Custom, Excise & Service Tax Tribunal
The Delhi Public School Society vs Cst, New Delhi on 19 July, 2013
CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
West Block No.2, R. K. Puram, New Delhi
COURT-I
Date of hearing: 09.05.2013
Date of decision: 19 /07/2013
For Approval and Signature:
Honble Mr. Justice G. Raghuram, President
Honble Mr. Sahab Singh, Technical Member
1
Whether Press Reporter may be allowed to see the Order for publication as per Rule 26 of the CESTAT (Procedure) Rules, 1982?
2
Whether it should be released under Rule 26 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3
Whether their Lordships wish to see the fair copy of the Order?
4
Whether Order is to be circulated to the Departmental authorities?
Service Tax Appeal No. 248 of 2006 and
Service Tax Misc. Application No. 3441 of 2012
Arising out of the Order in Original No. 11/RK/2006 dated 30.03.2006 passed by the Commissioner, Service Tax, New Delhi.
The Delhi Public School Society Appellant
Vs.
CST, New Delhi Respondent
AND
Service Tax Appeal No. 335 of 2008
Arising out of the Order in Original No. 21 & 22/VKG/CST/2008 dated 18.02.2008 passed by the Commissioner of Service Tax, New Delhi.
The Delhi Public School Society Appellant
Vs.
CST, New Delhi Respondent
AND
Service Tax Appeal No. 415 of 2009
Arising out of the Order in Original No. 09/VKG/CST/29 dated 23.02.2009 passed by the Commissioner of Service Tax, New Delhi.
The Delhi Public School Society Appellant
Vs.
CST, New Delhi Respondent
AND
Service Tax Appeal No. 1356 of 2010
Arising out of the Order in Original No. 30 - 31/RDN/10 dated 30.06.2010 passed by the Commissioner of Service Tax, New Delhi.
The Delhi Public School Society Appellant
Vs.
CST, New Delhi Respondent
Appearance: Shri P.K. Sahu and Sh. Prashant Shukla, Advocates
for the appellant.
Shri Amresh Jain, DR for the Revenue-Respondent
Coram: Honble Mr. Justice G. Raghuram, President
Honble Mr. Sahab Singh, Technical Member
Final Order No..57036-57039/2013
Per Justice G. Raghuram:
Delhi Public School Society (the assessee) is the common appellant in the appeals before us. It has established and manages several schools in Delhi and elsewhere in India and abroad under the title Delhi Public School (DPS).
2. Appeal No. 248 of 2006 is preferred against the adjudication order dated 30-03-2006 passed pursuant to a show cause notice (SCN), dated 24-01-2006, covering the period 01.07.2003 to 30.09.2004; Appeal No. 335 of 2008 against the order dated 18.02.2008, passed pursuant to SCN's dated 23-10-2006 and 19-10-2003 covering the period 01.04.2005 to 31.03.2007; Appeal No. 415 of 2009 against the order dated 23.02.2009, passed pursuant to the SCN served on 4-11-2008 on the assessee covering the period 01.04.2007 to 31.03.2008; and Appeal No. 1356 of 2010 is against the order dated 30.06.2010, passed on the basis of the SCN dated 05-10-2009 (and a corrigendum dated 21.01.2010, demanding the demand of service tax due), covering the period 01.04.2008 to 31.03.2009. Service Tax liability of Rs.59,38,111/-; Rs.1,19,27,736/-; Rs.54,89,959/-; and Rs.63,66,118/- apart from interest and penalties as specified in the respective orders of adjudication were assessed for the periods 1-7-2003 to 31-03-2005; 1-4-2005 to 31-3-2007; 1-4-2007 to 31-3-2008; and 1-4-2008 to 31-3-2009, which are the subject matter of the respective appeals. Shri P. K. Sahu, the learned counsel for the appellant contends that the impugned orders are unsustainable since the adjudicating authority erred in concluding that the assessee had received amounts under transactions (covered by several agreements with distinct institutions), constituting the taxable service of Franchise. According to the appellant the impugned orders are invalid and unsustainable on a plurality of grounds, summarized hereunder:
(a) the transaction(s) [to which the assessee is the common party] with distinct other parties covered by distinct agreements, do not amount to Franchise within the meaning of the expression as defined in Sec. 65(47) of the Finance Act, 1994 (hereinafter the Act) r/w Sec. 65(48) which defines the term Franchisor. Consequently, the receipts by the assessee in relation to the transactions are not liable to service tax under 65(105)(zze) of the Act;
(b) prior to 16-06-2005, the expression Franchise was defined to comprise 4 components cumulatively and the transactions in issue did not fulfill 3 of the 4 conditions;
(c) since 16-6-2005, conditions 2 to 4 in the earlier definition of the expression Franchise were omitted. In respect of the periods after 16.06.2005, the transactions in issue do not fulfil the singular criterion of the amended definition (this contention is applicable to part of the periods covered by adjudication orders which are the subject matters of Appeal Nos. 335 of 2008, 415 of 2009 and 1356 of 2009, i.e., for periods on and from 16-6-2005);
(d) w.e.f 10-9-2004 vide- Sec 65(105)(zzr) of the Act - any service provided or to be provided to any person, by the holder of intellectual property, in relation to intellectual property service, is a distinct category of taxable services; and the transactions of the assessee, if at all, constitute Intellectual Property Service (IPS) as defined in Sec. 65(55b). Intellectual Property Rights is defined in Sec. 65(55a). The impugned assessment orders (even for the period after 10-9-2004) cannot however be sustained (as IPS), since the relevant SCN's proceeded on the premise that the transactions in issue constitute Franchise service and the assessee was never put to notice that it would be liable to service tax as an IPS provider; and
(e) three of the impugned orders (dated 31.03.2006; 23.02.2009; and 30.06.2010, the subject matter of Appeal Nos. 248/2006, 415/2009 and 1356/2010) are pro-tanto invalid since the SCN's in respect of these impugned orders were issued beyond the normal period of limitation prescribed u/Sec 73(1), invoking the extended period of limitation under the proviso to Sec. 73(1) of the Act, without justification therefor and contrary to settled precedential authority in this area, the adjudication orders are invalid for the periods - 1-7-2003 to 30-9-2004; 1-4-2007 to 30-9-2007; and 1-4-2008 to 30-9-2008 (in respect of the adjudication orders impugned in the three appeals referred to earlier herein).
3. Before we proceed to advert to the competing contentions addressed before us on behalf of the assessee and by the learned DR, Shri Amaresh Jain on behalf of Revenue; appraise the vitality of reasons recorded by the adjudicating authority; consider the terms and conditions of the agreements leading to the transactions in issue; and analyze the precedents cited at the Bar, we consider it appropriate to set out relevant provisions of the Act and of the agreements, which have a bearing on determination of the appeals.
Relevant provisions of the Act:
(a) Sec. 65(47) defined Franchise (upto 15-6-2005) as meaning 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 the 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 the 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 the 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.
(b) since 16-6-2005 however, the definition of Franchise was amended to mean 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.
(c) Sec.65(48) defines Franchisor, as any person who enters into franchise 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.
(d) Section 65(105)(zze) enacts that the taxable service means any service provided or to be provided to a franchisee, by the franchisor in relation to franchise.
(e) Sec.65(55a) defines intellectual property right as meaning any right to intangible property, namely, trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, but excluding copyright.
(f) Sec.65(55b) defines intellectual property service as meaning (a) transferring, temporarily; or (b) permitting the use or enjoyment of, any intellectual property right.
(g) Sec.65A (to the extent relevant and material) sets out interpretive principles for classification of services. Sub-section (2)(b) states that where for any reason, a taxable service is, prime facie, classifiable under two or more sub-clauses of clause (105) of Sec.65, classification shall be effected as follows ----- (b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, insofar as this criterion is applicable. It requires to be noticed that clause (a) provides that the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description.
(h) Sec.65B (introduced w.e.f 1-6-2012 by the Finance Act, 2012) enacts interpretations of certain expressions occurring in Chapter V of the Act. Sub-section (44) enjoins that the expression service shall mean any activity carried out by a person for another for consideration, and includes a declared service. Activities which however do not constitute service as above defined are also enumerated in the provision; the exclusions are however not relevant for our analysis. Shri. Sahu, the learned counsel for the assessee has fairly stated that this interpretation of the expression service could fairly be adopted as indicative of the purport of the said expression, prior to 1-6-2012, as well.
4. Salient clauses of the agreement between the assessee and the Franchisee:
The assessee entered into agreements with distinct entities which intended to establish schools in different areas (within India and overseas as well) in collaboration with the assessee. The assessee apparently has experience in establishing and managing schools that provide quality education and has a brand image in the said area. We are informed by learned counsel for the assessee; and this assertion is not disputed by Revenue, that the several agreements, insofar as are relevant for the purposes of these appeals, are substantially similar and have identical provisions, relevant to consideration of this lis. We therefore advert to relevant provisions of the agreement dated 20-01-2004 entered into between the assessee and Maharaja Hari Singh Social and Educational Foundation, Jammu (hereinafter referred to as Society). This agreement and another was considered in the adjudication order dated 30-03-2006, the subject of Appeal No. 248 of 2006. Now, to the relevant provisions of the agreement dated 20-01-2004:
i) the agreement bears the heading Education Joint Venture;
ii) the preamble to the agreement states that as the Society is desirous of setting up an English medium school at Leh (Ladakh) it approached the assessee for an educational joint venture and the parties agreed to set up an English medium school at Leh. Clause 1 provides that the parties would collaborate to set up the school at Leh. Clause 2. sets out that the assessee permits, allows and grants a revocable license to the Society to use the name DPS, its Logo and motto for the purpose of the school to be established at Leh, during currency of the agreement. Under Clause 3, the Society is required to pay the assessee rupees one lakh, in advance commencing from the year the school starts functioning.
iii) Clause 4. provides that the assessee shall be at liberty to grant license for or open more schools in the area of Leh (Ladakh), in collaboration with any other society/organization or on its own.
iv) Clause 5. states that the school shall be established, managed and run by a Board of Management(BOM). Other sub-clauses in this Clause set out the composition of the BOM. Suffice it to notice, that the chairman of the BOM shall be the chairman of the assessee or any other nominee of it; and the vice-chairman is also a nominee of the assessee; and three of the other six members of the BOM would also be nominees of the assessee. The pro vice-chairman and three of the ordinary members of the Board would be nominees of the head of the Society and the pro vice-chairman could exercise powers of the chairman or the vice-chairman only in their absence. Thus, of the nine members of the BOM, five are representatives of the assessee and four of the Society.
v) Clause 6. enumerates powers, functions and authority of the BOM. The BOM is responsible for the management, control and running of the school; all rights in relation to the school (save as excepted); the liabilities in relation to the BOM or the school shall however be to the account of the Society (not the assessee or the BOM); and the BOM is obligated to fulfill the assessee's (DPSS) policies. Apart from (specified) academic responsibility, the BOM is entrusted the duty to appoint the Principal, teachers and staff of the school, to be selected by a selection committee constituted by the assessee which shall comprise one member of the Society. The Clause sets out other powers and functions of the BOM which are of a house-keeping nature and incidental to management.
vi) Clause 7. enumerates the obligations of the Society under the agreement. The Society (not the assessee) has extensive and exclusive obligations, in respect of providing land, buildings, all infrastructural amenities for the school including residential accommodation for the Principal, teachers and staff; and the entire financial responsibility towards these provisions. The Society is also responsible for meeting the deficit in the revenue budgeted expenditure, to raise loans for all establishment and running expenditure and to meet the consequent financial liability. The assessee is specifically immunized any liability or responsibility in this area and the Society undertakes to indemnify the assessee from any claims in this regard. Sub-clause (p) enjoins the Society to ensure that the school will be in a single campus and that no other educational or other institution (unconnected with the assessee) purports to claim any association with the school. The Society is also required to contest all litigation against the assessee by third parties, arising out of the agreement (under instructions from the assessee) and to bear all the expenses in this behalf.
vii) Obligations of the assessee are spelt out in Clause 8. Included are academic, managerial, supervisory and mentoring obligations, integral to transfer of the assessee's academic, operational and managerial expertise in the area of establishing and running of schools. Sub-clause (g) enjoins that the assessee will allow and permit use of the name (DPS), its motto/logo, during currency of the agreement; however without any right/title/interest acquiring thereto to the Society or the school. It is specifically stipulated that the rights in the name/motto/logo are the absolute property of the assessee and use of the name (DPS), the motto or the logo is limited for the purposes of the Leh school; and use of these is prohibited for establishing branches or granting sub-licenses [sub-clause (h)].
viii) Clause 9. sets out the further agreed terms and conditions between the parties. Accordingly, the school building, furniture, fittings, laboratory, library and sports materials etc., shall be provided by the Society; the Society shall bear the expenditure of the staff and the assessee shall not be liable for the same; and on determination of the agreement all assets will stand transferred to the Society. The entire liability arising out of termination of the faculty, staff shall be to the sole account of the Society, to the total exclusion of the assessee.
ix) Clauses 10 and 11 of the agreement set out provisions relating to the tenure of the agreement, extension of the same and for termination thereof.
x) Clause 12. stipulates that on termination of the agreement and closure of the school, all moveable and immoveable properties of the school will be returned to the Society, after settlement of the liabilities owing to the assessee; and on dissolution, the Society shall be exclusively liable for all claims against the school, its BoM or the assessee in respect of the management thereof; and the assessee will not in any manner be liable. Clause 13. stipulates that on termination of the agreement, the Society will not use the name/logo/motto of DPS or identical/similar or deceptively similar name/logo/motto, even if it desires to run a school in the same premises or elsewhere.
Analyses of the impugned adjudication orders:
As earlier noticed, there are four adjudication orders. The challenge in the appeals before us is to the normative bases, interpretation of the agreements and of the statutory provisions, leading to the assessments. It is the demonstrable position that the several adjudication orders have employed a substantially identical raft of reasons and process of interpretation of the relevant material to determine the liability of the assessee to service tax, interest and penalties. We therefore treat the adjudication order dated 30-03-2006 (assailed in Appeal No. 248 of 2006) as a representative order, for analyses.
5. Analyses of O-I-O No. 11/ RK/2006, dated 30.03.2006:
Events preceding the adjudication order-
(i) Revenue addressed a letter dated 08.08.2003 to the assessee calling upon it to obtain registration under the provisions of the Act under the category Franchise service. In response the assessee by its letter dated 14.11.2003 claimed that it was not a Franchisor. On 26.12.2003 and 30.12.2003, the assessee was issued summons seeking copies of operation agreements and details of amounts received since 01.07.2003, in any form. The assessee by its letter dated 15.01.2004 furnished the documents/ records, including copies of the operational agreements, details of money receipts since 01.07.2003 and names of its nominees. Revenue by the letter dated 11.06.2004 called upon the assessee to submit details of amounts received till 31.03.2004. Another letter was addressed on 02.07.2004, by way of a reminder. The assessee under its letter dated 12.07.2004 furnished details to Revenue regarding :-
(a) Amounts received during January 2004 to 31.03.2004 under agreements with schools in the name of DPS;
(b) Copy of the agreement with Maharaja Harisingh Social & Educational Foundation, Leh (Ladakh); and
(c) Copy of the agreement with Shyam Vihar Misra Memorial Charitable Trust, Kanpur. Revenue on 02.11.2004 directed the assessee to furnish a list of agreements entered into with various parties, for opening schools. In response, the assessee vide letter dated 11.11.2004 enclosed ten (10) agreements. Revenue vide letter dated 29.11.2004 informed the assessee that it is liable to pay service tax from 01.07.2003 as a provider of the taxable Franchise Service. By another letter dated 02.12.2004, the assessee was asked to comply with provisions of the Act. Thereafter, the assessee was issued summon dated 13.01.2005 for submission of requisite documents regarding registration and payment of service tax. In response, the assessee on 02.02.2005 stated that it was not rendering any taxable service. Thereafter, vide letter dated 19.04.2005 the assessee furnished details of amounts collected on account of maintenance charges/ signing fees due from 01.07.2003 to 31.03.2004 and 01.04.2004 to 31.03.2005 from its franchisees.
(ii) On 24.01.2006, a show cause notice was addressed to the assessee. The assessee submitted its response vide letter dated 20.02.2006. The assessee contended that it was not liable to remit service tax and in any case was under the bonafide belief that no service tax was payable; that its activities were within the knowledge of Revenue; and therefore there was no justification for invoking the extended period of limitation nor for levy of penalty.
(iii) After considering the material on record including the written submissions and contentions urged on behalf of the assessee, the adjudication order was passed on 30.03.2006.
6. Analyses of the conclusions in the adjudication order:-
(a) Para 4 dealt with the assessees claim that it did not provide the taxable franchise service, defined in Section 65 (47) of the Act. The order noticed that Section 65 (47) required fulfilment of four ingredients to constitute franchise service and proceeded to consider whether the four ingredients were fulfilled. In para 4.4.1, the order concluded that since the assessee permitted the franchisee trust to use its logo (DPS) to provide the educational service and undertake the educational process identified with it, the first ingredient is fulfilled.
(b) Para 5 of the order considered whether the second ingredient is fulfilled and concluded that since the assessee provides managerial expertise, concept of business operations and know-how of its operations to the franchisee but does not pass the ownership of the know-how to the franchisee, the second ingredient is fulfilled.
(c) Para 6 of the order considered whether the third ingredient is satisfied. The third ingredient is that the franchisee should pay a fee to the franchisor, directly or indirectly. Since a stipulated amount is payable to the assessee at signing of the agreement and annual amounts are also payable commencing from a specified date, the order concluded that the third ingredient is satisfied.
(d) Fulfilment of the fourth ingredient was analysed in paragraph 7. The fourth ingredient obligates the franchisee not to engage in selling or providing similar goods or service or process, identified with any other person. The adjudicating authority concluded that since a clause of the agreement requires that the school shall be operated from a single campus and the franchisee shall ensure that no other educational or other institution, unconnected with the assessee shall claim an association with the school and these conditions restrict and prohibit the franchisee from engaging in providing similar service within the campus, identifiable with any other body, other than the assessee, the fourth ingredient is also fulfilled.
(e) Part B of the order dealt with the claim of the assessee that since it is a charitable and not a commercial organisation its activities cannot be considered commercial service and are thus outside the purview of taxable service. This contention is rejected on the ground that definitions of franchise and franchise service do not exclude the activity of the assessee. In the appeal before us the assessee has not perused this aspect of the matter.
(f) In part C of the adjudication order the contention of the assessee that the agreement being in the name of the joint venture, the service provided if any would be to itself and the amounts received cannot therefore be regarded as consideration for service rendered to other entities and would not thus be taxable, was discussed. This contention was negatived in para 10 of the adjudication order.
(g) Part D of the order considered the assessees claim to have harboured a bonafide belief that it was immune to the liability to tax; that its activities were within the knowledge of Revenue and therefore there was no justification for invoking the extended period. The adjudication authority held that the contravention by the assessee was deliberate and calculated to evade service tax; that Revenue was unaware of the existence of the agreements, information regarding other entities, terms and conditions; and particulars and duration of payments and services; and the relevant information was revealed only pursuant to constant correspondence with the assessee, including after issue of summons. The adjudicating authority also held that since the assessee had failed to disclose material facts to Revenue and to obtain registration and pay service tax, even after being informed of its liability, there is intent to evade payment of service tax. The adjudicating authority further observed that Revenue initially had no knowledge of the entire activities of the assessee and discovered the relevant and total nature of its operations only after responses received pursuant to several letters addressed and summons issued.
(h) Part E of the adjudication order records conclusions as regards computation of the gross amount charged under Section 67 of the Act i.e. inclusive of service tax component. This aspect is not in issue in any of these appeals.
(i) In part F of the adjudication order, the assessees contention against levy of penalties was rejected.
(j) The adjudicating authority accordingly justified invocation of the extended period of limitation; confirmed the demand of service tax of Rs. 58,92,297/-; education cess of Rs. 45,814/-; ordered payment of interest under Section 75; imposed penalties under Section 76 and penalty equal to the service tax and cess assessed, under Section 78 of the Act, besides imposing penalty under Section 77.
7. Issues for determination :
Having regard to the competing contentions, the following issues arise for determination:-
A) Whether no taxable service under any category was provided by the assessee?
B) Alternatively, whether (for the period 01.07.2003 to 15.06.2005 i.e. prior to 16.06.2005) the activities of the petitioner fall outside the ambit of franchise, defined in Section 65(47), since;
i) The first ingredient of franchise namely the franchisee being granted a representational right to provide service or undertake any process identified with the assessee (the Franchisor) was not involved as per the terms of the agreement;
ii) The second ingredient of franchise i.e. the assessee (franchisor) providing the concept of business operations to the franchisee including knowhow, method of operation, managerial expertise, marketing techniques, standard of quality control but excluding the passing of the ownership of all the knowhow to the franchisee, is equally not satisfied, since the agreement is a joint venture agreement involving a joint and collaborative arrangement between the parties; and
iii) The third ingredient is also not fulfilled since the agreement enjoined no obligation on the franchisee not to engage in providing similar services or process, identified with any other person;
C) Whether, on and after 16.06.2005 (pursuant to amendment of the definition of franchise), the activities of the assessee fall outside the ambit of the taxable franchise service, since no representational right is granted by the assessee to the franchisee, to provide service or undertake any process identified with the assessee, particularly since under a joint venture agreement / arrangement no representational right is conferred on one joint venture partner to represent the other parties;
D) W.E.F. 10.09.2004 a new taxable service, namely a service provided to any person by the holder of intellectual property right, in relation to intellectual property service was introduced vide Section 65(105)(zzr). Intellectual property service is defined in Section 65(55)(b) and intellectual property right in Section 65(55)(a). Since the brand name (DPS), its logo and motto apart from its concept of business operations, managerial expertise etc. are provided to the trusts/ societies to run educational institutions, the service provided by the assessee would appropriately be comprised within the newly introduced (w.e.f. 19.09.2004) taxable service in relation to intellectual property service. Whether, in the circumstances the activities of the assessee always constituted IPS and therefore outside the ambit of franchise service, even prior to 10.09.2004; and the assessments cannot also be justified as IPS after 10.09.2004 as well, since the assessee was never put on notice that Revenue proposes to assess under IPS;
E) Whether the adjudication orders, invoking the extended period of limitation, to the extent the extended period was invoked, are unsustainable;
F) Whether imposition of penalty is unsustainable since the failure of the assessee to remit service tax was on account of a bonafide belief as to its simmunity to service tax, arising out of a bonafide interpretation of the relevant provisions.
8. Joint Venture Contention of the assessee:
This is a contention relevant to Issue A. The agreement (s) is designated as education joint venture. We have earlier herein set out the salient clauses of the agreement. The recitals state that the assessee and the other party to the agreement (a society) have jointly agreed to set up an English Medium School, pursuant to the other party desiring so and approaching the assessee for an educational joint venture. Clause 1 states that the two parties would collaborate for setting up an English Medium School. Other clauses of the agreement bring out the true nature of the arrangement between the parties. Under clause 2 of the agreement the assessee grants a revocable license to the other party to use its name (DPS), its logo and motto for the purpose of the School, for the duration of the agreement. Under clause 3, the other party is required to pay the specified amount annually to the assessee as the consideration for granting the license specified in clause 2 and for the other obligations to be performed by the assessee. Clauses 5 and 6 enjoin that the school should be established, managed and operated through a BoM comprising five representatives of the assessee and four of the other party, with the Principal of the school acting as the Secretary of the BoM. It is the BoM that is entrusted the function of management, control and running of the school. While all rights in relation to the School vest with the BoM, the liability in relation thereto, of the school or the BoM is to be borne only by other party and the assessee is also indemnified against all manner of liability in relation to the school. The BoM is obligated to fidelity to policy decisions by the assessee and is entrusted enumerated functions regarding academic, managerial and administrative control over affairs of the school. The raising of funds by loans, donations or voluntary contributions is however the exclusive obligation of the other party, though in consonance with the norms of the assessee. Clause 7 details the several obligations of the other party to the agreement including the entirety of the financial commitment and provision of land; place; suitable accommodation; furniture for the library; laboratories; facility in relation to sport activities; adequate transport and other infrastructure, including for expansion; residential accommodation for faculty and other staff or for payment of HRA in lieu of accommodation; medical allowances; and a general obligation to make available the entirety of the requisite funds for administration of the enterprise including capital and other expenses. Clause 7 (q) indemnifies the assessee from the consequences of any litigation arising from or out of the agreement and all expenditure in this behalf is the obligation of the other party. Clause 8 sets out the obligations of the assessee. These pertain to maintenance of standards of academic excellence; carrying out academic and other activities related or incidental to imparting of quality education; to provide expertise, knowhow and educational tools and material to ensure academic and other standards; to supervise evaluate and monitor academic and other activities of the school; periodically to depute visiting teams, though the travel and incidental expenditure is to be borne by the other party; to allow and promote use of the name (DPS), the motto/ logo, for the purpose of the school during the currency of the agreement but with the covenant that the name (DPS) and its motto/ logo shall not be used or misused, in violation of the agreement. Clause 8(h) specifically clarifies that the name / motto/ logo is under the agreement confined to the school to be established at the designated place and cannot be used for establishing branches or issuing licenses or sub-licences. Under clause 9 of the agreement it is the explicit obligation of the other party to provide all financial inputs for establishing and running of the school and is also required to provide the buildings and infrastructure, so however that all the assets will be transferred to the other party on determination of the agreement. This clause also stipulates that the other party alone (and not the assessee) would be responsible for salaries and other financial commitments in relation to the school and further that on termination of the agreement, the other party would be exclusively liable to meet all expenses, liabilities etc. incurred for settlement of service dues and the like.
9. Shri Sahu referred to two decisions of this Tribunal in support of his contention that since the agreements between the assessee and the other parties are education joint ventures, the services provided by the assessee thereunder would not constitute taxable services. In CCE, Chennai vs, Sundaram Finance Ltd.1, the respondent a non-banking finance company entered into a Joint Venture with a Dutch company whereunder the respondent provided certain services to the Joint Venture company. Revenue proceeded against the respondent, for levy service tax for having provided the taxable management consultancy service. Departmental adjudication proceedings having been dropped, Revenue preferred an appeal to this Tribunal. Dismissing the appeal by Revenue and relying on an earlier judgment in Glaxo Smithkline Pharmaceuticals Ltd. vs. CCE, Mumbai2 2006 (3) STR 711 (Tri-Mum.), it was declared that since services were rendered by the respondent to the Joint Venture these services were the nature of internal organisation and internal management, falling outside the definition of management consultancy.
10. In Phase 1 Events & Entertainment Pvt. Ltd. vs. CST, Bangalore3 the appellant company conducted a festival while part of committee which had organised the festival, relating to Indo-German Relations. The festival committee entrusted organisation of the event to the appellant company. Upholding the claim of the assessee/ appellant, this Tribunal concluded that since the appellant was a member of the committee which organised the festival there was no client -service provider relationship warranting levy of service tax. These decisions would be relevant only if the agreements pursuant to which the assessee herein provided service to the other party under the agreements, are in truth and reality Joint Venture agreements.
11. Two other decisions, one of the Supreme court and the other of the Chancery Division were also cited on behalf of the assessee. In Sultan Bros. (P) Ltd. vs. CIT, Bombay City II4, the appellant company leased out a building owned by it duly fitted with furniture and fixtures. The lease agreement provided separately for a specified monthly rent for the building and for hire charges for furniture and fixtures. The question was how the income received as rent and hire are to be assessed i.e. under which Section of the Income Tax Act, 1922. According to the appellant the entire income should have been assessed under Section 10, as income from business or alternatively under Section 12 as income from a residuary source, a source not specified in Sections 7 to 11, with allowances respectively specified in sub-section (3) and (4) of Section 12. For the relevant assessment year, Revenue taxed the appellant under Section 9 in respect of rent on the building and under Section 12 in respect of hire charges received towards hire of furniture and fixtures. The appellate authority concluded that rent from the building could only be assessed under Section 12 with the allowances mentioned in sub-section (4) since for letting of furniture and fixtures it was indispensible to let the building also. On further appeal the Tribunal confirmed, holding that the allowances mentioned in Section 12(4) cannot be allowed since that sub-section was applicable only where the letting of the building was incidental to the letting of the furniture and fixtures; and that was not the case on hand. On reference, the High Court confirmed. To the extent relevant and material for the present case, the Supreme Court, interpreting the provisions of Section 12 of the Act observed that the inseperability referred to in sub-section (4) is one arising from the intention of the parties. If it was the intention in drawing up the lease agreement (whether the agreements were one or two) to charge separately for lease of the building and separately for furniture and fixtures, the agreements considered as a whole, then it should be concluded that it is the intention of the parties that furniture and fixtures and the buildings should be enjoyed separately from one another and not together. Allowing the appeal, the Supreme Court answered the question as reframed by it by stating that rent from the building must be computed separately from the income on furniture and fixtures; that in case of rent from the building the appellant would be entitled to allowances mentioned in Section 12(4) and in case of income from furniture and fixtures, to those mentioned in Section 12(3); and that no part of the income could be assessed under Sections 9 or 10 of the Act.
12. In Byrom and Others (trading as Salon 24) vs. Revenue and Customs Commissioners5 ; the appellant was pursuing trade as a massage parlour from a premises which include toilet facilities, a kitchen a day room for use by ladies self-employed (masseuses) awaiting customers, a changing room for the ladies, a shower room and a sitting area for customers awaiting service, etc. On the first floor there were four rooms for masseuses to entertain their customs apart from a toilet and an additional room for use by the masseuses. The appellant entered into a written contract with the ladies to offer massage services; providing separately for rent of the room; including use of laundry facilities, during stipulated hours. Appellant was brought to tax under the relevant sales tax (VAT) provisions of U.K. The relevant provision of the Act of 1944 incorporated an exemption from VAT for leasing or letting of immovable properties. The issue before the Chancery Division was how these bundled services (including leasing and letting of immovable property) should be categorised in the context of the applicable legislation. Dismissing the appeal it was held that the resulting single supply must be categorised as a complex of elements comprising the provision of the license and various appurtenant services; that the overarching single supply is not to be treated as a supply of a license to occupy land; that the description which reflects the economic and social reality is a supply of massage parlour services, one element of which is the provision of the room; and that in the facts of the case, the provision of the room to was the ladies the single most important element of the overall supply and one which predominated over the other elements taken together.
13. The aforesaid two decisions (Sultan Bros and Byrom) afford no possible guidance to resolution of the issue whether the transactions involved in the present appeals fall within the taxable franchise service. It cannot be gainfully contended by the assessee that provision of buildings and infrastructure and footing of the expenditure therefor by the other parties to the agreements are the foundational premises of the enterprise nor does the contention commend acceptance that these are the essential integers of the enterprise. The dominant component of the enterprise is the provision by the assessee of the four ingredients of franchise service as per the definition upto 15.06.2005 and the ingredients of the definition subsequent thereto; namely granting of a representational right to provide service or undertake any process identified with the assessee. The fact that buildings and infrastructure are requisite for the pursuit of the enterprise would not derogate from the fact that without the transfer of the expertise; know-how; operational methodology; brand name and other incidents of the assessees experience in the field, the enterprise would not have fructified. Fertilisation and impregnation of these core competencies of the assessee into the schools to be established and for their functioning, is all that the agreements envisaged.
14. In Faqir Chand Gulati vs. Uppal Agencies Pvt. Ltd6 the issue was whether a land owner who entered into an agreement with the builder for construction of an apartment building and for sharing of the constructed area, is a consumer entitled to maintain a complaint against the builder as a service provider, under the Consumer Protection Act, 1986. The Supreme Court referred to its earlier decision in New Horizons Ltd. vs. Union of India7 and to the definition of Joint Venture in American Jurisprudence, in Corpus Juris Secundum and in Blacks Law Dictionary, to identify the contours of Joint Ventures. The respondent (builder) had contended that since the agreement between himself and the land owner was designated as a collaboration agreement and was therefore in the nature of a Joint Venture, there could be no deficiency of service and the land owner could not prefer a consumer complaint in relation to any shortfall in the builder delivering upon its obligations under such an agreement. The Supreme Court reiterated the settled principle that the title, caption or the nomenclature of an instrument/ document is not determinative of the nature and the character of the instrument; though the name may usually provide some indication of the nature, the nature and true character of a document must be determined with reference to the terms of the document, which express the intention of the parties. The use of the words Joint Venture or collaboration in the title of an agreement or even in the body of the agreement will not make the transaction a joint venture, if there are no provisions for shared control of interest or enterprise or shared liability for losses, pointed out the Court. The agreement between the builder and the landlord was considered by the Supreme Court to be a hybrid agreement for construction for consideration and sale and as a pseudo joint venture; not a true joint venture. The earlier decision of Supreme Court in New Horizons Limited, the definition of joint venture in American Jurisprudence, in Corpus Juris Secundum and in Blacks Law Dictionary also clearly indicate that sharing, both in profits and losses and a community of interest among the parties are among the integral ingredients of joint ventures and each joint venturer stands in the relation of the principal, as well as an agent, as to each of the other co-venturers within the general scope of the enterprise, concurred the Court.
15. Shri Sahu, ld. Counsel for the appellant referred to a passage from the Law of Partnership by Dr. Avtar Singh which is to the effect that while a provision in the partnership agreement for sharing of losses may be necessary for enjoying tax concessions by registration under the Income Tax Act, is not a requisite under the Partnership Act for creating a partnership, referring to a judgment of the Bombay High Court, reported in AIR 1927 Bom 187. The learned author also refers to a passage in Halsburys Laws of England and to a English judgment referred to therein for the proposition that sharing of gains and losses is not a sine qua non for a valid partnership, or a joint venture arrangement.
16. Before we part with the aspect relating to interpretation of the agreements between the assessee and the other parties, for establishing schools under the brand name, motto and logo of the assessee, a brief analysis of the general principles of interpretation / construction of documents is appropriate.
(a) In Radha Sundar Dutta vs. Mohd. Jahadur Rahim8; Puzhakkal Kuttappu vs. C. Bhargavi and Others9; Ford against Beech10; Inntrepreneur Pub Co. Ltd. vs. East Crown Ltd.11; Investors Compensation Scheme Ltd. vs. West Bromwich Building Society12 and Hideo Yoshimoto v. Canterbury Golf International Limited13 the general principles pertaining to construction of documents/ contracts were delineated:
Lord Hoffmann in the leading opinion of the House of Lords (with which the other learned law Lords concurred) in West Bromwich Building Society, while observing that almost all the old intellectual baggage of legal interpretation was discarded, summarized the principles by which contractual documents are presently considered, as under:
(i) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(ii) The background was famously referred to by Lord Wilberforce as the matrix of fact, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the documents would have been understood by a reasonable man.
(iii) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(iv) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the word words or syntax (Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. 14).
(v) The rule that words should be given their natural and ordinary meaning reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties An intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v. Salen Rederierna AB, The Antaios 15
... if detailed semantic and syntactical analyses of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.
17. In Hideo Yoshimoto, Thomas, J for the New Zealand Court of Appeal after quoting with approval the restatement of law by Lord Hoffmann in West Bromwich Building Society and noting that the five principles Lord Hoffmann articulated were reiterated and applied by the New Zealand Court of Appeal in Boat Park Ltd. v. Hutchison, referred to a paradigm shift in the interpretative principles noticed by Wigmore16 and agreed with the observation : The history of the law of interpretation is the history of a progress from a stiff and superstitious formalism to a flexible rationalism; and proceeded to state: The cardinal rule of contractual interpretation must be to ascertain the intention of the parties. To the extent this rule is not implemented, the courts must incur the criticism of failing to give effect to the reasonable expectations of the parties. Surely the parties are reasonably entitled to expect that the courts will strive to ascertain their true intention or, certainly, not to arrive at a meaning of their contract which is at variance with their actual intention. They cannot expect that the judicial exercise of constructing their contract will be buried under a stockpile of excessive formalism.
Lewison17 refers to a lucid summary of the relevant principles set out in the judgment of Saville, J in Vitol B.V. v. Compagnie Europeene des Petroles18 : The approach of the English law to questions of the true construction of contracts of this kind is to seek objectively to ascertain the intentions of the parties from the words which they have chosen to use. If those words are clear and admit of only one sensible meaning, then that is the meaning to be ascribed to them and that meaning is taken to represent what the parties intended. If the words are not so clear and admit of more than one sensible meaning, then the ambiguity may be resolved by looking at the aim and genesis of the agreement, choosing the meaning which seems to make the most sense in the context of the contract and its surrounding circumstances as a whole. In some cases, of course, having attempted this exercise, it may simply remain impossible to give the words any sensible meaning at all in which case they (or some of them) are either ignored, that is to say, treated as not forming part of the contract at all, or (if of apparent central importance) treated as demonstrating that the parties never made an agreement at all, that is to say, had never truly agreed upon the vital terms of their bargain.
In para 4 (supra) we have reiterated the relevant clauses of the representative agreement relevant to the present lis. On a true and fair analyses of the agreements between the parties it is clear that not only is the assessee wholly immune to any lossess arising out of the enterprise - the educational institution to be established pursuant to the agreement but has also no entitlement to any share in the profits arising therefrom. Any accretions to the enterprise, accruing as a result of profitable running of the schools would constitute assets which would be transferred only to the other party (not the assessee), vide clause 9 of the agreement. The participation of the assessee in the management of the schools, through its representation on the BoM is calibrated only for effectuation of the assesses perceived expertise and experience, in establishing and running quality English Medium Schools. For this service provided, the assessee receives remuneration as clearly indicated in clause 3 of the agreement. All financial inputs, obligations and liabilities, including liabilities arising out of any litigation in respect of the enterprise is to the account of the other party and to the exclusion of the assessee. In the totality of circumstances neither the indicia of a partnership or a joint venture is discernable from the terms and conditions of the agreements between the parties, particularly since there is neither a contribution of assets nor a sharing of profits and / or losses provided in the agreements between the parties. These normative ingredients of a partnership or a joint venture are absent.
18. In view of the authoritative pronouncement by the Supreme Court in New Horizons Limited, reiterated in Faqir Chand Gulati, we are required to conclude that an agreement such as one in the present case which places the entire financial burden of establishing and maintaining the school, including the liability to fund the entire capital and non capital expenditure; under writing the entire financial liability; liability arising out of any litigation; and obligating further that all available and remaining assets on determination of the agreement would revert to the other party alone, would not tantamount to a joint venture arrangement, regardless of the description of the arrangement as a joint venture or a collaborative arrangement. The fact that the other party is required to pay a specified amount to the assessee clearly and compellingly indicates that the assessee is remunerated for services provided to the other party to the agreement. Clearly therefore there is a service provided by the assessee to another, for consideration. There is no element of service to the assessee itself.
Issue A is accordingly answered against the assessee. We hold that the assessee provides service, not to itself but to the other parties to the agreements. Whether the service is a taxable service; and if so is to be classified in which taxable category, is an aspect which will be considered in analyses of the following issues.
19. Issue B : This issue requires determination as to whether during the period 01.07.2003 to 15.06.2003 [prior to amendment of the definition of franchise in Section 65(47)], the services provided by the petitioner satisfy the ingredients of franchise as defined. As earlier adverted to, franchise is defined during the period (01.07.2003 to 15.06.2005) as comprising four ingredients:
(a) The franchisor granting representational to the franchisee to provide service or undertake any process identified with the franchisor;
(b) The franchisor providing concepts of business operation to the franchise including know-how, method of operation, managerial expertise, marketing techniques or training and standard of quality control except passing on ownership of the know-how, to the franchisee;
(c) The franchisee having to pay a fee to the franchisor, directly or indirectly; and
(d) The franchisee being under an obligation not to engage in providing similar services or process, identified with any other person.
On 20.06.2003, Board circular No. 59/8/2003-ST was issued to clarify the contours of new taxable services introduced pursuant to the Finance Act, 2003, including franchise service, brought into force w.e.f. 01.07.2003. This circular states that franchise service as defined in Section 65(47) of the Act sets out four generic ingredients and unless all the four ingredients of the sub-section are satisfied, an agreement cannot be called franchise agreement. Revenue does not contest this proposition, in view of the clear definition of franchise w.e.f. 01.07.2003, until its redefinition w.e.f. 16.06.2005.
Since the assessee, under the terms of the agreements receives an annual fee from the other party to the agreements, the third ingredient is clearly fulfilled. In our analysis on Issue A we have concluded against the assessee that the enterprise pursuant to the agreements is not a joint venture in the true sense of the term and that the services provided by the assessee to the other party would not constitute services to itself but would clearly constitute services to another. The terms of the agreement clearly reveal that the other party to the agreements is granted a representational right to provide services by way of imparting of education through the school to be established, representing the name (DPS), the motto and the logo of the assessee, the holder of the brand associated therewith. Further the assessee provides its established concepts of imparting education; its managerial expertise and operational techniques and standards of imparting education to the other party to the agreements. On this view of the matter the first and second ingredients of franchise are also fulfilled. The fourth ingredient enjoins that the franchisee should be under an obligation not to engage in providing services or processes, identified with any other person. This ingredient indicates that the other party to the agreements should be obligated not to establish or administer an English Medium School identified with any other person. In clause 8 (h) [of the representative agreement considered for analysis], we have noticed that rights in the name/ motto/ logo are stipulated to be the absolute property of the assessee and the use of these is prohibited to the other party for establishing branches or granting sub licenses. Clause 7 (p) and (r) clearly stipulate that amongst the obligations of the other party is the clear obligation to ensure that no other educational or other institution, connected with the assessee purports to claim an association with the school, to be established under the agreements; and the other party also undertakes not to cause or use, connect, associate or relate the name, logo or motto of the assessee with any other activity commercial or otherwise, other than for the School to be established under the agreement, either in the media, advertisements, greeting cards or any other means of communication, including but not limited to letter heads, visiting cards. The interactive effect of the aforementioned stipulations, considered in the general tenor of the agreement clearly fulfil the fourth ingredient of the definition of franchise as well.
We therefore conclude, in concurrence with a similar conclusion by the adjudicating authority, that during 01.07.2003 to 15.06.2005, the terms of the agreements fulfil the four ingredients of the expression franchise as defined in Section 65(47) and therefore the assessee has provided the said taxable service. Issue B is answered accordingly and against the assessee.
20. Issues C and D
With effect from 16.06.2005, franchise is defined (to the extent relevant and material for the lis), to mean an agreement where the other party is granted a representational right to provide service or undertake any process identified with the franchisor. Ingredients (2) and (4) of the earlier definition are omitted. In the light of our analysis on issues A and B and for reasons recorded therein the assessee must be considered as having provided the taxable franchise service subsequent to 16.06.2005 as well.
The appellant has contended that w.e.f. 10.09.2004 a new taxable service was introduced vide Section 65(105)(zzr) which is enacted to be a service provided to any person by the holder of Intellectual Property Right (IPR) in relation to Intellectual Property Service (IPS). IPR is defined in Section 65 (55a) and IPS in Section 65(55b). IPR is defined to mean any right to intangible property, namely, trademarks, designs, patents or any other similar intangible property, under any other law for the time being in force, but excluding copyright IPS is defined to mean transferring, temporarily or permitting the use or enjoyment of, any intellectual property right. The assessee argues that w.e.f. 10.09.2004 the agreements, on a true and fair construction of their terms, constitute the taxable service falling under Section 65(105)(zzr) and therefore subsequent to 10.09.2004 the assessee could not have been assessed to service tax for having provided franchise service. The assessee cannot also be assessed to service tax for having provided the taxable IPS, since even from the show cause notice stage and thereafter as well, the assessee was never put on notice that it would be assessed to tax as the provider of IPS.
In this connection, Shri Sahu referred to a Board circular dated 27.10.2008 which is a clarification of service tax liability in relation to production of alcoholic beverages under a brand licensing arrangement. Para 2.1 of the circular clarifies that wherever licensee/ manufacturers alcoholic beverages under the authority to use a brand name granted by the owner of such brand name the brand owner; and even where the brand owner provides technical staff/ assistance to maintain the required quality, alcoholic beverages so manufactured on the user of such brand name and technical know-how would come within the taxable IPS, even where the property, risk and reward of products so manufactured inhere with the manufacturer and not the brand owner. We are not inclined to lay much credit on this Board circular, particularly since there is no apparent analyses in the circular on whether such activity would not comprise the other taxable category namely franchise service. In any event, in the agreements under consideration in the present lis, apart from receiving remuneration for services provided by the assessee and inherence of risk and reward of the enterprise solely and exclusively on the other parties and not on the assessee, there is also a more regular engagement between the assessee and the other party under the agreements for the purpose of ensuring integration of the assessee academic and managerial experience; operational inputs and its concepts of the business of establishing and running quality English Medium Schools. Further, there is no transfer of the right in the name/ logo/ motto from the assessee to the other party.
Another contention of the appellant requires to be considered. According to Shri Sahu, the adjudicating authority had assessed the demand on the analysis of sample agreements between the assessee and other parties and concluded that the assessee is administering schools in collaboration with the others; is actively participating in management of the schools with a dominant role thereat vis-`-vis the other parties. The role of the CESTAT is therefore confined to the issue as to whether the conclusion by the adjudicating authority that the assessee had given representational rights to the other parties, in terms of the agreements, is valid and sustainable; this Tribunal cannot in the circumstances arrive at a conclusion as to the taxability of the assessee contrary to the conclusions recorded by the adjudicating authority. Shri Sahu referred to several decisions on this aspect including Hukum Chand Mills Ltd. vs. CIT19 ; Karanataka State Forest Industries Corporation Ltd. vs. CIT20; Ciba of India Ltd. vs. CIT 21; CIT vs. Indira Balkrishna22; Hindustan Ferodo Ltd. vs. C.C.E.23; Saci Allied Products Ltd. vs. C.C.E., Meerut24; Warner Hindustan Ltd. vs. C.C.E., Hyderabad25; and Reckitt & Colman of India Ltd. vs. C.C.E. 26.
The above citations, in our respectful view, do not assist the appellant. In paragraphs 5.3 to 5.5 ( of the adjudication order dated 30.3.2006 the subject matter of ST Appeal No.248/20006), the adjudicating authority analysed the claim of the assessee that it was not expected to have a mere passive role, of receiving money for allowing the franchisee to exploit its goodwill and had in fact a dominant role in running the schools and anybody having a dominant role is the master of the situation and has a definitive role in managing the organisation by applying its know-how and expertise in running the schools and therefore the assessee cannot be said to have fulfilled the second ingredient of the definition of franchise (prior to 16.6.2005). In our analysis, the adjudicating authority in the abovementioned paragraphs while setting out the contentions of the assessee concluded nevertheless that the second ingredient of franchise is also fulfilled. The adjudicating authority concluded that in order to internalise the know-how expertise etc. of the assessee into the enterprise (the schools), a regular engagement of the assessee with the enterprise is essential and such engagement is not inconsistent with the provision of franchise service, in so far as the second ingredient thereof is concerned. In our considered view, the extent of engagement of the assessee with the enterprise (school) as provided by the terms of the agreement is in furtherance of effective execution of the franchise service provided by it and would not tantamount to the assessee being a joint venturer with the other parties to the agreements. The several decisions referred to by Shri Sahu, in the circumstances do not apply to the facts and circumstances of the present appeals.
On a careful analysis of the transactions engendered pursuant to the agreements between the assessee and other parties, we are of the considered view that these fall more appropriately and clearly within the framework of the taxable franchise service rather than the other, namely IPS. Pursuant to the agreements in issue there is not a mere temporal transfer or permitting of the use or enjoyment of IPR, as defined in Section 65(55a). There is a raft and bouquet of other services provided by the assessee (apart from a mere temporal transfer of intangible property, even assuming that permitting the other party to use the assessees name (IPS), motto and logo, constitute transfer of intangible property). Under the agreements, the assessee provides its established concepts of business; operational expertise in establishing and administering English Medium Schools; standards of academic quality and the assessee undertakes to supervise, evaluate and mandate academic and other activities of the School through periodic deputing of visiting teams, ensuring that reports of findings of such teams are considered and adopted by the school and the staff. The terms of the relevant agreements considered holistically bring the transactions more wholesomely within the fold of franchise service rather than IPS. The essential character of the services provided by the assessee fall overwhelmingly within franchise service. We are compelled to the conclusion that the services provided by the assessee do not fall within IPS since except the temporal permitting of the use or enjoinment of the assessees intangible property (in its name/ motto/ logo), other services performed under the agreements are outside the purview of IPS. The temporary permission to use or enjoy the assessees intangible property right in its name/ motto/ logo also falls within franchise service as an ingredient thereof; and the agreements fulfil the other requirements of franchise service as well, in a more comprehensive sense, than in the case of IPS.
It may also be noticed that in accordance with the interpretive principles for classification of services set out in Section 65A of the Act, where composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a) are in issue, these are required to be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable. Considered on the touchstone of this principle, the raft of services provided by the assessee under the several agreements, in their essential character fall within franchise service.
On the aforesaid analysis we hold against the assessee on issue C. Since the aspects for determination set out as Issue D are dovetailed into our analysis on issue C, answered as above, issue D is also answered against the assessee and in favour of Revenue.
21. Issues E and F: These issues can conveniently be analysed together. Issue E is whether the adjudication orders, invoking the extended period of limitation, to the extent extended period was invoked, are unsustainable. Issue F is whether imposition of penalty is unsustainable since the assessee failed to remit service tax on account of an asserted bonafide belief that there was no liability to do so, predicated upon a bonafide interpretation of the relevant provisions of the Act.
(i) Invocation of extended period for assessments: By an order dated 17.04.2009, we directed the assessee to file a date chart in support of its contention that Revenue was in correspondence with it since 08.08.2003; had issued a summons on 30.12.2003 and the assessee had furnished the requisite information from time to time thereafter; nevertheless the earliest show cause notice was issued on 24.01.2006. Revenue was also directed, to prepare a date chart and requisition the adjudication record from the office of the Commissioner, and to submit the same by 05.05.2009. On 27.04.2009 the assessee submitted a list of correspondence between Revenue and assesse, pertaining to the issues under these appeals.
The Commissioner (ST), New Delhi has filed an affidavit setting out dates on which the assessee was asked to obtain registration; response of the assessee thereto; dates of issue of summons directing to furnish the relevant agreements and amounts received w.e.f. 01.07.2003; the response of the assessee thereto; further summons issued to the assessee; the letter of the assessee dated 15.01.2004 enclosing copies of agreements since 01.07.2003 and details of amounts received from 01.07.2003 to 15.01.2004; departments letters to the assessee intimating that the information furnished was incomplete and the assessee should furnish details of amounts received since January 2004 to March 2004; stating that the assessee furnished statements of amounts received during January 2004 to March 2004 and copies of agreements, by its letter dated 12.07.2004; subsequent correspondence including pertaining to the assessee furnishing details of maintenance charges etc. received during 2003-04 and 2004-05, vide its letter dated 19.04.2005, etc.
Responding to the affidavit by Revenue (dated 30.07.2009), the assessee filed an affidavit in response dated 03.08.2009, contesting the assertions in Revenues affidavit and pleading that in response to the summons dated 26.03.2003 and 30.12.2003 it furnished all the requisitioned information, by its letter dated 15.01.2004 and stating that even in his letter dated 11.06.2004, the Superintendent (ST) did not complain that information furnished by the assessee was incomplete; he only sought information regarding subsequent periods and copies of fresh agreements if any. According to the assessee it furnished all the relevant information from time to time and repeatedly. It did so on 15.01.2004, 12.07.2004 and 11.11.2004 and on 19.04.2005 as well. The assessee reiterated that since the department had full knowledge of its activities ever since January 2004, there was no justification for invocation of the extended period of limitation.
It requires to be noticed that in response to the summons dated 30.12.2003, the assessee by its letter dated 15.01.2004 had furnished copies of the operational agreements; details of amounts received pursuant to the enclosed agreements, from 01.07.2003 till the date of the letter; names of its nominees on the Boards of Management of the Schools established; and stated that no consideration was received by any of the nominated members and therefore there was no question of any such amounts being passed on to it by its nominees. By a further letter dated 12.07.2004 the assessee, responding to the notice dated 02.07.2004 furnished statements of amounts received during January 2004 to 31.03.2004 and copies of agreements entered into by it with Maharaja Hari Singh Social & Educational Foundation, Leh; and with Shyam Behari Memorial Charitable Trust, Kanpur;
In response the notice dated 8.8.2003 and the later summons dated 30.12.2003, the assessee by its letter dated 15.1.2004 had enclosed and furnished copies of the several agreements entered into with other parties, for establishing schools, details of amounts received pursuant to such agreements during the period 1.1.2003 up to date; names of its nominees of the Boards of management of schools established and also clarified that since no consideration was received by its nominees there was no question of any such consideration passed on to itself. Pursuant to other letters dated 11.6.2004 and 2.7.2004 addressed by Revenue, the assessee by its letter dated 12.7.2004 furnished statements of amounts received during January 2004 to 31.3.2004; and copies of agreement with the Maharaja Social Educational Foundation, Leh and Shyam Behari Memorial Charitable Trust, Kanpur. The show cause notice ( dated 24.1.2006) admits that the assessee on 15.1.2004 had furnished documents/records namely, copies of agreements and details of money received apart from the names of its nominees. The show cause notice also admits that the assessee on 12.7.2004 had submitted details regarding amounts received during January 2004 to 31.3.2004 and copies of agreement with two institutions.
These materials admittedly furnished by the assessee, even by 15.01.2004 were sufficient for Revenue to have clearly identified the liability of the assessee to tax, for the taxable Franchise service. The assessee had consistently asserted the position, including before this Tribunal, that it was not liable to tax since the transactions under the several agreements do not constitute the taxable, franchise service. The assessee had suppressed no relevant information and had provided information which was requisitioned by the Department. It is incomprehensible why the Department again on 2.11.2004 called upon the assessee to provide a list of agreements entered into various parties nor is it apparent why the Department was persisting in issuing a clarification to the assessee as to its liability to pay service tax from 01.04.2003, vide its letters dated 29.11.2004 and 2.12.2004. It is also not clear why another summons dated 31.1.2005 was issued to submit the requisite documents regarding registration of the assessee and details of service tax paid by it.
Shri Sahu has also referred to a letter dated 29.9.2004 addressed by the Additional Commissioner (CCU) to the Commissioner (ST), Delhi with a copy marked to the C.C.E., Rohtak and Panchkula to the effect that the agreement between the assessee and MP Singh Foundation (one of the agreements) does not constitute franchise and there is no service tax liability. While nothing significant pertaining to the assessees tax liability turns upon this letter, it may be indicative of the fact that a section of the department also entertained doubts about taxability of the transactions in issue as franchise service . Suffice it to observe that since the Department had sufficient information by 15.1.2004 and at any rate by 12.7.2004, to conclude that the assessee had provided the taxable franchise service, there appears no justification for having failed to proceed with the assessment. The Department had ample powers in particular under Section 72 and other relevant provisions of the Act and of the Service Tax Rules, 1994 to initiate proceedings towards assessment.
The Supreme Court in Uniworth Textiles Ltd. vs. C.C.E., Raipur27, after a detailed analysis of existing precedents in the area summarised the principles justifying invocation of the extended period of limitation. The Court pointed out that misstatement or suppression of facts must be associated with wilful intention and that contravention of any provisions of the Act or the Rules must be with the associated intent to evade payment of tax; Where this mental element is alleged and established, only then would invocation of the extended period of limitation be justified. The material on record discloses that the assessee had furnished the information requisite for the Department to have initiated proceedings, by 15.1.2004 and 12.7.2004. Nevertheless, the first show cause notice was issued on 24.1.2006 (in respect of the period 1.7.2003 to 31.3.2005, the subject matter of ST Appeal No. 248/2006). Subsequent show cause notices were issued on 04.11.2008 for the period 01.04.2007 to 31.03.2008 and on 05.10.2009 for the period 01.04.2008 to 31.03.2009.
As pointed in Tecumseh Products India Ltd. vs. C.C.E., Hyderabad 28; in Fedders Lloyd Corporation Pvt. Ltd. vs. C.C.E., New Delhi29 and in Modipon Fibre Company vs. C.CE.. Meerut30, apart from the decision of the apex Court in Uniworth Textiles Ltd., the extended period of limitation could not be invoked when there is a bona fide dispute between the parties in regard to issues as to tax liability; where the department was aware of the essential ingredients of the transactions on which liability to tax could be determined; and no suppression could be inferred when the assesee had categorically sensitized the Department as to the relevant facts on which a view could have been taken as to the liability to tax. In Nizam Sugar Factory vs. C.C.E. A.P.31, Supreme Court clearly pointed out that suppression of facts cannot be alleged in each subsequent show cause notice, when the first show cause notice was issued and relevant facts were within the knowledge of the authorities; and that the same or /similar facts could not be urged to constitute suppression of facts on the part of the assessee, de novo.
22. Conclusions:
On the aforesaid analysis we conclude that on the point of limitation, the following orders of assessment are partly unsustainable (as indicated ):
(a) The adjudication order dated 30.3.2006 (ST Appeal No.248/2006) is barred by limitation, in so far as the period 1.7.2003 to 30.9.2004 is concerned;
(b) The adjudication order dated 23.2.2009 (ST Appeal No.415/2009) is unsustainable, for invocation of the extended period of the limitation, in respect of the period 1.4.2007 to 30.9.2007;
(c ) As regards the adjudication order dated 30.06.2010 (pertaining to ST Appeal No.1356 of 2010) the show cause notice dated 05.10.2009, was issued on 09.10.2009 by Commissioner, demanding service tax for 01.04.2008 to 31.03.2009. Since the ST-3 return for the period 01.04.2008 to 30.09.2008 is to be filed by 25.10.2008, the show cause notice having been issued within one year from the relevant date [vide Section 73(6)], is within the normal period of limitation. As regards the contention, that the corrigendum to the show cause notice was issued on 16.12.2009 beyond the normal limitation period and is hence time barred, we notice that by the corrigendum only arithmetic recomputation of the alleged liability was conveyed and there was no fresh attribution of fact or law against the assessee. As such the corrigendum does not substantially alter the framework of the show cause notice dated 05.10.2009/09.10.2009. We therefore reject this contention of the appellant and conclude that this demand is not barred by limitation nor is illegal for unwarranted invocation of the extended period, under the proviso to Section 73(1) of the Act.
The extent of the liability of the assessee to service tax, within the normal period of limitation under Section 73(1) of the Act (not the proviso thereunder) in respect of ST Appeal Nos.248/2006 and 415/2009 is required to be remitted to the adjudicating authority for de novo computation of the liability.
Issue E is answered as above.
In so far as Issue F is concerned (relating to validity of the imposition of penalty), we find no reason to interfere with imposition of penalties under Sections 76 and 77 of the Act. Consistent with our conclusions on Issue E, the imposition of penalties under Section 78 of the Act cannot however be sustained. We however find no justification for a generic invocation of the provisions of Section 80 of the Act to eschew levy and collection of penalties under Sections 76 and 77 of the Act.
Issue F is answered accordingly.
23. Result :
On the aforesaid analysis and for the reasons recorded (supra), we declare and hold:
a) that the assessee had provided the taxable franchise service during 1.7.2003 to 30.9.2008, both under the pre-amended and post-amended definition of franchise, defined in Section 65 (47) of the Act;
(b) the Adjudication orders, which are the subject matter of ST Appeal Nos. 248/2006 and 415/2009 are partly unsustainable in so far as the assessed liability to service tax pertains to the respective periods outside the normal period of limitation, as indicated in our analysis on Issue E (supra);
(c) ST Appeal Nos. 335/2008 and 1356/2010 are partly allowed, only to the extent of penalty imposed under Section 78 of the Act;
(d) The quantum of tax and the penalties imposed under Sections 76 and 77 as adjudicated, are confirmed;
(e) in the light of our conclusions above, ST Appeal No.248/2006 and 415/2009 are partly allowed (to the extent of tax, interest and penalties assessed for periods beyond the normal period of limitation and;
(f) all the adjudication orders (subject matter of the four (4) appeals) are remitted for re-computation of the liability to tax and/ or penalties as the case may be, relevant to the normal period of limitation and in relation to the tax liability upheld herein, to the adjudication authority as indicated above, for determination of the liability to tax, interest and penalties (under Section 76 & 77 but not under Section 78), in conformity with the judgement.
24. Appeals are allowed as above but in the circumstances, without costs.
iHi
(Pronounced in the Court on 19 /07/ 2013).
(Justice G. Raghuram)
President
(Sahab Singh)
Technical Member
Pant
1 2007(7) STR.55(Tri-Chennai).
2 2006(3)STR.711 (Tri-Mumbai).
3 2008(12)STR.174 (Tri-Bang).
4 AIR.1964.SC1389.
5 (2006) EWHC.111(Ch).
6 2008(12)STR.401 (SC).
7 (1995)1.SCC.478.
8 AIR. 1959. SC.24
9 (1977) 1.SCC.17
10 (1848) 11.QB.852
11 (2000) 2. Lloyds Rep.611.
12 (1998) 1. All.E.R. 98
13 2000 NZCA.350
14 1997) ALL ER 352).
15 (1984) 3 ALL ER 229 at 233, (1985) AC 191 at 201
16 Wigmore on Evidence 1981-vol.9, para.2461.
17 Kim Levison The Interpretation of Contracts, Sweet and Maxwell, (1989).
18 (1988). 1.Lloyds Rep.574.
19 (1967) 63 ITR 232 SC
20 (1993) 201 ITR 674(Karn.)
21 (1993) 202 ITR .I 8 (Bom.)
22 (1960) 39 ITR 546 (SC)
23 (1997) 106 STC 214 (SC)
24 2005 (183) ELT 225 SC
25 1999 (113) ELT 24 (SC)
26 (1997) 10 SCC 379 SC
27 2013 (228)ELT 161 (SC)
28 2004 (167) ELT 498 (SC)
29 2002 (19) ELT 1426 (Tri-Delhi)
30 2007 (218) ELT 8(SC)
31 2006 (190) ELT 465 (SC)
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