The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held in a recent case that liability to pay Service Tax cannot be levied on charges paid to Advertisement agencies by a Franchisor which are in fact, collected from the Franchisees by virtue of an Agreement executed between both Parties.
The CESTAT was hearing a Service Tax Appeal filed by Institute of Advance Networking Technology (IANT) against the Commissioner of Central Excise and State Taxes,- Vadodara-I, on the basis of Order passed by Commissioner (Appeals) Commissioner of Central Excise, Customs and Service Tax – Vadodara – I.
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The Appellant is involved in the business of providing and creating specialized training courses and programs in computer education for enrolled students. As part of their business expansion plan, the Appellant has offered the opportunity to establish franchise facilities to persons and organizations all over India.
Franchisees would function in the same manner as the Appellant-Assessee and impart training courses to Students under the name of the Assessee, while also receiving technical knowhow, expertise and information technology already in possession of the Appellant.
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In exchange for the availment of Franchise Facility, the Franchisor receives fees from the Franchisee. Further, the Franchisor has also executed advertisement agreement with its Franchisees to receive payments specifically for advertisement purposes.
A show-cause notice was issued to the Franchisor for the period from 2012-2013 to 2015-2016 proposing that Service Tax be demanded from them while contending that advertisement charges paid by the Franchisor are liable to be added to the gross value of franchise service, thus making it liable to service tax.
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The Show-cause Notice was quashed by the Adjudicating Authority, Additional Commissioner, Central Excise, Customs and Service Tax, Vadodara –I citing that advertisement charges collected from the franchisees cannot be considered as part of the gross value of franchise service.
Revenue Department, being aggrieved by the Order of the Additional Commissioner lodged an Appeal before the Commissioner (Appeals) which allowed the Appeal on the basis of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.
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The present case, being lodged against the Order of the Commissioner (Appeals) was vehemently opposed by the Counsel for the Appellants citing that Rule 5(1) has already been deemed “Unconstitutional” and ultra vires the provisions of Sections 66 and 67 of the Finance Act, 1994 by the Supreme Court in Intercontinental Consultants & Technocrats Pvt Ltd in Civil Appeal No. 2013 of 2014.
The 2-Member Bench of CESTAT, Ahmedabad comprising Ramesh Nair, Judicial Member and C.L. Mahar, Technical Member, after perusing the material and submissions made on record proceeded to follow the binding precedent set by the Apex Court in Intercontinental Consultants underlining the unconstitutionality of Rule 5(1).
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Additionally, the 2-Member Bench, while allowing the present Appeal held that even if Rule 5 was ignored by the Tribunal, the valuation of gross value is determined by Section 67 of the Finance Act, 1994.
In light of this observation, it was held that advertisement is paid for by the Franchisor but the amount for the same is reimbursed via payment made to the Franchisor by the Franchisee. Therefore concluding that advertising expenses are ultimately borne by the Franchisee, discrediting the same from being added to the gross value of the Franchise Service.
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