No Service tax on course fees as it is not franchise Service

Ashish Philip, Adv. for the Appellant. R.K. Das, DC (AR) for the Respondent.

ORDER

P.S. Pruthi, Technical Member – Under the impugned order passed by the Commissioner (Appeals), service tax demand of Rs. 32,14,844 is upheld for the period 01.07.2003 to 30.09.2004 under the category of franchise service. Service tax credit amounting to Rs. 2,79,463/- demanded under Rule 14 of CENVAT Credit Rules, 2004 is also confirmed; equivalent penalty under Section 78 of the Finance Act, 1994 has also been confirmed apart from interest leviable under Section 75. Appellant (referred as C-DAC) are in appeal against this order.

2. The appellant is a scientific society recognised as a Scientific and Industrial Research Organisation by Ministry of Science and Technology, and by Ministry of Communications and Information Technology. Its Governing Council is chaired by the Minister of State of Science & Technology and has other senior officials on its Board. Under the Memorandum of Association, the society is mandated to undertake design and development of advance computing systems as also to build up high quality research and development manpower in advance computing. It introduced a scheme to provide quality training through diploma and post-graduate diplomas in advance and short-term course. For this purpose they entered into training agreements called Authorisation Agreements with authorised computer education training centres (referred to ACETC). Under the agreements, ACETC is to provide infrastructure, recruit faculty, select trainees, collect and pay fees to the account of the appellant. Further it collects course material and question papers from the appellant and conduct examination based on such question papers. ACETC runs the centre in its own name. The appellant receives Authorisation fees as well as renewal fees every year from ACETC for grant of Authorisation for conduct of educational training activities passed on C-DAC materials provided by the appellant i.e. Centre for Development of Advance Training (in short C-DAC). On these amounts the appellant paid service tax under the category of franchise service.

2.1 Under the same agreement, the appellant receives course fees from the students who are enrolled for the course. The fees is collected at the authorisation training centres i.e. ACETC. After deducting 25% of its share and other recoverables, C-DAC forward 75% of the fees to the authorised training centres. The case of Revenue is that the appellant have not included their share of the course fees in the taxable value while discharging service tax liability under the category of franchise service. Another issue raised in the show-cause notice is that the appellant utilised Cenvat credit of service tax amount to Rs. 2,79,463/- without having balance in their credit account of 30.09.2004 and thereby contravened Rule 14 of CENVAT Credit Rules, 2004.

3. The ld. counsel emphasised that in the sharing of course fees between the appellant and the authorised training centre there is no service provider and service receiver relationship and therefore no service tax is payable. The appellant relied on Board circular no. 109/03/2009 dated 23.02.2009 in which it is clarified that revenue sharing activities are not taxable. The counsel shows the definition of franchise under Section 65(47) of the Finance Act, 1994 as it existed prior to 16.06.2005 which defines ‘franchise’ as under:—

‘”Franchise Service” means service provided to a franchisee, by the franchisor in relation to franchise;

“Franchise” means an agreement by which

He contends that none of the four clauses in the definition of franchise are satisfied and therefore, their activity is definitely not covered in the ambit of franchise service. The ld. counsel also argues that Commissioner (Appeals) has wrongly held their activity to be “in relation to” franchise service.

3.1 The alternative argument of ld. counsel is that even if their activity is held to be covered under commercial, training or coaching service, the same would be exempted under Notification 9/03-ST dated 20.06.2003 as amended by Notification 1/04 dated 04.02.2004 and Notification 24/04 dated 10.09.2004. The ld. counsel makes a strong argument that the payment of 25% of course fees which is received by the appellant is not in relation to the franchise service but is received from the students for imparting training. Appellant relies on the CESTAT judgment in the case of Doon Institute of Information Technology (P.) Ltd. v. CCE [2009] 19 STT 329 (New Delhi – CESTAT). The ld. counsel also states that if their appeal is not accepted on merits, the benefit of deduction of value of course material from the total value should be given in terms of Notification 12/03-ST. He also challenged the computation of service tax liability and said it should be on basis of cum duty value. It is further contended that extended time period is not invocable as the appellant is set up as a National Initiative of the Government of India and were under bona fide belief that they are not liable to pay service tax on the course fees. He similarly argues against the imposition of penalty under Section 78. Regarding the demand of Cenvat credit said to be wrongly availed, he showed from a copy of the Cenvat credit register for the period 01.07.2003 to 30.09.2004 evidencing that Cenvat credit was available.

4. Ld. AR appearing for the Revenue reiterates the findings of the Commissioner. He draws our attention to the Authorisation Agreement. Emphasising that the payments under the Agreement indicated that they are in relation to the franchise service because the entire training program is conducted with the approval of the appellant. The Agreement provides that the authorisation training centre cannot used C-DAC name, trade mark, trade name or any other intellectual property, training material without the prior written consent of the appellant.

5. We have considered the submissions of both sides. We do find that the Authorisation Agreement, under Para 10 Schedule of Fees provides for Authorisation fee and course fees separately and distinctly. Only because all the fees are provided in one Agreement does not necessarily lead to a conclusion that the different components of fees are onlyfor the purpose of grant of franchise. Their very names suggest differently. Under Para 10B, the Authorisation fees is for grant of authorisation for conduct of training at the sites of authorisation training centres as approved under the Agreement. The authorisation fee is paid at the time of signing of the Authorisation Agreement. On these fees the appellant have paid service tax under the category of franchise service. We do not understand how the course fees can be said to be a part of the franchise fees. We agree with the ld. counsel that as the course fees are paid by the students for the training and the fees is shared in the ratio of 25% : 75% between the appellant and various training centre, therefore, it cannot be said that the share of 25% received by the appellant is received towards the franchise service. This share is clearly for their role in providing training to students in advance computing. Their role is to ensure that the standard of infrastructure, faculty, selection of training, course material, examination is maintained at a high standard. The Agreement is clearly akin to the revenue sharing model held to be non-taxable under Board circular (supra). The details of the Agreement show that the appellant and the training centre jointly participate in the activity of providing high level skills and knowledge in computers. It is a Principal to Principal arrangement. We see no reflection of franchise service by the appellant to the training centre in this activity of training.

5.1 We have also seen the definition of franchise reproduced above. All the clauses from (i) to (iv) must be met to fall under the category of franchise service. We find that there is no right given to the training centre to provide training independently in the name of the appellant. The activity is only a joint business activity between the two. Neither can it be said that the appellant is providing concepts of business operation to the training centre; the appellant is merely ensuring that the standard of training is maintained. The words “business operation” have a totally different connotation. Business operation would mean passing of ideas and knowledge in running the business from a commercial point of view. In the present case, the whole activity is only to impart high standard training. Even clause (iii) of the definition of franchise is not met because the fees is not paid by the training centre to the appellant. Rather the fees collected from the students comes into the account of the appellant who then pay 75% of the share to the training centre. In this view of the matter, the activity clearly falls outside the scope of the franchise service.

5.2 The argument of the revenue as held in the adjudication proceedings is that the words “in relation to” used in the definition of franchise service signify that any activity in connection with the franchise service will also be considered as part of the franchise service. Since the course fees is part of the franchise activity, it should be included in the value of the service for purpose of service tax. In our view the words “in relation to” have to be read in the context in which they are used. Thus words are in the context of franchise service. But the issue before us is the course fees or training fees. The service tax law nowhere states that if two distinct activities are undertaken or provided in a single agreement, they should be taxed under the same service category. The activity of coaching for which course fees is received is not even remotely connected to the franchise granted by the appellant in the form of Authorisation. In our view, the provisions of law have not been appreciated properly by the Revenue.

6. Another issue in the proceedings is the denial of the Cenvat credit said to be wrongly utilised. The adjudication order is far from clear on this issue. It only states that the appellant utilised the credit without having Cenvat balance in their account on 30.09.2004. It also states that the noticee failed to produce the relevant invoices as proof of their having balance. The findings of the Commissioner (Appeals) did not provide any details to hold the issue. In the hearing before us, the appellant produced the invoices before us. They also showed us Form ST-3 for the period 01.07.2003 to 30.09.2004 which indicates that during this period the appellants had taken Cenvat credit and also utilised the same. The return under Rule 5 for the period also indicates that service tax credit of Rs. 2,79,299 was taken and the same was utilised in this period. The return shows the remarks ‘under amnesty scheme’. We do not understand the significance of Commissioner’s finding that the balance as on 30.09.2004 was nil. It is obvious that if the credit is utilised for the preceding period they will be a nil balance. No objection appears to have been raised at the time of submission of the returns or on their scrutiny thereafter. The return also shows that it was received by one Shri Patil. In view of the factual circumstances, we find no reason to deny the benefit of Cenvat credit and therefore, we set aside the demand on this count.

7. Having decided the issue on merits, we do not find it necessary to go into the other aspects such as time limitation. However, we do note that in their own case in respect of C-DAC Hyderabad Centre appellant faced proceedings in which it was held by the Tribunal in Centre for Development of Advance Computing v. CC & CE [2009] 18 STT 361 (Bang. – CESTAT) that the training imparted will not even come into the purview of commercial training and coaching service and extended time period for demand cannot be invoked because the institution which is under the Ministry of Science and Technology is doing research in advance computing. Further, Supreme Court in Centre for Development of Advance Computing v. CCE [Civil Appeal No. 2749 of 2001, dated 27-2-2002] held in a case of import of sophisticated equipment by C-DAC, that the organisation had a genuine belief that the goods were not liable to payment of duty. In the present case also, we find no justification for invoking the extended time period as the appellant are an advanced research and development centre under the Ministry of Science and technology and will not indulge in any mis-statement or suppression with an intention to evade duty.

8. In view of the above discussion, appeal is allowed and the impugned order is set aside.