Royalty Received by Training Institute from Franchisees Taxable as Franchise Service: CESTAT [Read Order]

The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that royalty received by a training institute from its franchise centres was taxable as franchise service.

Hitech Institute of Advance Technologies Pvt. Ltd., the appellant, was registered with the service tax department for commercial coaching and training service, maintenance and repair service, and franchise service.

The appellant ran courses under the brand name “Hitech” through its own centres and franchise centres. Under the arrangement, franchisees collected fees from students and paid 10% to 20% of the fee to the appellant for using the “Hitech” name.

The appellant’s premises were searched and investigation was conducted. The department issued a show cause notice alleging short payment of service tax of Rs. 16,22,737 on royalty received from franchisees for the period 1 October 2013 to 2015-16.

The Assistant Commissioner dropped the proposals in the show cause notice. The department filed an appeal. The Commissioner (Appeals) allowed the department’s appeal and confirmed the demand. Aggrieved by that order, the appellant approached the CESTAT.

No one appeared for the appellant at the hearing. However, written submissions were filed through counsel. They argued that students sometimes did not complete the course or pay the full fee. In such cases, franchisees paid royalty only to the extent of fee actually received. The appellant’s counsel argued that it had paid service tax on the royalty actually received and that the demand could not be sustained.

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The revenue counsel argued that the demand was raised only on amounts actually received by the appellant. The department relied on the records and the findings of the Commissioner (Appeals), including the relied upon document attached to the show cause notice.

The two-member bench comprising Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member) agreed with the revenue. The tribunal observed that the Commissioner (Appeals) had clearly recorded that service tax liability was calculated only on royalty amounts received from franchisees, based on the relied upon document.

The tribunal also observed that the appellant had not given details to prove that some amounts were not received. It found no reason to interfere with the Commissioner (Appeals)’s order. The tribunal dismissed the appeal and upheld the service tax demand on royalty received from franchise centres.

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