The Delhi bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in the case of Devyani International Limited Versus Commissioner of Service Tax has held that the amount spent on advertisement of outlets is not includable in value of franchise services received from overseas franchisors.
The bench of Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) has observed that the amount is towards promotion of appellant’s own outlets in this arrangement presence of the two people to Constitute Service rendered by one & received by another is missing vis-a-vis the promotion the promotional activity for the appellant operated outlets.
The amount has wrongly included in gross value towards franchise service received by the appellant from the two overseas Franchisors. The confirmation of demand of service tax on this amount is therefore, liable to be set aside.
The appellant/assessee is having service tax registration for providing Restaurant Services, Outdoor Catering Services, Business Auxiliary Services, Franchise Services, Management Consultant Services, Goods Transport Operator Services, Renting of Immovable Property Services etc.
During the audit of appellant’s records, the department observed that the appellant was receiving Franchise Services from M/s Costa International Limited United Kingdom who owns the trade name and trademarks (Costa, vide the Development Agreement dated 28.09.2004. The Franchise Service has also been obtained from M/s International Franchise holding (Labuan) Ltd. Labuan who owns the trade name and trademark “Swensen’s” by virtue of Master Franchise Development Agreement dated 09.12.2009.
The department observed that franchisee/ appellant, apart from remitting franchisee fee and royalty amount, it has to contributed at least 2% of its gross sale for advertising and promotion of the brand name “Costa” owned by the Franchiser M/s Costa International Limited and Promotion of Brand name “Swenson’s” of M/s International Franchise holding (Labuan) Ltd.
Thus, both the Franchisors are getting extra consideration in the form of contribution towards advertisement from the Franchisee for promotion of their own brand instant of appellant incurring it’s own advertisement.
Department formed the opinion that the activity of the Franchisee is therefore, taxable as he is providing Business Support Service to the Franchisor, the amount paid by the appellant being the extra consideration spent by the franchisee-appellant on advertisement and promotion of the Brand name of the Franchisor should form the part of the value of taxable service in terms of Section 67 of Finance Act 1994 read with Rule 5 of Service Tax ( Determination of Value) Rules, 2006. The appellant is accordingly, alleged liable to pay the service tax on the amount paid as contribution towards advertisement.
The issue raised was whether, the amount spent by the appellant (2%/4% of the gross net revenue) towards advertisement and promotion of the Costa/IFHL outlets operated by the appellant is an amount of consideration in terms of Section 67 of Finance Act 1994 read with rule 5 of service tax (determination of value) rules 2006 being includable in the value of Franchise Services received by the appellant from overseas franchisors.
The CESTAT held that the advertisement amount spent by Appellant is not includible in the taxable value of Franchise Services by treating the same as non-monetary consideration under Section 67 of the Finance Act as is held by the adjudicating authority. Therefore, the confirmation of demand of service tax on this amount is therefore, liable to be set aside.
Case Details
Case Title: Devyani International Limited Versus Commissioner of Service Tax
Case No.: Service Tax Appeal No. 51038 Of 2017
Date: 05.12.2024
Counsel For Appellant: B.L. Narsimahan
Counsel For Respondent: Jayakumari
