant(s)
Vs.
CCE, Hyderabad
..Respondent(s)
Appearance Mr. K. Parameshwaran, Advocate for the appellant.
Mr. Harish, JDR for the Revenue.
Coram:
Honble Mr. M.V.Ravindran, Member(Judicial) Honble Mr. P.Karthikeyan, Member(Technical) FINAL ORDER No._______________________2011 Per M.V.Ravindran These two appeals are filed against the following impugned orders:-
Appeal No.ST/70/2006 Order-in-Appeal No.32/2005(H-II) S.Tax dt. 29/12/2005 Appeal No.ST/332/07 Order-in-Revision No.01/2007-Service Tax dt. 29/5/2007 Since the issue involved in these two cases are inter-connected and is of the very same assessee, we dispose these appeals by a common order.
2. The relevant facts that arise for consideration are that the appellant is service provider of Commissioning and Installation, Maintenance or Repair Service and Scientific and Technical Consultancy. Department gathered intelligence that CMC entered into Franchising agreements with several subscribers to lend its Modular part time semester wise course leading to Diploma in advanced software technology, popularly called as CMC Modular DAST course and for use and access under its Franchise Scheme by the subscribers. The assessee has not registered itself with the Department under Franchisee Services. The Department contended that the Franchising Agreement entered by CMC with the subscribers have satisfied the definition of Franchise services under Section 65 of Chapter V of the Finance Act, 1994 (the Act) with effect from 1/7/2003 and they are liable to pay service tax w.e.f. 1/7/2003 as per provisions of Chapter V of the Act. The Department found that CMC collected one time franchise fee / licensing fee and deducts 25% of course fee as royalty from the course fee collected, as per Franchising agreement and has collected Rs.8,13,697/- on licensing fee and Rs.48,09,109/- on course fee fro the period from 1/7/2003 to 30/6/2004 from the subscribers and has not paid service tax of Rs.4,49,825/-. The Department alleged that CMC by reason of omission or failure on their part have failed to disclose wholly or truly all-material facts required for verification of the assessment under Section 71 of Chapter V of the Act and that the value of taxable service that has escaped assessment is on account of failure on the part of the assessee to disclose the true value of the service rendered by them and hence, the extended time limit of five years was invoked to recover service tax, in view of the assessee failing to pay service tax by reason of omission or failure on their part, thereby making himself or herself liable to penalty under Section 78 of Chapter V of the Act read with Section 73(1) of Chapter V of the Act. The appellants contested the demand before the adjudicating authority. The adjudicating authority did not agree with the contentions and held that the appellant is liable to pay the service tax on the amount of 25% retained by them. But he refrained from imposing any penalties on the appellant. Aggrieved by such an order, appellant preferred an appeal before the ld. Commissioner(Appeals) contesting the service tax liability on the 25% course fee received by them. Ld. Commissioner(Appeals) did not find any merits in the appeal filed by the appellant and coming to such a conclusion, he rejected the appeal. Hence, appellant is before us in appeal No.ST/70/2006.
3. In respect of appeal No.ST/332/2007, the Revenue aggrieved by the Order-in-Original passed by the adjudicating authority by not imposing any penalties on the assessee, reviewed the order of the said adjudicating authority by the powers vested in Commissioner under Section 84 of the Act and passed an Order-in-Revision wherein penalties under Section 76 and 78 were imposed on the assessee. Aggrieved by such an order, the assessee is also on appeal before us.
4. The ld. Counsel appearing on behalf of the appellant would submit that the appellant has been undertaking the activity of franchisee services and has entered into a contract for impartment of computer knowledge, at the end of the course, they award degree to the student. It is his submission that the activity of the appellant will be covered under the Commercial Coaching or Training service and the imparting of knowledge of computer being exempted by Notification No.9/2003-ST, they are not liable to pay any service tax. It is his submission that from 01/07/2004, the said notification was withdrawn and any computer training institute where even it imparts knowledge on computer, the said activity is liable to be taxed under Commercial Coaching or Training service. He would draw our attention to the definition of the Franchisee services and submit that the appellant has not been receiving any fees from the franchisees and hence, they are not liable to pay any service tax. He would draw our attention to the typical agreement entered by the assessee with the franchisees and draw our attention to the various clauses and submit that at the end of the course the diploma was granted by the assessee. He would submit that a one time franchise fee which has been paid by the franchisees were liable for service tax under the franchise services and they have discharged the same and are not disputing the same before the Bench. They are challenging the findings of the lower authorities only to the extension of liability to pay service tax on 25% of fees retained by them. He would submit that student makes payment for the entire course to the appellant i.e. M/s. CMC Ltd. Out of this amount, the appellant retained 25% and disbursed the balance 75% to the franchisees who conduct such courses. This would indicate that they have been collecting the fees and the amount which is retained by them is nothing but fees. He would submit that subsequent to 1/7/2004, the appellant has been discharging the service tax liability on such amount under the category of Commercial Coaching or Training service. He would submit that if this classification is accepted by the Revenue today, service tax liability cannot be fastened on them under any other headings for the same amount prior to that period. He would rely upon the judgment of Honble High Court of Punjab & Haryana in the case of CCE, Ludhiana Vs. Patient Service Centre [2008(9) STR 229 (P&H)], Federal Bank Ltd. Vs. CCE, Calicut [2008(10) STR 320 (Tri. Bang.)]. He would also submit that when an activity to be considered as a computer coaching or training, the same could not have been taxed under any other category i.e. to say when an activity cannot be taxed directly, it cannot be also taxed indirectly as laid down by the Honble Supreme Court in the case of CCE, Pondicherry Vs. Acer India Ltd. [2004(172) ELT 289 (SC)]. It is his submission that after going through the clauses of agreement, it would become clear that the franchisees are not required to pay any fees relating to the appellant and the amount retained by them would not become a franchisee fee thereon. For this proposition, he would rely upon a decision of the Tribunal in the case of Bonanza Speed Couriers Pvt. Ltd. Vs. CC&CE, Cochin [2010(19) STR 675 (Tri. Bang.)], Franch Express Network (P) Ltd. Vs. CST, Chennai [2008(12) STR 370 (Tri. Chennai)].
5. As regards the appeal No.ST/332/2007, it is his submission that the review undertaken by the ld. Commissioner against the Order-in-Original was much after the Order-in-Original got merged with the Order-in-Appeal and even after the grant of stay by the Bench in the same matter. It is his submission that Order-in-Revision should not have been passed by the ld. Commissioner as the orders have already got merged with the ld. Commissioner(Appeals) order.
6. Ld. DR on the other hand after taking us through the definition of franchisee service and the clarification issued by the Board, would submit that there is no dispute in this case that the appellant is a franchiser and has given its brand name to many people for conducting computer courses. He would take us through the clauses of the very same agreement on which the ld. Counsel relied upon and specifically bring to our notice that the financial considerations which have been enacted in the agreement would show that franchisee has to pay the appellant one time franchisee fee and also royalty worked out at the rate of 25% of the course fee of each participant. It is his submission that this 25% of the course fee which has been remitted back or retained by the appellant is nothing but a franchisee fee as envisaged in the definition of franchisee services. He would submit that the exemption granted to the commercial Coaching or Training classes for conducting computer education would not applicable in this case as the appellant is only franchiser and has not conducted any commercial coaching classes but the franchisee is conducting the same. It is his submission that if nay exemption has to be given under Notification No.9/2003-ST, it could be only to the franchisees who are conducting this computer education classes. He would submit that the issue is now fairly settled by the decision of the co-ordinate Bench of the Tribunal in the case of Jetking Information Ltd. Vs. CCE, Mumbai-I [2007(7) STR 314 (Tri. Mum.)]. He would submit that the adjudicating authority had not given any reason for non-imposition of penalties on the appellant and hence the penalties imposed by the ld. Commissioner as a Reviewing Authority under the powers granted by Section 84 of the Act is correct. It is his submission that the appellant needs to be penalized for not discharging the service tax liability despite there being franchise agreement and they being exempt under the exempt under the said services.
7. We have considered the submissions made at length by both sides and perused the records.
8. The issue involved in this case is regarding whether the appellant is liable to discharge service tax liability on an amount of 25% retained by them out of the course fee paid by the student for the purpose getting a degree of CMC Modular DAST Course.
9. It is undisputed that the appellant is conducting CMC Modular DAST course not by himself but through franchisees all over India. It is also undisputed that the appellant is getting fixed amount on execution of agreement as a franchisee fee, on which service tax liability has been fastened and discharged by the appellant along with interest and is not being disputed before us. It is also undisputed that the certificate issued on completion of such course is given by the appellant.
10. On this factual matrix, we proceed to decide the issue. The definition of the franchise service during the relevant period reads as under:-
Franchise Service :
Franchise service is a service provided by franchiser to a franchisee. Section 65 of the Finance Act 1994, (sub section 47) defines franchise as a specific type of agreement. This agreement has various ingredients, which have been specified in the said definition. For removal of doubt it is clarified that unless all the ingredients mentioned at (i) to (iv) of the said sub section are satisfied, the agreement can not be called as franchise agreement. These ingredients are,-
(i) the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchiser, 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 franchiser provides concepts of business operation to franchisee, including know-how, method of operation, managerial expertise, marketing techniques 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 franchiser, 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.
11. From the above reproduced definition, it can be seen that to consider an agreement as franchise agreement or the service rendered under the category of franchising service or not an assessee to satisfy all the four conditions which are enumerated herein above. Even the Board vide their Circular dt. 20/6/2003 had specifically indicated that all the ingredients mentioned from 1 to 4 need to be satisfied and then only such agreement can be considered as a franchise agreement. The assessee claims that they are not satisfying the condition (iii) as much that no amount is paid back to the franchiser i.e. appellant directly or indirectly as fee.
12. On the factual matrix on the perusal of the agreement entered by the appellant with one of the franchisees, we find that in clause No.5, there is a clear cut restriction on the franchisee in the following terms:-
5. Territory, Audience and General curriculum:
i. The Franchisee will not conduct their own technical classes / teaching topics similar to those included in the standard CMC Modular DAST Course covered under this agreement.
13. From the above reproduced Clause No.5(i) of the agreement, it is very clear that the franchisees are not allowed to conduct their own technical classes / teaching topics similar to those included in the course given by the appellant through the franchisees. In Clause No.7, the agreement specifically indicates that there has to be periodic reporting and audit in respect of the students who undertook the courses conducted by the appellant. It is also seen from the said clause that the franchisee has to provide an annual business plan which includes marketing and teaching plans of the courses covered under the agreement and that said clause also talks about forecasting the amount of royalty payments expected to be paid to the appellant. We find that Clause No.11 of the said agreement is of financial considerations to be paid by the franchisee to the appellant which we may reproduce:-
11. Financial considerations:-
i. The current schedule of charges for conducting CMC Modular DAST Course facilities by the Franchisee is as follows:-
a) The franchisee will pay to CMC a one time Franchise Fee of Rs.1,44,000/- (Rupees one lakh fourty thousand only) per location for the specific twenty seven months period under this agreement.
b) A royalty worked out at the rate of 25% of course fee of each participant to CMC Modular DAST Courses. Fee for the courses would be determined from time to time by CMC. The current fee schedule applicable for the Modular DAST Courses Semester wise is given in Annexure-II.
14. It can be seen from the above reproduced clauses in the Financial consideration in the agreement that 25% of the fees which has been retained by the appellant on which demand of service tax has arisen is indicated as a royalty. In our view, this royalty would be recurring and of perpetual nature till the agreement is valid. If that be so, the contention of the assessee that they are not satisfying the clause No.3 of the definition of the franchise service seems to be mis-conceived, as if an amount is paid periodically, by any other name would be an amount paid in connection with the arrangement as per the agreement entered between the appellant and franchisee. We find that the decision of the co-ordinate Bench in the case of Jetking Information Ltd.(supra) is squarely on the point. We may reproduce the ratio:-
6.?The taxable service stands defined in Section 65(105)(zze) of Service Tax Act, as any service provided to a Franchisee, by the Franchisor in relation to Franchise. The Franchisor develops the brand name, concept of following the business, promotes the same and establishes the name. As such, by entertaining into an agreement of Franchisees, it assigns the brand name to other person to carry out the business under his brand name or trade name, in the same manner in which he himself was conducting the business. The definitions of Franchisor under Section 65(48) of the Act, means any person who enters into franchise with an franchisee and includes any associate of franchisor or a person designated by franchisor to enter into franchisees on his behalf. The agreement as placed before us refers the appellant as the franchisor and the other party as franchisee. In terms of the said agreement there are obligations on the franchisee to set up the adequate premises and to conduct the business in accordance with the terms of the agreement. For the said franchisee, is under an obligation to pay fixed amount to the appellant and in addition recurring franchisee fee at the rate of 15%. The purpose of the agreement of franchisees is to enable franchisee to carry on the business in the manner desired by the franchisor. The agreement also reveals that the appellant shall provide prospectus, course material, brochure, leaflets, direct mail materials, stationery etc. They shall also provide additional training to the staff franchisee request at additional cost. As such, it is seen that the agreements between the appellant and their franchisees satisfy all the four requisites of the definition of Franchise as provided under Section 65(47) of the Act, and the appellant is liable to pay service tax on the said services.
7.?The appellants have also claimed the benefit of Notification No. 9/03-ST, dated 20-6-2003, which exempts taxable services provided in relation to commercial training or coaching by a vocational training institute, computer training institute or a recreational training institute, to any persons from the whole of the service tax leviable thereon under Sub-Section (2) of Section 66 of the said Act. Reading of the above notification clearly leads to the conclusion that the exemption provided is in respect of services relating to commercial training or coaching. As rightly held by the Commissioner (Appeals) appellant is providing two different services under two different categories namely - (a) Commercial Training and Coaching Services and (b) Franchise Services. The notification only exempts services provided as commercial training and coaching. The ld. Advocates argument that the expression in relation to appearing in the notification is of wide connotation and would include the franchisees services also, cannot be accepted. Even if the said expression in relation to is held to be of wide sphere, the same has to be extended only in relation to the commercial training or coaching being given by the institute. It cannot be extended and stretched to such an extension, so as to hold that any service by training institute would get exempted even though it may be in a different field. Taking hypothetical example that if a training institute is also undertaking advertising service, can it be said that the same would not attract to tax merely because the same is provided by a training institute. The vocational training institute and recreational training institute stands defined in the explanation to the notification and it is the commercial training or coaching by the said institute to any person. (emphasis provided). The services provided by the institute have to be viewed in the light of the definitions of such institute given in the notification. The same cannot be extended to franchise services given by the said institute to the franchisee. As such, we hold that the benefit of the said notification is also not to be available to the appellant. It can be seen from the above reproduced portion of the decision and order of the co-ordinate Bench that the issue is now covered in favour of the Revenue and against the assessee on merits.
15. As regards the appeal filed by the appellant on the imposition of penalty by the Reviewing Authority, we find and hold that Reviewing Authority is well within his right to review the order of the adjudicating authority and imposed the penalty under the provisions of Section 84 and at the same time, we find that the adjudicating authority has not imposed any penalties on the ground that there could be some mis-conception about the services rendered. We are of the considered view that the appellant could have been entertaining a bonafide belief that they being conductor of course which related to computer education, were eligible for the benefit of Notification No.9/2003. This bonafide belief cannot be considered as a faulty or mis-conceived, as the courses which are conducted by the appellant were in fact related to computer software. In view of this, invoking the provisions Section 80 of the Finance Act, 1994, there being justifiable reason for non-payment of service tax, we are of the considered view that appellant need not be visited with any penalties. In view of this, the penalties imposed by the ld. Commissioner in the Order-in-Revision No.01/2007-Service Tax dt. 29/5/2007 is set aside and that appeal is allowed.
16. In sum, appeal No.ST/70/2006 is rejected and appeal No.ST/332/2007 is allowed. Both the appeals are disposed off as indicated herein above.
(Pronounced in court on ..) (P. KARTHIKEYAN) MEMBER (TECHNICAL) (M.V. RAVINDRAN) MEMBER (JUDICIAL) Nr 13