CESTAT Quashes Penalty for Non Payment of Service Tax on ground of Wrongful Categorisation of Service Rendered as ‘Franchise Service’ [Read Order]

The Bangalore bench of the Custom, Excise, and Service Tax Appellate Tribunal (CESTAT) quashed the penalty imposed for the nonpayment of service tax on the ground of wrongful categorization of service rendered as franchise service. 

Kitco Ltd, the appellant assessee was registered with the Department for providing various taxable services viz., Consulting Engineering, Market Research Agency, Manpower Recruitment Agency, Management Consultant Service, etc. 

The assessee appealed against the order passed by the Commissioner (Appeals) for the penalty imposed under section 78 of the Finance Act, 1994 for non-payment of service tax of service rendered as franchise service. 

Paulose C. Abraham, the counsel for the assessee contended that there was no grant of representational right by the assessee to the Institute of Hotel Management Studies and mere use of the word ‘Franchisee’ in the said agreement was not determinative of the nature of the agreement. 

It was further submitted that the assessee was not a hotel or hotel management institute and they do not have any specialized skill, knowledge, or expertise in hotel management or hotel management training and there cannot be a grant of any representational right to qualify as a ‘franchisee service’. 

K. Vishwanatha, the counsel for the revenue relied on the decisions made by the lower authorities and contended that the agreement was a ‘franchisee agreement’ since it granted representational rights to the institute. 

The bench observed that the arrangement with the institute was not a franchisee service, but a joint venture agreement, hence the imposition of penalty, in the facts of the present case under various provisions of the Finance Act was not sustainable. 

The two-member bench comprising D. M. Misra (Judicial) and R. Bhagya Devi (Technical) held that the penalty imposed was not as per the law and liable to be deleted while allowing the appeal filed by the assessee. 

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