Disposed

M/s. Subway Systems India Private Limited, (Now Eversub India Pvt. Ltd.)

GST AAAR23 Nov 2023HAAAR/2021-22/ 03

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Disposed

M/s. Subway Systems India Private Limited, (Now Eversub… — GST and Indirect Tax | GST AAAR (2023)

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HARYANA APPELLATE AUTHORITY^{FOR ADVANCE RULING}

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(Constituted under Section 99 of the Haryana Goods and Services^{Tax Act,} 201-7 read with Central Goods and Service^{Tax Act, 2O17)}

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BEFORE TH BENCH OF

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Sh. Upender Gupta, iRS^(C&IT) Sh. Ashok Kumar lvleena, IAS Chief Commissioner Com missioner Central Goods and Service Tax Zone Excise & Taxation DePartment Panchkula Ha rya na Member, Appellate Authority for Member, Appellate AuthoritY^for Advance Ruling, Haryana Advance Ruling, Ha rya na

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HAAAR Order-In-Appeal^No. :-

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2oLt-

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Date:2j.11.2023

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(Passed by Haryana Appellate Authority for Advance^{Ruling under sectlon 101(1) of the} Haryana Goods and Service Tax^{Act, 2Ol7 read with Central Goods and ServiceTax} Act, 2017)

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Preamble

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In terms of Section 102 of the^{Central Goods&ServiceTax, Act} 2Ol7 /Haryana Goods & Service Tax^{Act 2017 ('the Act', in Short), thls Order} may be amended by the Appellate^{Authority,so as to rectify anyerror} apparent on the face of^{the record, if such error is noticedby the Appellate} Authority on its own accord, or is^{brought to its noticeby the concerned} officer. the^{jurisdictional} officer^{or the Appellant within a period of six months} from the date of the Order.

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2 In terms of Section 103(1) of the^{Act, this advanceruling pronounced by the} Appellate Authority under Chapter^{XVII of the Act shall be binding only:-}

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(a) on the Appellant who had sought it in respect^{or any matter referred to in} sub-section (2) of Section 97 for^{advanceruling:}

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(b) on the concerned officer or the^{jurisdictionalofficer in respect of the}

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Appellant.

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3 In terms of section 103^{(2) of the Act, this advance ruling shall be binding} unless the law, facts or circumstances^{supporting the said AdvanceRuling} have changed.

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4 In terms of Section 10a(1) of the^{Act, where the AppellateAuthorityfinds} that advance ruling^{pronouncedby it under sub-section(1) oF Section 101} has been obtained by the^{Appellant by fraud or suppressionof materialfacts} or m isrepresentation of^{facts, it may.by order, declare suchruling to be void} ab-initio and there upon all the^{provisions of this Act or the rules made there-} under shall a^pply to the^{Appellant as if such advance ruling has neverbeen} made.

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DETAILS OF THE APPELLANT:

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	M/s.Subway SystemsIndiaPrivateLimited,
Nameand Address of the	(Now EversubIndiaPvt. Ltd.)
Appellant	UnitNo.20-24, 3rdFloor,MGFMetropolis,MG Road,Sector-28,Gurugram-122OO2,Hatyana
GSTIN/User idol'the Appellant	O6AAGCS5SOSMIZZ
Advance Ruling Order against which appealis filed	HR/ARL/02/2021-22dated08.12.2021 (received bythe'Appellant'on13.12.2021)
DateofFiling ofAppeal	72.0t.2022
RepresentedUy	Sh. AbhishekA.Rastogi&Sh.PratyushpravaSaha, Advocates
lurisdictionaIAuthority- Centre	CGSTCommissionerate, Gurugram
JurisdictionaIAuthority- State	DeputyExcise &TaxationCommissioner(ST), Gurugram
Whether paymentoffees for filingappealis discharged.Ifyes,the amountand ChallanNo.	HDFC22010600033348dated 11.01.2022 videCINNo. CGST&5000/-HGST No, PartlyPaidt10,000/-inTaxHEAD s000/-

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q,,'\d
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Order under Section 101 of Central Goods and Service^{Tax Act, 2017} /

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Haryana Goods and Service Tax AcL^2OL7

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The present appeal has been filed by M/s.^{SubwaysystemsIndia Private Limited} (Now Eversub India Pvt. Ltd.,) (hereinafter referred^{to as'theAppellant')undersection} 1OO (1) of Central Goods and^{ServiceTax Act,2OU} l1aryana^{Goods and serviceTax} Act, 2017 (hereinafter referred to^{as "the Act") against the Advance Ruling No.} HR/ARL/02I2021-22 dated^oa.t2.2o2t.

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A copy of order of the^{Advance RulingAuthority (hereinafter referred to as} 'AAR') issued on 08.12.2021 was received^{by the'Appellant' on !3'12'2027and the} appeal has been filed on^{12.07.2022 which is within timein terms of Section 100(2) of} the Act

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1. BRIEF FACTS OF T E CASE:

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1.1 M/s subway systems^{India PrivateLimited, Gurugram (NowEversub India Pvt'} Ltd) a company registered^{under HGST Act, 2Ot7 in the state of Haryana vide} registration number O6AAGCS5SO8MIZZ^{and having its business situatedat Unit No} 20-24,3rd floor, MGF Metropol|s,^{MG Road,Sector28, Gurugram l22oo2,Haryana.}

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1.2 This appeal ls^{preferredby the Appellant, who is the authorizedlicensee in India} of a "system" developed^{for establishing and operating quick servlcesrestaurant} featuring sandwiches and^salads.

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1.3 The system^{preferred above is an intellectual propertydevelopedby Subway} group and comprises of the brand^{name"suBWAY"along with proprietaryand} confidential information^{such as recipes, formulas,food preparationprocedures,} business methods,^{policies, trade secrets, etc. The Appellanthas been licensed to} establish, operate and^{franchisee others to operate SUBWAYrestaurants in India using} the System.

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1.4 The aforesaid^{licensehas been granted to the Appellant by way of a Master} License Agreement dated 01^{october 2002("MLA',) by subway International B.V.,} Netherlands. The said^{MLA alsoauthorized the Appellant to further license the System} and the brand name 'subway'^{to franchiseesin India. The relevant extracts of the MLA} are reproduced below:

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,,1.00 The Company hereby grants to Master Licensee the right to franchise itself and others to estabtish^{and operate sandwich shops in the Territory,Master} Licensee shall use the^{system and the Proprietary Markssolely in connection} with the devetopment and^{franchisingof Sandwich Shopspursuant to this} Agreement.TheCompanygrantstoMasterLicenseethelicensetouseallofthe Company'srightsinandtotheSystemandtheProprietaryMarks'andtolicense thesYstemandtheProprietaryMarkstoFranchiseesintheTerritory......,'

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1.5 The Appellant^{has also been grantedthe right to use and sub-liTfse others to} use the System^{and trademark in India by way of Trademarkt-icg$l)Agreement}

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A, >ilrrl2? tdr'" I l-'

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('TLA") dated 18.11.2019 entered into between Subway IP LLC, USA, Subway Internal 8.V., Netherlands and the Appellant. The relevant extracts of the TLA are reproduceC below:

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"WHEREAS the parties wish to grant S PL the right to use the Trademarks in India under the terms and conditions set forth in this Agreement.

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(...)

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GRANT OF LICENSE

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SIP, through a series 6f ticense agreements described above, has granted SSIPL a non- exclusive right to use and sub-license others to use the System, the System IP and the Trademarks in India and the right to use the System, the System IP and the Trademarks for the purpose of entering into franchise agreements with qualified individuals and certain approved entities so they may establish and operate SUBWAY restaurants in India"

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1.6 The TLA makes it clear that only a limited license and right to use the System and Trademarks, and to sub-llcense the said System and Trademarks had been granted to the Appellant, and the substantive rights in the System and Trademarks had not been transferred and remained with the foreign entities. The relevant extracts of the TLA in this regard are reproduced below:

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"3. TRADEMT\RK RIGHTS AND OWNERSHIP

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SSIPL agrees and acknowledge that;

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a) SIP is the exclusive owner of all right, title and interest in and to the System IP and the Trademarks including any goodwill associated therewith, subject to the license and right to use the Trademarks granted to SSIpL hereunder.

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b) except as provided in this Agreement, SStr.L acquires no right, tide or interest in or to any of the System IP and the Trademarks;

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c) any use of the System IP and Trademarks by SSIPL and the goodwi arising from such use shall inure to the benefit of SIP."

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1'.7 The aforesaid extracts indicate that the Appellant had been authorized only to license or sub-license the system to franchises in India and the Appellant had not been authorized to transfer the right to use the System to such franchise.

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FRANCH SE MOD'EL FOLL WED BY THE A PPELLANT

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1.8 Through a franchise agreement, the Appellant has licensed the franchisees the right to access and use the system (including the brand name, trademarks, proprietary and confidential informatlon) for setting up and operating a SUBWAy restaurant in India, serving sandwiches, salads and other food items. The relevant extracts of a sample Franchisee agreement is reproduced below:

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"3. PERMITTED ACCESS ro rHE sysrEM AND MARKi During the term of this Agreement we grant to you:

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a Continued access to the system including the loom of a copy of the operations Manual and same being a confidential information^{as defined} in Sub Paragraph 5(n), subject to restrictions and^{terms and conditions} stated in Subparagraph 5(n) applicable to^{a Confidential Information} and or access to the electronic^{version of the operations Manual on our} website.

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b Continued access to information^pertaining to^{new developments,} improvements, techniques and^{process in} the^system'

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C A timited, non exclusive sublicense^{to use the marksin connection with} the operation of the Restaurant^{at One(L) location at a site we and you} approve. "

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1.9 Along with the aforesaid^{License, the Appellant also conducts a trainingand} assistance^program for the^{franchisees and provideson call consultationservices} concerning operation of the^restaurant.

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1.10 The Franchisees are responsible^{for making their own businessa success. The} franchisees independently run their^{respective restaurants. However, the Appellant} ensures minimum^quality and safety^{standardsto ensure similarserviceofferings in all} SUBWAY restaurants.

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1.11 As a consideration of^{grantinglicenseto the Franchisefor the light to use the} system, the Appellant inter^{alia chargesroyalty calculatedat a specified percentageof} the gross Sales made from^{the restaurants operatedby the Franchisee' In the above} referred agreement, royalty^{has been statedto be payable by the franchiseeon a} period basis, at the rate of 8olo of^gross sales.

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Ctassification of services and^{applicable GST rate}

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SERVICE CODE ADOPTED^{BY THE APPELLANT:}

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1.12 The Appellant classified the^{licensingservices provided by it pursuant to the} Franchisee Agreement under^{service code 997336basedon NotificationNo. 1U2017-} Central Tax (Rate) dated 28^{lune 2017.}

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1.13 The services such as^{training,assistanceand consultatlon providedby the} appellant to the franchisee^{are merely ancillaryto the principalservicesof providinga} license to use the System.

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Since,withoutsuchlicensethefranchIseewouldnotbeentitledforthese ancillary services,^{accordingly consideringthat these ancillaryservicesare naturally} bundled with the^{principal serviceof providing a licenseto use the system and thus} together form^part of^{a composite supply" the appellanthas adoptedthe same service} code and GST rate^{as determinedfor the aforesaid principal service,for the ancillary} service as well. This^{is in accordancewithSection 8 of the CentralGo} o s and Service Tax Act, 2017^(CGST Act).

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1.14 The relevant extract of the scheme is reproduced below (showing the

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service code adopted by the Appellant):

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Chapter,Sectic n,	Service	Sr:rvice Description
HeadingorGroup	(Tariff)
Chapter99		AllServices
Section7		Financialandrelatedservices; real estate services;andrental andleasing services
Heading9973		Leasingorrental without operator servtces
Group 99733		Licensingservicesfor theright touseintellectual propertyand similarproducts
	997336	Licensing servicesforthe righttousetrademarksand franchises.

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1.14 Alternatively, another reasonably plausible service code applicable to the services provided by the Appellant could be service code 997339. This is because the Appellant not only receives right to use the brand name "SUBWAY", but also receives right to use other intellectual property products such as recipes, trade secrets, business policies and other knowhow.

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The relevant extract of the scheme for the said code is reproduced below:

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Chapter. Se:tion,	Service code(Tariff)	Service Description
HeadingorGroup
Chapter99		AllServices
Section7		Financialandrelatedservices;
		realestateservices;andrental andleasing services
Heading 9973		Leasingorrentalservices without operator
Group99733		Licensingservicesfortherightto
		useintellectualpropertyand similarproducts
	997339	Licensing servicesfor the right
		to use otherintellectual
		propertyproductsandother

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E.'

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resources	nowhere	else
classified.

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1.15 As per Notification No. 11/2017-Integrated Tax^(Rate) dated^{28 June 2017,both} the aforesaid service codes carried a CGST rate of^{60lo up} to^{30 September 2021. The} relevant extract of the Notification is^{provided below:}

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Chapter,	Section or	DescriptionofService	Rate
Heading			(Percent)
Headi	ng9973	(i)Temporaryorpermanenttransfer	6
(Leasing	orrentaI	or^permittingtheuseorenjoyment^of
servic	ewithout	Intellectual Property^(IP)rightⁱⁿ
operator)		respectofgoodsother^than
		InformationTechnology Software

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Thus, the combined GST rate for the aforesaid^{servicecodes was at l2o/ofor} intra- state supply of services.

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COMPETTNG SERVICE CODE

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1.16 The Appellant is conscious that^{"Trademarks and Franchises"are covered under} service code 998396.However^{service code 998396 does not cover the licensing} services provided by it. The relevant^{extract of the scheme for the said code is} reproduced below:

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Chapter, Section,	Service code^(Tariff)	Service Description
HeadingorGrou^p
Chapter99		All Services
Section8		BusinessandProductionService
Heading9983		OtherProfessional,TechnicaI^and
		Business Services
Group99839		OtherProfessional,TechnicaI^and
		BusinessServices
	998396	Trademarks andFranchises

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1.17 As per Notification No.^{11/2017-CentralTax(Rate) dated28.06.2017 (the} aforesaid service code carries^{a CST rate of gYo.The relevantextract of the Notification} is provided below:

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Chapter, Section or Heading	DescriptionofService	Rate (Percent)	Condition
Heading 9983	OtherProfessional services^otherthan	9
(other Professional,	(i)and(ia)aboveandserialtechnical
	7of40	13[	rr/!	6V"

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Technical and anJnrmbei:S below Business Services)

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Thus the combined GST rate for the aforesaid service code (inclr.rding state GST) would be 18o/o for intra-state supply of services.

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1.20 The Appellant has preferred this application to ascertain whether licensing services provided by it under the Franchise Agreement are correctly classifiable under service code 9973361997339 or under Service Code 998396 or under any other Service Code.

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STATEMENT CONTAINING THE APPLICANT'S INTERPRETATION OF LAW :

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The Appellant's interpretation of the law and/or facts in respect of the questions mentioned in their appllcation is re-produced as under:

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Scooe of Service 'codes 997336/997339 and 998396

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1.21 It is well settled that intellectual pi-operty rights are considered as "goods" for the purpose of tax legislations. Reliance in this regard is placed on the decision of the Supreme Court in Vikas Sales Corporation vs. Commissioner of Commercial Taxes, [1996]^{102 STC 106(SC)andTata Consultancy} Services^ys. State of Andhra Pradesh, (20041 137 STC 620 (SC).

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1.22 However, it is equally well settled that temporary transfer or permitting the use of intellectual property rights is a supply of "services". In the context of GST laws, reference in this regard is made to Schedule II of the CGST Act, which deems the following transactions to be supply of services:

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a) Any transfer of right in goods without the transfer of title thereof IPara 1(b)]

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b) Temporary [ransfer or permitting the use or enjoyment of any intellectual property right IPara 5(c)]:

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c) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration lPara^s(f)l

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1.23 It is the casr-' of the appellant that:

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transaction (b) and transaction (c) above i.e. permitting the use or enjoyment of IPR (in other words, licensing the right to use IpR, being the Appellant,s services under the Franchise Agreement) and transfer of right to use IpR are covered under service codes 997336/997339; and

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transaction (a) and (c) above, i.e. transfer of right to use goods or in goods, in the conteXt of trademarks and franchises, are covered under service code 998396.

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Re: Servic(! Codes 997336/997339

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7.24 the Scheme of Classification of Services adopted^for the^{purposesof Indian GST} Law is a modified version of the united Nations^{CentralProduct Classification(UNCPC)} and the explanatory Notes for the said^{schemeare based on the Explanatory Notes to} the UNCPC (refer Para 1-2 of the^{prefaceof the Explanatory Notes). The relevant} extracts of the Explanatory Notes are^{reproducedbelow}

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Exolanatorv Note to Grou o 99733

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"This group includes permitting,^granting or otherwise^{authorizingthe use of} inteltectual property^products and similar^products.

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Note: This covers rights to exploit these^{products, such as licensing to third} parties; reproducing and publishing software, books, etc';^{using patented designsin} production processes to produce new^goods and so on.^{Limitedend user licences,} which are sold as^part of a^{product (e.g., packagedsoftware, books)are not included} here.

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n to No U 99733

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"This service code includes licensing services for^{the right to use trademarks and} to operate franchises".

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Exolanato rv Note to GrouD 997339:

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"This service code inctudes licensing services^{for the right to use other kinds of} intellectual property^products, such^{as architectural and engineeringplans,industrial} designs etc".

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1.25 The term^,,Trade mark" has^{beendefined under section 2(2b)of the Trade Marks} Act, 1999 as follows:

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"..... "trademark" means a mark capable of being^{represented graphicallyand which is} capable of distinguishing the^{goodsor servicesof one person from those of others and} may include shape of^goods, their^{packaging and combination of colours; and-}

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(i) in relation to chapter XII^(other than section^{107), a registered trade markor} a mark used in relation to^{goods or servicesfor the purposeof indicatingor so} as to indicate a connection^{in the course of trade between the goods or services,} as the case may be, and some^{person havingthe right as proprietorto use the} mark; and

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(ii) in relation to other provisions of this Act, a mark^{used or proposedto be used} in relation to^goods or services^{for the purposeof indicatingor so to indicatea} connection in the course of trade^{betweenthe goodsor services,as the case} may be, and some^person having the^{right, either as proprietor or by way of} permitted user, to use the mark whether with or^{without any indicationof the} identity of that^person, and includes a^{certificationtrade mark or collective} mark."

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1.26 The mark SUBWAY and other^{mark have been duly registered in India underthe} Trade Marks Act, lggg.Accordingly,^{thesemarksfall within the meaning of the term} "Trademark" as referred in the scheme of classification of^{services fo} he purpose of

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a t)ltt u/rrf )3

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indian GST Law. sample certificates evidencing registration of the mark name suBWAY in India under the Trade Marks Act, 1999 were provided.

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1.27 The term "license" means "permitting someone to do something,'. Accordingly, the services covered under the said codes involve a permissible use certain IP products with certain conditions and restrictions. The said service codes contemplate a permissive use of the underlying IP and in that sense, confer a very limited and conditional right.

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1.28 This is further substantiated by the fact that the explanatory note to Group 99733 specifically states that the group includes permitting, granting or otherwise authorizing the use of intellectual property products, whlch covers licensing to third parties.

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1.29 By way of the Franchise Agreement, the Appellant grants to the franchisees the license to use/permissive use of the system (including the brand name, trademarks, proprietary and confidential information) for setting up and operating a suBWAY restaurant franchise. The said license or permission is a very limited right and subject to various conditions and restrictions.

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Re: Se rvice Code 998396

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1.30 The relevant extract of the explanatory Notes are reproduced below

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Explanatory Notes to Service Code 998396

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" This service code includes original trademarks and franchises, i.e. the legally registered ownership of a certain brand name. Note: These products are produced on own account with the intent of deriving benefits from allowing others to use these trademarks or franchises.

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This service code does not include

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-licensing services for the right to use trademarks and franchises, :- 99733

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1.31 At the outset Appellant submits that the explanatory Note to Service Code 998396 expressly states that licensing services are not included within the said code. Since the services provided by the Appellant to the franchisees constitute a license or permission to use the system for operating a SUBWAy restaurant (franchise), they are automatically excluded from the ambit of the said service code.

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1.32 In the case of Appellant (from the explanatory note reproduced above) the service code 998396 covers transactions amounting to transfer of right to use trademarks/franchise or transfer of right in trademarks franchises which specifically excludes licensing of trademarks franchises. As has been explained further below, the aforesaid concepts are broad and involve transfer of more sustentative rights (as opposed to a mere license to use).

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q.,

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1.33 In any case, as^per the MLA and TLA, Subway^{InternationalBV Netherlands and} Subway IP LLC, USA have^granted the^{Appellant only the right to sub-licensethe} "System', and the^,suBWAY@ trademark to franchisees in the territory.^{The Appellant is} not authorized to transfer the right to^{use the system and the SUBWAYtrademark to} franchisees as^per the MLA or TLA. It^{is well-settled that a person cannottransfera} better title than he himself has^(as enshrined^{in the Latinmaximnemo dat quodnon} habet). Accordingly, the^question of^{the Appellant transferring such right to use to} franchisees does not arise.

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Distinction between transfer of right to use^{goods "and licenseto use} permissive use"

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Re: Transfer of rioht to use^qoods

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1.34 The meaning and scope of the^{expression" transferof right to use goods has} been expounded in several landmark^{Judgements such as20th centuryFinance} corporation Limited vs state of^{Maharashtra,(2000)6scc 12; Rashtriya Ispat Nigam} Limited vs Commercial Tax Officer^{(1990) 77 STC 182, Aggarwal Brothers vs State of} Haryana (199) 9 SCC 182, State^{of AndhraPradeshvs Rashtriya Ispat Nigam Limited} (2002) 3 SCC 314; BSNL vs UOI 2006⁽²⁾ STR^{161 (SC), GS Lamba and sons vs state} of Andhra Pradesh (2011) 43 VST 323^{(AP HC), McDonaldsIndia Pvt Ltd vs} commissioner of Trades & Taxes,^{New Delhi 2017(5)TMI999-Delhi-HCand finally in} the Appellants own case in Subway^{Systems India Private Limitedv Union of India &} Ors, 2016 (B) TMI 717-Bombay^HC.

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1.35 Based on the law laid downⁱⁿ the^{aforesaid precedents, the general features of} the expression "transfer to right^{to use" are given below:}

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a) Transfer should not be of the^{property (ownership)in goods, but of the right} to use property in^goods;

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b) The transfer must be divested of^{the right or goods and the same should be} vested In the transferee, to the excluslon^{of all others;}

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c) Effective or^general control;^over the^{goods mustpass to the transferee.} Effective or^general control does^{not alwaysmean physical control and even if} the manner, method, modalities^{and the time of the use of goodsis decidedby} the transferee, it would be under the^{effective or generalcontroloverthe goods.}

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d) The approvals, concessions,^{llcenses and permits in relatlonto the goods} would also be available to the^{transferee, even if such licenses or permits arein} the name of the transferor^{of the goods; and}

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e) The transferee should have^{a legal rightto use the goods and consequentlyall} legal consequences should fail upon^{the transferee'}

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1.36 The Appellant states that since^{the FranchiseAgreement entered into by it do not} possess the aforesaid features; the services^{provideddo not constitut} "transfer of

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right to use goods." This has been ciemonstrated in detail in the following section by referring to specific clauses in the enclosed agreement.

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Re: License to USE/Permissive use

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1.37 At the outset, the Appellant states that the Bombay and Delhi High Court, in the Appellant's own case have held that the franchisee Agreement entered into by the Appellant merely granted permissive use of defined intangible rights to the franchisees and the agreement, in substance, was nothing more than a mere license.

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1.38 Based on the law^judicially laid down in this regard, the general features of the expression "license to use/permissive use" are given below:

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a) License must be granted merely to access or use the rights or goods subject to conditions laid down by the licensor;

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b) At the end of the period for which the license is granted, the rights or goods must be returned to the licensor;

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c) The licensor must have the right to terminate and repossess ad the deny further access to that intangible;

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d) The license must not be able to sub license the permission it obtains under the ag reement; and

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e) the transfer must be on a non-exclusive basis.

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1.39 Based on clause3, 5(m),11(m), 5(o), 8(9), 11(b) and several others of the Franchisee agreement, the Appellant submits that since the Franchise Agreements entered into by it possess the aforesaid features, the services provided constitute a mere "license to use/Permissive use of" goods. This has been demonstrated in detail in the agreement.

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1.40 In simple terms, the Appellant submits that if Microsoft Corporation USA were to transfer to Microsoft India the right to use the windows operating system source code and develop copies thereof for sale, on an exclusive basis, within the territory of India, the transactions would be regarded as a "transfer of right to use" goods in the hands of Microsoft Corporation, USA. On the other hand, if one Mr. ABC were to purchase a Windows Operating system license for its personal computer from Microsoft India, the transactions would be regarded as a mere license/perm ission to use goods.

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Extracts from th., Franchisee Agreement:

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1.41 The Appellant wishes to highlight certain clauses from the enclosed sample Franchise Agreement demonstrating the fact that the services provided by it constitute a mere permissive use of the System and the SUBWAY@ brand for operatlng Subway restaurant franchise, subject to several restrictions and conditions:

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a) The Appellant permits the franchise to access the System, including the Operations Manual subject to restrictions, terms and conditions of the Franchise Agreement. The

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.,N; q.,,

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Franchisee is^granted a limited non exclusive^{sub licenseto use the SUBWAYtrademark} in connection with the operation of the restaurant [clause-3]

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b) The franchisee is obliged to use or^{display trademarks on materials and stationary} only as^permitted by the Appellant.^{The franchiseeis requiredto specifyat a prominent} place in the restaurant that it is an independent franchised^{operator of the restaurant} and a licensed user of the SUBWAY^trademarks. [clause^5(m)]

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c) The Appellant has exclusive and^{unrestricted right to} sell food^products and beverages under the SUBWAY^{trademark at any locationand} the Franchise would not have any right to impose any conditions^{in this regard.} Iclause 11(m)l

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d) The term of the Franchise^{Agreement has been specified to be twenty years with} provisions for further renewal [clause-7]

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e)The franchise has not been^{conferred any territorial rights and the appellant} possesses unlimited rights to compete^{with the franchiseeor license others to do so} Iclause-K]

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f) Prior to the opening the^{restaurant, the franchise owner must complete a mandatory} training^program followed^{the training code of business conduct and passa} sta ndardized test [clause^5(a)(ii)]

¶167

g)The location of the suBWAY restaurant^{must be approved by the Appellant} Iclause5(a)(iii)]

¶168

h) The restaurant must be^{operatedin accordance with OperationManual provided by} the Appellant and all^{quality controlstandardsmustbe followed. The franchisemust} not conduct any business or^{sell any productsfrom the restaurant which ls not} approved by the Appellant.^{Procurements of food, equipment,beveragesand other} products and services should be madeⁱⁿ the^{manner as approvedby the Appellant} [clause^5(b)(i)]

¶169

and electronic data of^the i) The appellant is authorized to^{verifybooks, records} franchisee as part of a audit to^{verify the amountof sales.} Iclause^5(h )]

¶170

j) The franchisee is required to use the name^{and word SUBWAY only as specified by} the Appellant. The^{franchise owner agrees not to contestthe validityor ownership of} the sUBWAY@ trademark.^{The Franchise acknowledges that lt will not acquire any} ownership rights in the^{SUBWAY@trademark'} [clause^5(o)]

¶171

k) upon Termination of^{the Franchisee agreement, the franchisee is required to change} the appearance of the^{restaurant,stop usingthe System and return the Operations} Manual. The Franchisee^{owner is not allowedto engage directly or indirectlyin any} sandwich business^{within5 Kilometers of the locationof anySUBWAY restaurant} [clause^8(9)].

¶172

@ >z(rrlgn',

¶173

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¶174

l) The franchise rights and priviieges under the Franchise Agreement would return to the Appellant upon the franchise surrendering, abandoning or suffering revocation if its rights and privileges. [clause 11(b)]; and

¶175

m) The Appellant would enter into a primary lease with the landlord and a corresponding leave and license agreement with the franchise owner. In case the franchise owner is authorized to directly sign a lease with the landlord, the franchise owner would be required to get the lease terms approved from the Appellant and provide the Appellant with an assignable interest in the lease. Iclause 5(a)(iv)]

¶176

1.42 The above referred clauses demonstrate that the license to use the System is not absolute and the appellant exercises considerable control over the franchisees use of the System and operation of the restaurant. The License granted is non exclusive, for a defined period of time and is subject to several restrictions and conditions required to be met by the franchisee.

¶177

1.43 The franchisee required to use the SUBWAY trademark only as directed by the appellant and is not authorized to sub license the same. The Appellant is authorized to terminate the agreement in case of the franchisee's failure to comply with the conditions. Upon termination the franchisees rights and privileges would return to the Appellant and the appearance of the restaurant must be changed so that it can no longer be identified as a SUBWAY restaurant.

¶178

1.44 The Franchise neither obtains general or effective control over the system nor does it acquire any rights in the System to the exclusion of the Appellant o!- other Licensors. The license in the System is not territorial in nature and the Appellant has unlimited rights to compete with the franchisee. The franchisee does not possess any property rights in the SYSTEM and is only conferred with a limited, representationa I rig ht.

¶179

1.45 Based on the above it can be concluded that the Franchisee Agreement is nothing but a licensing agreement having the effect of granting permissive use of the system for operating a SUBWAY restaurant franchise.

¶180

2. QUESTTON(S) ON WHICH ADVANCE RULTNG WAS REQUIREp:

¶181

whether the licensing services provided by the Appellant under the Franchise Agreement, for which a periodlc royalty is charged, are correctly classifiable u nder:

¶182

Service Code 997336. which covers licensing services for the right to use trademarks and franchises, and liable to GST at the Rate of l2o/o.

¶183

ii. Service Code 997339 which covers licensing services for the right to use other intellectual property products and other resources nowhere else classified, and liable to GST at the rate 12olo.

s9'.$

L4 of 40

If the answer to the Question No. 1 above is in the^{Negative i.e. if the} Appellants services are not classifiable under servlces codes 997336 or 997339 both, the Appellants desires to understand:

¶188

i. Whether its services are correctly^{classifiableunderservicecode} 998396, which covers trademarks^{and franchisesand liableto GST at} the rate of 18o/o; or

¶189

ii. If not, then the services code^{underwhich its servicesarecorrectly} classifiable and the corresponding^GSTrate.

¶190

3.ADVANCE RULING AUTHORITY^{PASSED ORDERON ABOVE} QUESTION^AS UNDER:

¶191

we have gone through the records^{of the case andconsideredthe submissions} made by the Appellant at the time^{of virtual hearing. The matter was examined} in detail keeping in view the^{provisionsof GST, we rule that Franchisee} Agreement from the Franchisee^{for the right to use its trademark,brandname} and proprietary Knowledge^{(Intellectual Property) fall under chapter Heading} gg83 as Other Professional, Technical and Business services and service code (Tariff)-998396 Trademarks and franchises,^{attractingGST @ 18o/o.}

¶192

4. PRAYER OF 'APPELLANT':

¶193

a) Modify the impugned advance^{ruling passedby the AAR and hold that the} Licensing services^provided by^{the Appellantunder agreementwith Franchisee} for which a^periodic royalty^{is charged, are correctlyclassifiableeitherunder} service code 997336^{(entry1) or 997339(entry2) and are accordlngly liable to} GST @ 12olo.

¶194

b) Hold that given the nature of^{MLA & TLA between the Appellant and subway IP} LLC, USA & Subway International^{BV, Netherland,the doctrine of nemo dat quod} non habet is squarely applicable^{to the presentcase.}

¶195

c) Hold that given the^pith and^{substance of the Trade mark, MLAand} corresponding sub-license^{agreement with franchiseesentered by the Appellant,} the decision of Gujarat AAR^{in RE; M/s Tea Post Pvt. Ltd., 2001(1)TMI424-AARI} not applicable in the facts and^{circumstancesof the present case}

¶196

d) Grant a^{personalhearing through video conferencingmode in view of COVID} pandemic; and

¶197

e)^pass any such further^{or other order(s)as may be deemedfit and proper in facts} and circumstances of the^case'

¶198

GROU NDS OF AP EAL: A. SEVERAL SUBMISSIONS^{HAVE NOT BEEN CONSIDEREDBY AAR; THE RULING} HAS BEEN PASSED^{WITHOUT ANY INDEPENDENT A} PPLICATION F MIND AND THIS RENDERS THE ORDER^{A NONSPEAKiNGORDER}

¶199

@ ).3t r1 )J IrlB

¶200

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¶201

5.1 It is submitted that the Impugned Ruling dated 08.12.2021 passed by the Hon'ble AAR is a non-speaking order and has hence been passed in violation or the principles of natural justice.

¶202

5.2 It is submitted that the Written Submissions filed by the Appellant were ignored by the AAR, while some of the submissions are reproduced in the Ruling, there is no finding given to that effect in the impugned order. To this extent, the impugned order is violating of natural justice being non-speaking and is liable to he set aside on this ground alone.

¶203

5.3 The AAR has conveniently ignored critical terms of the Franchise Agreement and the Master License Agreement to bring out the true nature of the transaction the Appellant is involveC in. The Appellant submits that AAR has summarily rejected the submissions made by it without giving any independent findings. That the impugned RULING does not discuss the correct factual position, legal position or judicial decisions relied upon by the Appellant in its submission. Therefore, the impugned order passed by AAR is non-speaking.

¶204

5.4 The Appellant submits that the Impugned Ruling has been passed by the Hon'ble AAR without providing adequate reasons/justifications for holding that the Appellant has made a 'Franchise Agreement' and not the'License Agreement', and that the services in question cannot be said to be "Licensing Services". It is submitted that elaborate submlssions have been made by the Appellant in its application which has been entirely neglected.

¶205

5.5 Reliance in this regard is placed on the decision of Hon'ble Supreme Court in case of Kranti Associates Pvt Ltd vs. Masood Ahmed Khan [2011 (273) ELf 345 (SC)1, wherein the Hon'ble Supreme Court, relying several landmark decisions relating to the principles of natural justice, laid down comprehensive guidelines as follows: "57. Summarizing the above discussion, this Court holds a) In India the judicial trend has always been to record reasonst even in administrative decisions, if such decisions affect anyone prejudicially. b) A quasi-judicial authority must record reasons in support of its conclusions. c) Insistence on recording of reasons is meanit to serve the wider principte of justice that justice must not only be done it must also appear to be done as well. d) Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quasi-judicial or even administrative power. e) Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations. f) Reasons have virtually become as indispensable a component of a decision making process as observing princlples of natura! justice by judicial, quasijudicial and even by administrative bodies. g) Reasons facilitate the process of judicial review by superior Courts. h) The ongoing judiciar trend in alr countries committed to rule of law and constitutional governance is in favour of reasoned decisions o relevant facts.

¶206

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¶207

¶208

This is virtually the Life blood of^judicial decision making^justifuing the^principle that reason is the soul of^justice.

¶209

i) Judicial or even^{quasi-judicial} opinions these days can be^{as different as the} judges and authorities who deliver them. All these decisions serve one common purpose which is to demonstrate by reason that the relevant factors^{have been} objectively considered. This is important^{for sustainingthe litigants' faith in the} justice delivery system.

¶210

j) Insistence on reason is a requirement for both iudicial accountability^and transparency.

¶211

k) If a Judge or a^{quasi-judicial} authoritY^{is not candid enoughabout his/her} decision-making^process then it is^{impossible to knowwhether the person} deciding is faithfut to the doctrine of^{precedentor toprinciples of} incrementalism.

¶212

l) Reasons in support of decisions must be^{cogent, clear and succinct'A} pretense of reasons or rubber-stamp reasons is not to^{be equated with valid} decision-m a ki ng^process.

¶213

m) It cannot be doubted that^{transparencyis the sine qua non of restrainton} abuse of^{judicialpowers.} Transparency^{in decision making not onlymakesthe} judges and decision makers less prone to errors but also makes them^subjectto broader scrutiny."

¶214

5.6 Therefore, the AAR ought to have^{recorded reasonsand relevantprovisions for} holding as to how licensing services^{received by the Appellant from sIBV under the} MLA and TLA will be taxable at^{18o/o underEntry 17(ii) and not at 12olounder} EntrylT(iii) without sanction of the^{GSTCouncil as mandated under Artlcle 279A, of} the Constitution. The AAR has^{merely proceeded mechanicallyand deniedthe} Appellant's contention without^{recordingany reasons. on this aspect, reliancein} this regard is also^placed upon the^{followingjudgments:}

¶215

a. State of Orissa vs. Dhaniram^Luhar [(2OO4)^{5 SCC 568]}

¶216

"In Alexander Machinery^(Dudley) Ltd.^{v. Crabtree (1974ICR 120) (NIRC)it was} observed: "Failure to^give reasons amounts^{to denial of justice". Reasonsare live} links between the mind of the decision-taker^{to the controversyin questionand} the decision or conclusion arrived at".^{Reasons substitute subiectivity by}

¶217

. objectivity. The emphasis on recording^{reasonsis that if the decisionreveals the} "inscrutable face of the sphinx", it can, by ifs silence,^{render itvirtually} impossibte for the Courts to^perform their^{appellatefunction or exercise the} power of judicial review in adjudging the validity of the decision.^{Right of reason} is an indispensabte^part of a sound^{judicial system, reasonsat least sufficient to} indicate an application of mind to the^{matter before Court.Another rationaleis} that the affected^party can know^{why the decision has gone against him. one of} the salutary requirements of natural^{justice is spellingout reasonsfor the order} made,' in other words, a speaking out.^{The "inscrutable face of a sphinx" is} ce

¶218

ordinarity incongruous with^{a judicial} or^{quasi-judicial perfo}

¶219

.Ya ll >3 (rr 11)

¶220

L7 of 40

¶221

b. Oryx Fisheries Pvt. Ltd.'V. Union of India, [2011(266) E.LT. 422 (S.CTI

¶222

"...(b)A quasi-judicial authority must record reasons in support of its conclusions.

¶223

(c) Insistenc'e on recording of reasons is meant to sen/e the wider principle of justice that lustice must not only be done it must also appear to be done as wel!.

¶224

(d) Recording of reasons also operates as a valid restraint on and possible arbitrary exercise of^judicial and quasi-judicial or even administrative power.

¶225

(k) lf a Judge or a quasi-judicial authority is not candid enough about his/her decision-making process then it is impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism.....

¶226

(I) Reasons in support of decisions must be cogent, clear and succinct. A pretense of reasons or 'rubber-stamp reasons is not to be equated with a valid decision-ma ki n g process....

¶227

(o) In all common law jurisdictions judgments play a vital role in setting up

¶228

precedents for the future. Therefore, for development of law, requirement of giving reasons for the decision is of the essence and is virtually a part of "Due Process, "

¶229

5.7 It has been clearly established in the above decisions that a quasi-judicial order should contain proper reasons and the absence of the same is in gross violation of the princioles of natural justice. The action of the Hon'ble AAR in making such classification of the Appellant without adducing any reason/ relying upon any provisions for the same is grossly in violation of the principles of natural justice.

¶230

5.8 Hence, it is submitted in this regard that impugned ruling is non-speaking and arbitrary in its very essence and shall be set aside to the extent it is against the Appellant on this count alone.

¶231

THE IMPUGNED RULING HAS BEEN PASSED WITHOUT AN ADEQUATE OPPORTUNITY OF BEING HEARD PROVIDED TO THE APPELLANT AND IS IN GROSS VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE.

¶232

9 The Appellant submits that the Appellant was not provided with the adequate opportunity ol' being heard, as stated in the Impugned Ruling itself. Further, the submissions of the Appellant were blatantly ignored by the Hon'ble AAR. and the Impugned Ruling has been passed without paying any heed to the Appellant's submissions. It is submitted that this action is in gross violation of the principles of natural justice and the Impugned Ruling should be set aside on this ground alone.

¶233

5.10 As per Section 98(a) of the CGST Act, an order for Advance Ruling can be passed only after concluding hearing on admissibility and merits of the Application and after giving due and fair opportunity to the Appellant to dverse

¶234

t -aJ)ao

¶235

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¶236

apprehensions of the Authority. Conduct of AAR was heavily^prejudiced against^the Appellant and stands against the^principle of natural^justice. The concerned^officer has not only acted in discretion but also took^{away the right of the Appellant to} make an adequate representation to establish^{his case in front ofthe authorities.}

¶237

5.11The Appellant submits^{that despitethe requisite of a report,the concernedofficer} did not deem fit to submit^{the same and therefore, the Appellant'sright to makea} complete representation^{was done away with. Further, post such submission} made by the concerned officer,^{the Appellant was not given any chanceof being} heard and the Ruling^{waspassed in gross violationof the principlesof natural} justice.

¶238

5.12 The Appellant submits^{that duringthe admission hearing conductedby AAR on} o2j-j..2o2l, the Appellant^{was not givenan opportunity to representits submission} on merits, on the basis that^{an investigation proceedingis pending againstthe} Appellant. After some argument^{on admission, AAR informedthe Appellant that it} will verify the status of the^{investigationand grantanother opportunityof} hearing to the Appellant.^{The Appellant made repeated remindersto the AAR,} however, no hearing^{was grantedin respectof by the AAR.The Appellant directly} received the final order^{against the AAR dated 09.09.2021 came to be passed} without hearing the^{Appellant, in termsof Section98(a) of the CGST Act on} 08.t2.2)2t and^{was communicatedvide email dated 13.12.2021,4 daysafter due} date oF passing the order^{was over.}

¶239

5.13 In support of adherence^{of the principles of natural justice in affordingthe} opportunity of^{personalhearing, the Appellant relies on the following judgments:}

¶240

(l) Swadeshi Cotton Mills v. Union^{of India} [1981(1)^{SCC 664];}

¶241

(2) JT (India) Exports vs. UOI t2OO2(144)^{ELT 288 (Del)l;}

¶242

(i) Alfred Berg & Co.(1)(p) Ltd.^{vs. Cestat, Chennai} l20ll(273)^{ELT373 (Mad)l;}

¶243

(4) Automotive Tyre Manufacturers^{Associationvs' DesignatedAuthority} [2011(263)^{ELr a81(sc)];}

¶244

(5) Khaitan Chemicals & Fertilizers^{Ltd. vs. UOI} [2013(292)^{ELT 44(Bom)1}

¶245

(6) Tinplate Co. of India Ltd.^{vs. UOI} [2013(288)^{ELT 59 (Jhar)];}

¶246

(7) Manohar Vs. State of Maharashtra [2013(295)^{ELT 358 (SC)];}

¶247

(8) Reema Gases (P) Ltd. vs. Commissioner [2014(309)^{ELT 450 (Cap];}

¶248

(e) Kantilal B. Mobile vs. UOI [2014(306)^{ELT 51 (Born);}

¶249

(10) Baboo Ram Hari Chand^{vs. UOI} [2014(304)^{ELT 371 (Guj)1;}

¶250

(ll) Logic Transware India^{Pvt. Ltd. vs. CC.} [2014(302)^{ELT 228(Del)];}

¶251

(12) Adhunik Power Transmission^{Ltd. vs' UOI} [2015(325)^{ELT 865 (Jhar)];}

¶252

(14) CC. Bangalore vs. Fly Jac^{Logistics Pvt' Ltd'} [2015(323^{ELT 730 (Kar)];}

¶253

(ls) Shrushthi Plastics Pvt'^{Ltd. vs. CCE,Puducherry[2015(323)ELT 515(Mad)j;} (16) Confidence Petroleum^{India Ltd. vs' ADDL' C'C', C'E' & S'T'' Coimbatore} [201s(322)^{EL-r 237 (Mad)];}

¶254

)l; @_ liltr tl '>z lu

¶255

(17) General Mills India^{Pvt. Ltd. vs.uor} [201s(322)^{ELr 9s(}

¶256

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¶257

(18) Deputy C.orrrmissioner of Central Excise. Chennai vs. Dorcas l,lai-ket Makers Pvt. Ltd., [2015(32]) ELT45(N1ad.)l;

¶258

(le),iSL Lifestyle Ltd. vs. Union of India (2015(326) ELT 265(P&H)l;

¶259

(10) Panoli interrnediate(India) Pvt. Ltd. vs. Union of India [201s(326)ELTs32(Guj)] ;

¶260

(21) Data Field India Ltd,, vs. Dy. Commissioner of Customs (EOU), Chennai [2016(331)^{ELT ss7 (Mad)I:and}

¶261

(22) Electronics Corporation of India Ltd. vs. U01 [2018-TIOL-484- HC,Apcx-1131.

¶262

5.14 The Appellant thus submits, that silch acticn cf the Hon'ble AAp. of not providinq an oppoftunity of being heard and providing a ruling without providing the chance of adequate representation to the Appellant is in gross violation of principles of natural justice and should be set aside on this count alone.

¶263

.fHE ADVAI\ICE RULING AUTHORITY FAILED TO FOLLOW THE STATUTORY I4ANDATE PP.OVIDED UNDER SECTION 98 OF THE CGST ACT

¶264

5.15 It is submitted that when a statute explicitly prescribes for specific time limits through its provisions, the authorities is bound to act in accordance with the same and cannot delay the process as the provision is mandatory in nature.

¶265

5.16 The AAR has subverted the procedure laid down under Section 9g of the cGST Act issued a copy of the oroer manually on 13.72.2021. after due date of passing the order was over. Further, AAR failed to upload the GST portal thereby leaving the Appellant incapacitated to challenge the order in any manner, in Appeal.

¶266

5.17 Mandatory time limit for issuing a ruling in 90 days from date of filing the ARA. Admission hearing for the AAR was conducted on O2.Il.ZOZ1. Thereafter, no further hearing was granted despite repeated reminders filed by the Appellant.

¶267

5.18 It is submitted that the procedure to be adopted by the AAR Autho!-ities is laid down in Section 98 of the CGST Act, which provides:

¶268

"98. (1) On receipt of an application, the Authoritv sha cause a copy thereof to be forwarded to the concerned officer and, if necessary, call upon him to, furnish the relevant records:

¶269

Provided that where any records have been ca ed for by the Authority in any case, such records shall, as soon as possible, be returned to the said concerned officer.

¶270

(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorized representative and the concerned officer or his authorized representative, by order, either admit or reject the apptication:

¶271

Provided that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act:

¶272

Provided further that no apptication shalt be rejected under this subsection unless an opportunity, of hearing has been given to the applicant:

¶273

0 D'

¶274

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¶275

Provided also that where the application is rejected, the reasons for such rejection shall be specified in the order.

¶276

(J) A copy of every order made under sub-section (2) shall be sent to the applicant and to the concerned officer.

¶277

@^{Where an application is admitted undersub-section (2), the Authority shall,} after examining such further^{materialas may be placed before it by the} applicant or obtained by the Authority^{and after providingan opportunityof} being heard to the appticant or^{his authorisedrepresentative as well as to the} concerned officer or his^{authorised representative,pronounce its advance} ruling on the^question specified^{in the application.}

¶278

(5) where the members of the Authority differ on any^{questionon whichthe} advance ruling is sought,^{they shatl state the point or pointson which they} differ and make a reference^{to the Appettate Authority hearing and decision on} such question.

¶279

(6)TheAuthorityshallpronounceitsadvancerulinginwritingwithin ninety days from the date of^{receipt of application'}

¶280

() A copY of the advance ruling^{pronounced by the Authorityduly signed by the} members and certified^{in such manneras may be prescribed shall be sent to the} applicant, the concerned^{officerand the jurisdictional officerafter such} pronouncement. (Emphasis^{su pplied} )

¶281

5.19 A bare^{perusalof section98(2)and its proviso, as reproduced hereinabove,} makes it clear that^{the AAR is required to firstly issuea hearing notice and admit} or reject the Application^{filed for seeking advanceruling. The AAR Authorityis} required to^provide an^{opportunityof hearing to the respective Appellantwithout} which no Application^{can be rejected. Further, the AARin case of rejectingthe} Application is required^{to provide a reasonedorder'}

¶282

5.2O More importantly,^{Section 98(6) of the CGST Act providesthat the} AuthorityisrequiredtopaSsitsrulingwithinninetydaysfromthedateof receipt of Applicatlon.^{It is submittedthat the word "shall" used in section 98(6)} Actstrengthensthemandatorynatureoftheprovisionprescribingtimelimit withinwhichtheAARisrequiredtoperformitsduty.FUrther,theApexCourt hasheldinvariousjudgementsthattaxStatutesaretobeStrictlyConstrued IRefer:^{Raiasthan Ru/va Sahakari Spinning&Ginning Mills Federation} Ltd. v. Deputy CIT,^{Jaipur, (2014) 11 ScC 672i State Bank of}

¶283

Travancore v. commissioner^{ofIncomeTax' (L986) 2 scc11;} Commissioner of^{Customs,(Import) Mumbai' vsDilip Kumar And}

¶284

Company,^{(2013)9 SCCI. Therefore,the time limit prescribedin the aforesaid} section is mandatory^{in nature which should be duly adheredby the ARA'}

¶285

5.21 It is further^{submittedthat the above} explained^{aPProachof the AARis} if a statute Provides^{for a t} .hing to be

¶286

against a well^{settled salutary principle that} done in a^{pafticular manneT, then it is to} be done in that^manner and in no 253; Rao^

¶287

other manner [Refer:^{Nazir Ahmad v' Kin} g Emperor, AIR¹⁹ 13 (t

¶288

21 ol 40ol 4040 ,[:3^ffi

¶289

21 ol 40ol 4040

¶290

Shiv Bahadur Singh v. State of Vind-hya Pradesh, AIR 1954 SC 322; State of Li. P. v. Singhara Singh, AIR 7964 SC 358 and Chandra Kishore Jha Mahavrr Prasad, t199917 lT 256 (SC)l

¶291

5.22 The AAR has in grave non-compliance of the procedure laid down in section 98, it is submitted that firstly, no opportunity of hearing was granted to the Appellant to present its case and facts; the Impugned Ruling was received beyond the period on 90 days i,e. on 13.12.202L; till date the AAR has failed to upload the Impugned Ruling on GST Portal; and the Impugned Ruling has been passed neglecting the submissions of the Appellant and is in non-speaking in nature.

¶292

GROSS FAILURE OF THE MACHINERY OF J1DVANCE RULING AUTHORITY IS ATTRIBUTED TO ABSENCE OF A ]UDICIAL MEMBER:

¶293

5.23 In absence of a judicial member, the constitution of Authority for Acivance Rulings, (Respondent no. 2) is unconstitutional.

¶294

5.24 rn support of this contention, the^petitioners rely on the judgment of the l-lon,ble Supreme court in columbia sportswear company vs. Director of Income Tax, Bangalore, reported at (2012) 11 scc 224, wherein it was held that the Authority for Advance Ruling constituted under the provisions of Income Tax Act, 1962 is a 'tribunal, within the meaning of Article 136/227, as it is exercising judicial powers. In terms of the test laid by the Hon'ble supreme Court in columbia sportswear co. (supra), the Respondent No.2 is also a Tribunal as it is determining the rights and liabilities of various stakeholders.

¶295

5.25 It is submitted that appointment of a judicial member is a sin qua non for any authority which is performing judicial functions of determining rights and liabilities of a person. To the e)(tent an authority undertakes such functions, it is acting in the capacity of a 'court' and therefore it becomes imperative to appoint a judicial membcr with expertise and experience in dealing with legal and interpretation a I issues, Reliance is placed on the judgments of the Hon'ble supreme court in Madras Bar Association vs. union of rndia, reported at (2ors) g scc sgg, and Madras Bar Association vs. union of rndia, reported at 2o7o (rr) scc 7 and L. chandra Kumar vs Union of India and Others, reported at 1gg7 (g) SCC 267.

¶296

5.26 It is thus submitted that the constitution of Ld. Authority is against the judgment of the Hon'ble Supreme court as aI members appointed are technicar members.

¶297

5.27 constitution of Ld. Authority is also against the judgment of the Hon,ble Supreme court on the count that the administrative support is under the Ministry of Finance and not r:nder the Ministry of law and justice. Further, this is in violation of Article 50 of the constitution which requires state to separate judiciary from the executive in the public services of the State

¶298

6\6

¶299

22 ol 40

¶300

5.28 Appointment of a judicial member to create and maintain the^balancein functioning of Ld. Authority is necessary. In absence of^{any judicial member,the} constitution of Ld. Authority is defective.^{Consequently,the impugned order passed by} the Ld. Authority is u n constitution^{a I and it liable to be quashed.}

¶301

APPELLANT'S INTERPRETATION^{OF LAW AND FACTS:}

¶302

scope of service code 997335,997339^{and 998396}

¶303

5.29 It is well settled that^{intellectual property rights are considered as "goods" for} the purpose of tax legislations.^{Reliance in this regardis placedon the decisionof the} supreme Court in vikas sales^{corporationvs. commissioner of commercial} Taxes, [7996] 7O2 STC^{106 (SC) and Tata consultancy services vs, state of} Andhra Pradesh, [2OO4]^{737 STC 620 (SC).}

¶304

5.30 However, it is equally^{well settledthat temporarytransfer or permitting the use} of intellectual^{property rights is a supply of "services". In the contextof GSTlaws,} reference in this regard is^{madeto schedule II of the CGST Act, which deemsthe} following transactions to^{be supplyof services:}

¶305

(a)Any transfer of right in^{goods without the transferof title thereof[para 1(b)];}

¶306

(b)Temporary transfer or^{permittingthe use or enjoymentof any intellectual} property right [Para 5(c)];

¶307

(c)Transferoftherighttouseanygoodsforanypurpose(whetherornotfora specified^period) for^{cash, deferred paymentor other valuableconsideration} lpara^s(f)1.

¶308

5.31 It is the case of the^{Appellant that}

¶309

transaction^(b) above^{i.e. permitting the use or enjoyment of intellectual} propertyright(inotherwords,licensingtherighttouseintellectual property right, being the Appellant's^{servicesunder the Franchise} Agreement) is covered^{under service codes 997336 (Entry1)/997339} (Entry 2); and

¶310

transactions (a) and^{(e) above, i.e. transferof right to use goods or in} goods, in the context of^{trademarks and franchises, are coveredunder} service code 998396^{(EntrY 3).}

¶311

transactions^(a) and^{(e) above,i.e' transfer of right to use goods or in} goods, in the context of^{trademarks and franchises,are coveredunder} service code 998396^(Entry3).

¶312

Re: Service Code^{997336 (Entry 1)/997339 (Entry2)}

¶313

5.32 The Scheme^{of Classificationof Services adoptedfor the purposesof IndianGST} Law is a modiFied^{versionof the united NationsCentralProduct Classification(UNCPC)} and the explanatory^{Notesfor the said schemeare basedon the Exp} tory Notes^to @ }} tl1,3 )a )'r

¶314

23 of 40

¶315

the UNCPC (refer Para 1-2 of the preface of the Explanatory Notes). The relevant extracts ofthe Explanatory Notes are reproduced below

¶316

Explanatorv Note to Group 99733

¶317

"This group includes permitting, granting or otherwise authorizing the use of intellectual property products and similar products.

¶318

Note: This covers rights to exploit these products, such as licensing to third parties; repr<tducing and publishing software, books, etc.; using Datented designs in production processes to produce new goods and so on. Limited end user licenses, rvhich are sold as part of a product (c.9., packaged softr..,are, books) are not included here.

¶319

)

¶320

Expbrctory \q!s !o G_roup_997336 (Ettry U

¶321

"This service code includes licensing services for the right to use trademarks and to operate franchis,zs".

¶322

E :pla natorr N o te t o G ro u p_9 91 3_ 3 9: _ (_E_ntry_4

¶323

"This service' code includes licensing services for the righ! tc use other kinds of intellectual property products, such as architectural and engineering plans, industriei designs etc. "

¶324

5.33 The term "Trade mark" has been defined under section z(zb) of the Trade Marks Act, 1999 as follows:

¶325

"..... "trademark" means a mark capable of being represented graphicalty and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colours; and-

¶326

in relation to chapter xII (other than section 107), a registered trade mark or a mark used in relation to goods or services for the purpose of inclicating or so as to indicate a connection in the caurse of trade between the goods or services, as the case may be, and some person having the right as proprietor to use the mark; and

¶327

in relation to other provisions of this Act, a mark used or proposed to be used in relation to goods or services for the purpose of indicating or so to indicate a connection in the course of trade between the goods or services, as the case may be, and some person having the right, either as proprietor or by way of permitted user, to use the mark whether with or without any indication of the identity of that person, and includes e certification trade mark or coltective mark-"

¶328

5.34 The mark SUBWAY and other mark have been duly registered in India under the Trade Marks Act, 1999. Accordingly, these marks fall within the meaning of the term "Trademark" as referred in the scheme of classification of services for the purpose of Indian GST Law. Sample certificates evidencing registration of the mark name suBWAY in India under the Trade Marks Act, 1999 were provided.

¶329

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¶330

24 of 40

¶331

5.35 The term "license" means "permitting someone to do something".^{Accordingly,the} serviceS COvered under the said codes involve a^{mere permission} to^{use certain} Intellectual Property products with certain conditions^{and restrictlons. The said service} codes contemplate a mere^{permissiveuse of the underlying IntellectualProperty} products and in that sense, confer a very limited and conditional^right.

¶332

5.36 This is further substantiated^by the^{fact that the explanatorynote to Group} 99733 specifically states that the^{group includes permitting, granting or otherwise} authorizing the use of intellectual^{property products, which covers licensing to thlrd} parties.

¶333

5.37 By way of the Franchise^{Agreement,the Appellant grantsto the franchiseesthe} license to use/permissive use of the^{System (includingthe brandname, trademarks,} proprietary and confldential information) for setting up and^{operating a SUBWAY} restaurant franchise. The said license^{or permission is a very limited rightand subject} to various conditions and restrlctions.^{Accordingly,the Appellant's services are} classifiable under service code 997336^{(Entryno.1)/997339 (Entry No.2).}

¶334

Re: Service Code 998396^(EntrY 3)

¶335

5.38 The relevant extract of the^{explanatoryNotesare reproducedbelow}

¶336

Explanatory Notes to Service Code^{998396 (Entry 3)}

¶337

,, This service code includes original trademarks and franchises, i.e. the legally registered ownership of a certain^{brand name'}

¶338

Note: These^products are^{producedon own account with the intent of deriving} benefits from allowing others^{to use thesetrademarks or franchises'}

¶339

This service code does not^include:

¶340

-licensing services for the right to use trademarks^{and franchises, :- 99733}

¶341

(...)"

¶342

5.39 At the outset, the explanatory^{Note to Service Code998396expressly statesthat} licensing services are not included^{within the saldcode. Since the seruicesprovided by} the Appellant to the franchisees^{constitute a licenseor permission to use the system} for operating a SUBWAY restaurant^{(franchise),they are automatically excluded from} the ambit of the said service code.

¶343

5.40 Accordingly, the services^{provided by the Appellant to the franchisesare not} covered under the ambit of the^{said servicecode.}

¶344

Re. Nemo dat^quod non habet

¶345

5.41 In any case, as^per the^{MLA and TLA. SubwayInternational RV., Netherlands} and Subway IP LLC, USA^{have granted the Appellant only th} "rfi^{ht to ,rcense}

¶346

or sublicense the System and the 'SUBWAY"' trademark to franchisees in the territory. The Appellant has not been authorised to transfer the right to use thc System and the^'SUBWAY' trademark to franchisees as per the MLA or TLA. It is well-settled that a person cannot transfer a better title than he himself has (as enshrined in the Latin maxim nemo dat quod non habet). Accordingly, the question of the Appellant transferring such rlght to use to franchisees does not artse

¶347

Distinction betweren permissive use"

¶348

"transfer of right to use goads" and 'license to use/

¶349

Re: Transfer of rig.\t to use goods

¶350

5.42 The meaning and scope of the expression "transfer of right to use goods" has been expounded in several landmark judgments such as 20th Century Finance Corporation Limited v State of Maharashtra, (2000) 6 SCC 12; Rashtriya Ispat Nigam Limited v Commercial Tax Officer, (1990) 77 STC 182; Aggarwal Brothers v State of Haryttna (1999) 9 SCC 182; State of Andhra Pradesh v Rashtriya Ispat Nigam Limited, (2002) 3 SCC 314; Bharat Sanchar Nigam Limited v Union ot India, 2006 (2) STR 161 (SC), G.S. Lamba & Sons v State of Andhra Pradesh (2otl) 43 VST 323 (AP HC), McDonalds India Private Limited v. Commissioner of Trade and Taxes, New Delhi, 2017 (5) TMI 999 - Delhi HC; and finally in the Applicant's own case in Subway Systems India Private Limited v Union of India & Ors,2016 (8) TMI 717 -. Bombay HC.

¶351

5.43 Based on the law laid down in the aforesaid precedents, the general features of the expression "transfer of right to use" are given below:

¶352

a) Transfer should not be of the property (ownership) in goods, but of the riqht to use propefty in goods:

¶353

b) The transferor must be divested of the right or goods and the same should be vested in the transferee, to the exclusion of all others;

¶354

c) Effective or general control over the goods must pass to the transferee. Effective or general control does not always mean physical control and even if the manner, method, modalities and the time of the use of goods is decided by the transferee, it would be under the effective or general control over the goods;

¶355

d) The approvals, concessions, licenses and permits in relation to the goods would also be available to the transferee, even if such licenses or permits are in the name of the transferor of the goods; and

¶356

c) The transferee should have a legal right to use the goods and consequently all legal consequences should fall upon the transferee.

¶357

5.44 The Appellant states that since the Franchisee Agreements entered into by it do not possess the aforesaid features, the services provided do not constitute a^-transfer of right to use goods". This has been demonstrated in detail in the following section by referring to specific clauses in the enclosed agreement.

¶358

Re: License to use ,/ permissive use

¶359

5.45 At the outset, the Appellant states that the Hon,ble Bombay and Delhi High Courts, in the Appellant's own case have held that the Fra chisee Agreement

¶360

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¶361

26 of 40

¶362

entered into by the Appellant merely^{granted permissive} use of defined intangible rights to the franchisees and the^agreement,in substance, was nothing more than a mere license,

¶363

5.46 Based on the Law^judicially laid^{down in} this^{regard, the general features of} the expression "license to use /permissive^{use" are given below:}

¶364

a) License must be^{granted merely to access or use the rights or goods} subject to conditions laid down^{by the licensor;}

¶365

b) At the end of the^period for^{which the license is granted, the rights or} goods must be returned to the licensor;

¶366

c) The licensor must have the right^{to terminateand repossessand deny} further access to that intangible;

¶367

d) The licensee must not^{be able to sub-licensethe permission it obtainsunder} the agreement; and

¶368

c) The transfer must^{be on a non-exclusivebasis.}

¶369

5.47 Based on clauses 3, 5(m),^{11(m), 5(o), 8(g),11(b) and several others of the} Franchise Agreement, the^{Appellant submits that since theFranchise} Agreements entered into by it^{possess the aforesaidfeatures,the services} provided constitute a mere "license to^{use/permissive use of goods"' This has} been demonstrated In detail^{in the following sectionby referringto specific} clauses in the enclosed^agreement'

¶370

5.48 In simple terms, the^{Appellant submitsthat if Microsoft corporation,USA were} to transfer to Microsoft^{India the right to use the windows' operating system} source code and develop^{copiesthereof for sale, on an exclusive basis,within the} territory of India, the^{transaction would be regarded as a "transfer of right to use"} goods in the hands of Microsoft corporation,^{usA. on the other hand, if oneMr.} ABC were to^purchase a^{windows@ operatingsystemlicense for its personal} computer from Microsoft^{India,the transactionwould be regarded as a mere} license /^permission to^{use goods.}

¶371

Extracts from the Franchise^Agreement

¶372

5.49 The Appellant wishes to^{highlight certain clausesfrom the enclosedsample} Franchise Agreement^{demonstrating the fact that the services provided by it} constitute a mere^{permissiveuse of the System and the SUBWAY@ brand for} operating a suBWAY^{restaurant franchise,subject to several restrictionsand} conditions:

¶373

a; The Appellant^{permitsthe franchisee to access the System,including} the Operations Manual,^{subjectto restrictions, terms andconditionsof} the Franchise Agreement.^{The franchiseeiS granted a limited, non.exclusivesub-} license to use the suBWAY^{trademark in connection with the operationof the} restaurant [clause 3l;

¶374

b) The franchisee is^{obliged to use or display trademarkson materials and} StationeryonlyaspermittedbytheAppellant.Thefranchiseeisrequiredto specify at a^{prominent place in the restaurantthat it is an independent} franchised operator of^{the restaurantand a licensedus} of the SUBWAY' trademarks Iclause^5(m )] ; @

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27 ot 40

c) The Appellant has exclusive and unresti-icted right to sell food products and beverages under the SUBWAY@ trademark at any location and the Franchisee rryould not have any right to impose any conditions in this regard [clause 11(m)).

¶379

d) The term of the Franchise Agreement has been specified to be twenty years, with provisions for further renewal [clause 7];

¶380

c) The franchisee has not been conferred any territorial rights and the Appellant possesses unlimited rights to compete with the franchisee or license others to do so [clause K];

¶381

0^Prior to^opening the^restaurant, the^franchisee owner must complete a mandatory training program, follow the Training Code of Business Conduct and pass a standardized test fciause S(a)(ii)l;

¶382

s)^{The locatio'r of the SUBWAYrestaurant must be apprcved by the Appetlant} [clduse s(a)(iii)l;

¶383

h) The restaurant must be operated in accordance with the Operations Manual provided by the Appellant and all quality control standards must be followed. The franchisee must not conduct any business or sell any products from the restaurant, which are not approved by the Appellant. Procurements of food, equipment, beverages and other products and services should be made rn the manner as approved by the Appellant [clause S(b)(i)];

¶384

i) The Appellant is authorised to verify books, records and electronic data of the franchisee as part of an audit to verify the amount of sales fclause 5(h)];

¶385

j) The franchisee is required to use the name and word SUBWAY only as specified by the Appellant. The franchise owner agrees not to contest the validity or ownership of the SUBWAY^I trademark. The franchisee acknowledges that it will not acquire any ownership rights in the SUBWAY' trademark [clause 5(0];

¶386

k) Upon termination of the Franchise Agreement, the franchisee is required to change the appearance of the restaurant, stop using the System and return the Operations Manual. The franchisee owner is not allowed to engage directly or indirectly in any sandwich business within 5 kilometers of the location of any SUBWAY restaurant [clause 8(g)];

¶387

l) The franchisee's rights and privileges under the Franchise Agreement would return to the Appellant upon the franchisee surrendering, abandoning or suffering revocation if its rights and privileges [clause 11(b) and

¶388

m) The Appellant would enter into a primary lease with the landlord and a corresponding leave and license agreement with the franchise owner. In case the franchise owner is authorised to directly sign a lease with the landlord, the franchise owner would be required to get the lease terms approved from the Appellant and provide the Appellant with an assignable interest in the lease [clause^S'la)(iv)];

¶389

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¶390

28 of 40

¶391

5.50 The above referred clauses demonstrate that^{the license} to^{use the System is} not absolute and the Appellant exercises considerable control^{over the franchisee's} use oF the System and operation of the restaurant'^{Thelicense granted is non-} exclusive, for a defined^period of time^{and is subject to several restrictions and} conditions required to be met by the^franchisee.

¶392

5.51 The franchisee is required to^{use the suBWAY',trademark only as directed by} the Appellant and is not authorised^{to sub-license the same. The Appellant is} authorised to terminate the Agreement^{in case of the franchisee'sfailure to} comply with the conditions. Upon^{termination, the franchisee'srights and privileges} would return to the Appellant and the^{appearanceof the restaurant must be} changed so that it can no longer^{be identifiedas a SUBWAY restaurant.}

¶393

5.52 The franchisee neither obtains^{general or effectivecontrol over the Systemnor} does it acquire any rights in^{the system to the exclusionof the Appellant or other} licensors. The license in the^{Systemis not territorial in nature and the Appellant} has unlimited rights to compete^{with the franchlsee. The franchisee does not} possess any property rights in the system^{and is only conferredwith a limited,} representational right.

¶394

5.53 Based on the above,^{it can be concluded that the FranchiseAgreement is nothing} but a licensing arrangement,^{havingthe effect of grantingpermissive use of the} System for operating a SUBWAY^{restaurant franchise.}

¶395

Judgment of the Bombay and^{Delhi High courts in the Appellant's own case;}

¶396

5.54 The Bombay High court, in the^{Appellant's owncase} [subway^{systems India} private Limited v Union of India & ors, 2016 (8) TMI 717-Bombay HCl, has held that the Agreement entered^{into by the Appellant merely granted permissiveuse of defined} intangible rights to the franchisees.^{The relevant extracts of the judgmentare} reproduced below:

¶397

"69. We betieve that Mr. shroff^{is correct when he says that the agreement} between Subway and its^{franchisees is not asale, but is in fact a bare} permission to use. It is, therefore, subject^{onlY to service tax. In our opinion, the} fact that the agreement^{between subwayand its franchiseeis limitedto the}

¶398

precise period of time stipulated in the agreement^{is vital to subway's case.At} the end of the^period of the^{agreement,or before in case therewas anybreach} of its terms, the right of the^{franchiseeto display the mark subwayand its trade} dress, and all other^{permissions would also end...In subway'scase, there are set} terms provided by the agreement^{which have to be followed.A breach of these} would result in termination of^{the agreement. we believe that there is no} passage of anY kind of control or exclusivity^{to the franchisees.In fact,this} agreement is a classic example^{of permissive use' It can be} ng else...

¶399

ng else... a r2f rr )Jlr 1 lx

¶400

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¶401

72...The so-called 'system' is controlled by Subway and it is exclusive to Subway. At the end of the franchise term, it cannot be used. Some (though nor all) of the ingredients - breads, salad dressings and other'key,.' i1"^t are to be sourced from Subway or Subway-authorised vendors and nowhere else. This gives Subway deep and pervasive control and dominion over the franchisee's daily operations, without, at the same time, ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology...

¶402

73... Indeed, it seems to us clear that if we accept that a franchise agreement is, by definition, one that requires territorial exclusivity, then the Subway agreements are not franchise agreements at all, but purely licensing agreernetit.

¶403

74... What must be looked at is the real nature of the transaction and the actual intention of the parties. The agreement must be considered holisiicaliy, and effect must be given to the contracting parties" intentions. The label cr description of the document is irrele|tant. An agreement styled as a franchise might, on a prcper examination, turn out to be nothing more than a mere license (as in Subway's case)...

¶404

...As discussed above, we find that Subway's .francnise agreement grants to the franchisee nothing more than mere permissive use of defined intangible rights."

¶405

5.55 Further, the Delhi Hlgh Court, in the Appellant's own case [Subway Systems India Private Limited v. Government of NCT of Delhi & Ors., W.P. (C) 5340/20181 has also taken an identical view. In doing so, the High Court followed its previous decision dated 17 May 2017 in McDonalds India Private Limited v. Commissioner of Trade and Taxes, New Delhi, 2017 (5) TMI 999 - Delhi HC, which had held that the franchisee agreements entered into by the petitioners therein permitted a limited right to use the system of the petitioners to the franchisees and the intention therein was not to transfer the right to use goods.

¶406

5.56 The relevant extracts of the judgment delivered by the Delhi High Court in Subway Systems (supra) are reproduced below:

¶407

"This Court is of the opinion that it would be appropriate to follow the judgment ot 77.05.2077 because the issues are identical, however, in the event the final judgment is in any way set aside. modified or clarified by the Supreme Court in the pending proceedings before it, that decision will be binding upon the parties... It is pointed out on behalf of the petitioner that simitar judgment was delivered by the Bombay High Court [Subway Systems India Private Limited^ys, State of Maharashtra, W.P. (C) No.497/20ls decided I on 1 1. 08. 20 16.

¶408

Writ petition is accordingly disposed of in terms of the judgment dated 17.05.2017 in Writ Petition (C) No. 4453/2013 and Writ Petition (C) No. 3404/2015. "

¶409

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¶410

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¶411

5.57 The relevant extracts of the^{judgmentdeliveredin McDonalds India (supra) are} reproduced below:

¶412

"46. For a transfer of the right to use^goods to be effective,^{such transfer of right} shoutd be one that the transferee^{can exercise in exclusion of others; which is} not the case in the^present appeals^{and petitions,as the franchise agreement} only grants a non-exclusive^{right, retaining the franchisor'sright to transfer the} composite bunch of services to other^{parties, apart from it retainingownership} to the same. The ownership in^{the trade mark, logo, service marks, and brand} name is solely vested in Appellant and^{the Petitionersand has not been} transferred; as is clearly manifested in the^{variousclausesof the franchise} agreements. The Appeltant and^{the Petitioners grant a non-exclusive license to} the franchisees, which^{can be revoked upon non-complianceof the termsand} conditions as stipulated in their^{franchisearrangement.clearly, this doesnot} amount to a transfer of the^{right to use goods'}

¶413

47...ln the case of the franchise^{aqreements involvedin the presentcase, none} of the franchisees or in the case^{of the trademarklicensee(or in GSK',spetition} the trade mark licensee), are^{empoweredto safeguard violation of the mark,} through enforcement mechanismst^{such as filing suits for injunction or damages.} This underlines that the most^{impoftant attribute of ownership or transfer(even} in the most evanescent sense)^{is absent. Furthermore,by reason of section 48} of the Trade Marks Act, the^{utilizationof the mark by the franchisee/licensee} would accrue to the trade^{mark owner. Therefore, the reputation or brand} buitding which accrues on account^{of increased volumeof business becauseof} the franchise/licensing arrangement,^{continuesto be with the owner. No brand} buitding or brand benefit accrues^{or arises to the franchisee/licensee '}

¶414

From the above analysis,^{what irrefutably follows is that the franchise} agreements in the three cases^{(and trade mark licensing agreementin GSK's} petition) permit a limited right to use the composite^{system of the respective} businesses of the Appeltant^{and the Petitionersto the fra nchisors/licensee, and} the dominant intention, as^{well as the specific provisionsarisingfrom the} franchise agreements are not of a^{transfer of the right to use goods."}

¶415

5.58 The Bombay High Court has^{clearly held that the FranchiseAgreemententered} into by the Appellant is essentially^{a license since it involves a mere permissionto use} of defined intellectual^{property rights. Similarly,the Delhi Highcourt, by followingthe} decision in McDonalds India^{(supra) and recording an observationthat the facts in the} Appellant,s case were identical,^{has held that the relevant agreements merely involved} grant of a non-exclusive conditional right to^{usethe system and no transfer of right to} use goods had taken^place.

¶416

5.59 Based on this, it^{follows that the} Franchise Agreement entered lnto by the Appellant contemplate a mere^license to use the System(co pflsrng of certain

¶417

@ >:lrr/ts D)l rt

¶418

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¶419

intellectual property products) and operate a SUBWAY restaurant franchise^yJithour involving transfer of right to use any goods.

¶420

5.60 It is well-settled that when one entry/code is specific and the cther is general/ residuary, the concerned product or service should be classified in the specific entry/ code. Reliance in this regard is placed on the decisions of the Supreme Court in Moorco (India) Ltd., Madras v. Collector of Customs, Madras, 1rgg4 (74) ELT 5 (S.C.) and Speedway Rubber Co. v. Commissioner, Central Excise, Chandigarh and Ors, 2OO2 (143) ELr 8 (s.c.).

¶421

5.61 Further, a commodity cannot be classified in a residuary entry, in the presence of a specific entry. A residuary entry can be taken refuge of only in the absence of a specific entry; that is to say, the latter will always prevail over the former. Reliance in this regard is placed on the decision of the Supreme Court in Commissioner of Central Excise v. M/s Wockhardt Life Sciences Ltd, 2012 (3) TMI 40-SC.

¶422

5.62 Moreover, para 3 of the preface to the Explanatory Notes states that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

¶423

5.63 Relying on the above, the Appellant submits that the services provided by it are correctly classifiable undei'service codes 997336 (Entry 1) / 997339 (Enti-y 2), being specific entries, instead of service code 998396 (Entry 3), whtch is a generat /^{residuary'entry.}

¶424

Contrary decision of the Gujarat Advaitce Ruling Authority

¶425

5.64 The Appellant refers to a ruling issued by the Gujarat Advance Ruling Authority ("Gujarat AAR") in Re: MIs Tea Post Private Limited. 2O2l (1) TMI 424 - AAR, Gujarat, wherein the authority laid down a test to determine whether an arrangement constitutes "licensing"^gr "franchising". Briefly, the Appellant in the said case had entered into a franchise agreement whereby the Appellant therein had granted its franchisees the right to use trademark, brand name and other proprietary knowledge, against a periodic royalty calculated as a percentage of the sales made by the franchisee. The question before the Gujarat AAR was whether the services would be classified under service code 997336 (Entry 1) or 998396 (Entry 3). The Gujarat AAR ruled that the services would be classified under service code 998396 (Entry 3).

¶426

Re.' Iesf laid down by the Gujarat AAR has no universal applicability

¶427

5.65 The Appellant submits, at the outset, that the Gujarat AAR has not considered the fact that the service code 997336 (Entry 1) does not cover licensing services simpliciter but covers licensing services in the context of franch ees, The test laid

¶428

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¶429

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¶430

down by the Gujarat AAR compares "licensing" simpliciter^{and "franchising".The} Appellant submits that the aforesaid test is not^relevant to^{the present} discussion, because the term "licensing"^{as per service code997336 (Entry1)} needs to be understood as^{a "permissionto use certain intellectual property rights} to operate franchisees"^{and not a permissionto generallyuse any goods or} servtces.

¶431

5.66 Slnce the themes that^{form the subject matter of servicecodes997336} (Entry 1)/997339 (Entry 2) and 998396^{(Entry 3) prima facieoverlap,a} straitjacket test as laid^{down by the Gujarat AARcannot be made appllcable.} Instead, a harmonious^{reconciliationof the services governedby the saidcodes} should be attempted^{based on whetherthe given agreement contemplates} transfer of right to use^{or a mere licenseto use.}

¶432

5.67 The Appellant submits^{that certain importantpractical aspects apply equally to} licensing and franchising^{arrangementsand as such,the test laid downby the} Gujarat AAR cannot be^{madeapplicablein everyscenario.This hasbeen} demonstrated in a tabular^formbelow:

¶433

Sr. Test laid down^bY the^Gujarat NO. AAR in para 14 of the^ruling Licensing refers to^an arrangement^between 1 licensor and licensee^where latter partY would acquire the right to use Products and goods where^the ownership remains^{with the} licensor. However, Franchising refers to^an arrangement^between franchiser and^franchisee where the latter^{will enjoY} the ownershi7 of a business on^{behalf of the} franchiser in lieu^{of a fee} where the^processesare closely controlled^bY franchisor.^Therefore, it is^{generallY seen that}

¶434

Appellant's remarks

¶435

General remark: The Gujarat AAR^{has failed to} consider that service^code 997336⁽ EntrY 1)^includes licensing services^inthe context of franchisees^{and not} licensing services simpliciter.

¶436

i) OwnershiP enjoyed^bY franchisee is not "on^behalf of franchisor.^{Fra nchisees} can be oPerated^{even without} a profit-sharing^{arra ngement} i.e. without sharing ownershiP^{(for examPle,the} Appet^t a nt's Prese^{n t case} ) ;

¶437

ii) Processes^can be a closely controlledⁱⁿ licensing arra ngement a lso (for example, the^APP nt's

¶438

a
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¶439

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¶440

licensing is for prod ucts and goods whereas the franchising model is used more in service providing industry

¶441

present case where the Franchisees are expected to meet minimum quality and safety standards);

¶442

iii) Franchising a lso usually involves licensing of a right to use intellectual property (for example, the Appellant's present case).

¶443

an Franchising is agreement between two 2 parties where the, one party (henceforth refe rred as the franchisor), permits another party (henceforth referred as the fra nch isee ) to use its brand name or business model for a fee in order to conduct the business as an independent branch of the franchisor. However, Licensing is an agreement between two pa rties where the, one pa rty (henceforth referred to as the Licensor), se lls another pa rty (henceforth referred to as the Licensee)the rights to use its inte llectu a I property or ma n ufactu re the licensor's products in excha nge of roya lty.

¶444

w ith Licensing dea ls Products & Goods

¶445

¶446

However, Fra nch ising is mostly related to service businesses like food cha ins, Service Centres of automobiles, etc

¶447

The licensee is governed by the Iicensor's terms of use as prescribed in the licensing agreement for the licensed product. Licensor, however, has no autonomy over the business of the licensor Fra nch isor exercises enormous control

¶448

1. It appears that the has

¶449

Gujarat AAR agreed that fra nch is in g and licensing can both involve another

¶450

perm itting use one's intellectua I property:

¶451

1. Licensing a rrangements are not restricted to the manuFacturing sector and are equally prevalent in the service sector (for example, the Appella nt's present case).

¶452

i) Licensing

¶453

a rra ngements are

¶454

restricted to goods and are equally prevalent in the service sector;

¶455

iir Similarly, franchising

¶456

arra ngements are not restricted to service sector and are equally p reva le nt for goods (for example,the Appellant's pr case

¶457

There can be no general rule and the level of autonomy can differ on a case to-case basis.

¶458

o n,)^l</sup>

¶459

34 o{ 40

¶460

over the business of the franchisee in terms of quality of service p rov id ed, ma rketing & selling strategies, etc

¶461

Licensing is^{governedbY a} licensing agreement, 6 which involves a one-time transfer of^{proPerty or} rights for a fee.^{There is} no technical suPPort^or assistance^{providedbY the} licensor in most^cases. While, Franchising^is governed by an ela borate agreement sPecking^the responsibilities^&dutiesof both the^{parties involved.} The fra nch isor assistsⁱⁿ setting up the^service provider with adeq uate skill & knowledge^to emanate its^{brand to the} customers

¶462

In^- frahch ising,^corirPlete training and^{suPPort are} B provided by the fra^{n ch iso r} to franchisee which^is absent in licensing

¶463

9 The licensor has^controlon the use of^{intellectua I} property by the licensee but has no control^overthe licensee's business ' However, the^{fra nch isor} exerts considerable^control over franch isee's^business and^process.

¶464

i) Licensing ag^ree ment^may provide for a Periodi license fee as opposed^to one-time fee.^Licensorma a lso agree to provid tech nica^I support o assistance to the llcense (for examPle, the APPellant' present case).

¶465

ii) The features^offranchisee

¶466

en u merated here^{are also} equa lly aPPlicable^for licensing arrangementsⁱⁿ the context of^{fra nch ises.}

¶467

Licensor maY also^{agree to} Pro complete training^and support to the^{licensee (for} examPle, the^{APPella nt's} present case ).

¶468

i) The features^of franchisees^enumerated here are also^{eq ua llY} applicable for^licensing the arrangements in context of franchises; ii) Licensor may also exercise control^{over the} licensee's business,^bY prescribing adherence^to minimum^qualitYand safety standards^(for examPle,^{the APPellant's} present case) ' iii) Franchisees^are also licensed users of intellectual ProPerty rig hts of the^franchise that theY^oPerate(for examPle, the^APPellant's resent case

¶469

by the Gujarat^{AAR should} h ranchise Agreement. 1)ltr tl,,lB^a

¶470

5.68 The Appellant^{therefore submits that the text laiddown} not be applied^{and preference shouldbe glvento the terms of}

¶471

35 of⁴⁰

¶472

Re: The ruling of the Gujarat AAR cannot he regarded as a precedent on contentiors /, grounds which have passed sub-silentio

¶473

5.69 Without prejudice to the above, it is submitted that the Gujarat AAR has not considered inter alia, the following contentions raised by the Appellant in this application:

¶474

a) Distinction between a mere "license to use / permissive use,, and^,,transfer cf right to use";

¶475

h) Existence of licensing services in franchisee modeis;

¶476

c) specific entries [service codes 997336 (Entry 1) / 991339 (Entry 2)] vs. Generar r residuary,:ntry [service code 99B396 (Entry 3)].

¶477

5.70 Accordingly, the decision of the Gujarat AAR cannot be regarded as a precedent on th€ aforesaid contentions / grounds which have passed sub-silentio. fhe principle of subsilentio and its application in the present case is explained below.

¶478

5.71 In certain matters, more than one point of law mav be involved In a case. If the court has decided a case on only one point either because other points were not argued or because of inadvertence or conscious negligence, such other points are said to pass sub-silentio and the decision cannot be applied as a precedent on those other points. This princlple is accepted by courts when an earlier judgment on which reliance is sought to be placed had been passed without making a particular point of the matter in question in the judgment. The Appellant refers to the following authorities in support of the above:

¶479

a) salmond on lurisprudence, Twelfth Edition. by p F Fitzgeratd at pages i53..r 54 (referred L'y the Hon'bk supreme court in Municipal Corpn. of Dethi v. Gurnam Maur [(1989) 1 SCC 101])

¶480

"A decision passes sub silentiot in the technical sense that has come to be attached to that phrase, when the particular point of taw involved in the decision is not perceived by the court or present to its mind. The court may consciously decide in favour of one party because of point A, which it considers and pronounces upon. It may be shown, however, that togica y the court should not have decided in favour of the particular party unless it also riecided point B in his favour; but point B was not argued or considered by the court. In such circumstances, although point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on point B. Point B is said to pass sub sitentio.

¶481

A good illustration is Gerard v. worth of paris, Ltd rhere, a discharged employee: of a company, who had obtalned damages against the company for wrongful dismissal, applied for a garnishee order on a bank account standing in the name of the liquidator of the company. The onty point argued was on-the question of the priority of the craimant's debt, and, on this argument being heard, the Court of Appeal granted the order. No consideration was given to the quest:ion whether a garnishee order courd property be made on an account standing in the name of the tiquidator. When, therefore, this very point was argued irt a subsequent case before the Court of Appeal (I), the court held itself not bound by its previous decision. Sir Witfrid Greene, MR., said that he could not help thinking that the point now raised had been de erately passed

¶482

n\if"

¶483

36 of 40

¶484

sub silentio by counsel in order that the^point of substance might be decided He went on to say that the^point had to be decided by^the earlier^court before it could make the order which it did;^{nevertheless,, since it was} decided without argument, without reference to^{the crucial words of the} rule, and without any citation of authority^", it^{was not binding and wouldnot} he followed.

¶485

The rule that a^precedent sub^{sitentio is not authoritative goes back at least} to 1667 (in), when counsel said:^{'An hundredprecedent sub silentio are not} material"; and Twisden, J., agreed:^{'Precedentssub silentio and without} argument are of no moment"'^{This rulehas ever since been followed'"}

¶486

b) Tika Ram v. State of U.P. l(2o]g)^{10 SCC 6891}

¶487

" 1O4. We do not think^{that the taw laid down in these cases wouldapplyto} the present situation. In^{all these cases,it has been basically held that a} supreme court decision^{does not becomea precedentunlessa questionis} directly raised and considered^{therein, so also it does not become a law} declared unless the^{question is actuatly decidedupon'We need not take} stock of all these cases^{and we indeed haveno quarrelwith the propositions} settled therein."

¶488

c) Arnit Das v. State^{of Bihar} [(2000)^{5 SCC 4BB]}

¶489

"20. A decision not expressed, not^{accompaniedby reasons and not proceeding} on a conscious consideration^{of an issue cannot be deemed to be a law} declaredtohaveabindingeffectasiscontemplatedbyArticle14]' That which has escaped^{in the judgment is not the ratio decidendi.} This is the rule of sub^{silentio, inthe technical sense when a} particular point of law was not^{consciously determined"'}

¶490

d) State of UP v. )eet^{S. Bisht} l(2OO7)^{6 SCC 5861}

¶491

"18. No doubt in the aforesaid decision^{various directions have been givenby} this Court but in our^{opinion thatwasdone withoutany discussionas to} whether such directions^{can validly be givenby the court at all. The decision} therefore^passed sub^silentio."

¶492

5.-/2 Relyingontheabove,theAppellantsubmitsthattherulingoftheGujaratAAR cannot be considered^{to be a precedentor authority as regardsthose contentions/} grounds which the Gujarat AAR^{hasnot analysedor provided any find inglobservationon} (asmentionedabove)'Inanyevent,intermsofsectionl03oftheCGSTAct,the rullngoftheGujaratAARisblndingonlyonthepartiesinvolvedtherein.

¶493

5.73 Tilldateoffilingofthepresentappeal,copyoftheorderwasnotuploadedintheGST portaldespiteremindersfromtheAppellant.ThePetitionerwasnotfurnishedwithany certiFied copy of the^{Orderpassedby the Ld' Advance RulingAuthority'}

¶494

5.74 It is submitted^{that the Hon'ble SupremeCourt (in Suo Motu Writ Petition(C) No. 3 of} 2020) vide order^{dated LO.OL.2O22has orderedthat the period f} 15.03.2021 till 37 of 40 a rlt\ g

¶495

28.O2.2O22 will be excluded from the period of iimitation as may be prescribeo under any general or speciFic laws in respect of all judicial and quasi-judicial proceedings. Thi. jLidgment applies to all Iitigants in the country f;ling appeals in all quasi-judlcial proceedings within the period of limitation prescribed under a general law of limitation or under ony special law (both Central and/or State) due to outbreak of COVID-19 pandemic.

¶496

O. Beesrd_Sf fgs(>nal Hearing:

¶497

6.1 Personal Hearing was held in the light of directions of Hon'ble High Court. 6.1.1 As per the records available, an enquirv was initiated by the DGGl-Guruqranr unit against the Appellant and DRC-O1A bearing CBIC DIN 202307ADGEE000000ACA dated t7.o7.2023 issued for Tax amount a 499978567 /- for the period July-2017 to lvlarch-2o22 due to m is-classification of services provided and received, short payment of IGST on import of services under RCM and nonpayment of GST on account of not raising the invoices in respect of services provided to distinct entities without consideration for supply of Trademark/license fees. In reply to the DRC-o1A, the Appellant submitted that the Liability is not acceptable because their submissions have not been considered and GST on the said transactions has already been discharged. As connected AAAR was pending on the issue and writ petition was coming for hearing on O3.O7.2023, they requested for a virtual hearing on O9.07.2023. The Appellant, received letter bearing cBIc DIN 202308ADGEE000210645 dated 03.08.2023 for Personal Hearing before issuance of SCN on 16.08.2023.

¶498

6.1.2 The Appellant filed CWP No. 23895 of 2023 in the High Court of punjab & Haryana for directions to dispose the Appeal against the advance ruling No. HR/ARL/o2/2o2r-22 dated 08.t2.zozt in time bound manner as the same is pending and it has been directed by the Hon'ble High court vide order dated 19.10.2023 to complete the proceedings within 6 weeks and that the notice of hearing be giverr in i0 days advance to the Appellant.

¶499

6.2 The Appellant was offered the opportunity of personal Hearing on 27.1o.2023 vide letter dated 20.7o.2023 and the Appellant vide their e-Mail dated 27.to.202.3 submitted that they have no objection for appearing on 27.10.2o23 as per the directions of the Hon'ble Punjab & Haryana High court's order dated lg.lo.2023.

¶500

6.4 sh. Abhsihek A. Rastogi & sh. pratyushprava Saha, Advocates appeared on behaif of the 'Appellant' for personal hearing on 27.1o.2o23 and reiterated the written submissions made earlier. They also submitted the paper book of case laws relied by them in their favour during the hearing proceedings.

¶501

7. Discus sions arrd Fi d in os:

¶502

7.1 We have gone through the records of the case and consid d the submissions

¶503

r0Yf'r

¶504

38 of 40

¶505

made by the Appellant in the grounds of appeal as well as at^{the time} of^personal hea rin^g. 7.2 Before going into the merits of the^{case, it is noteworthyto mention that} perusal of records oF the case reveal that the^{pre-requisiteoF payment of fee for filing} appeal as^per section 1oo^{(3) read withRule 106 (1) of csGT Act, 2017has not been} fulfilled. The same are reproduced^{below for ready reference:}

¶506

section 7oo^{(3): Everyappeal under this sectionshall be in such form,} accompanied by such^{fee and verified in such manneras may be prescribed.} Rule 7O6 (7) An appeal against^{the advanceruting issued undersub-section} (6) of section 98 shalt be made^{by an appticant on the common portal in FoRM} GST ARA-O2 and shall^{be accompaniedby a fee of ten thousand rupees to be} deposited in the manner^{specifiedin section 49.}

¶507

ThecorrespondingSectionlo0(3)andRule106(1)ofHGSTAct,2017also have not been adhered^{to by the appellant.}

¶508

7.3 After the concurrent reading^{of both the provisions,it transpiresthat the} Appellant was mandated^{to deposit a total of ? 20,OOO/-as fee ({ 10,000/- CGST and {} 10,000/- HGST) as a^{mandatory Statutory preconditionfor filing appealagainst the} order of the Authority for^{AdvanceRuling, Haryana. However, it is foundthat vide} challan No. 22010600033348^{dated 1ll-ot-2o22,the Appellanthas paid only {} 1O,O0O/- as tax (t 5000/-^{CGST and ? 5000/- as HGST),not the requiredfee' since} the appeal of the^{Appellant is incomplete for wantof deposition of requisite fee (which} is to be deposited in the^{manner specifiedin section 49), the appealof the Appellant is} not admitted.

¶509

ORDER

¶510

In view of the above^{discussions and findings,we are of the view that the} application of the appellant,^{being incomplete for wantof deposition of requisite fee as} mandated under the GST^{law, deservesto be rejected. Therefore,the appealfiled by} M/s. Subway systems India^{Private Limited (NowEversubIndia Pvt. Ltd.,) Gurugram-} l22OO2, Haryana, is not^admitted '

¶511

TheappealfiledbyM/sSubwaySystemslndiaPrivateLimited(NowEversub India Pvt. Ltd.,) Gurug^{ram-722}O2,Haryana,is dlsposed in above terms'}

¶512

39 of 40

¶513

Coov to (Regd ADlSoeed Post/Email):-

¶514

M/s. Subway Systems India Private Limited.

¶515

(Now Eversub India Pvt. Ltd.)

¶516

Unit No. 2O-24, 3rd Floor, MGF Metropolis,

¶517

lvlc Road, Sector-28, G urug ra m - 122002, Haryana

¶518

GSTIN : 06AAGCS5808MIZZ

¶519

Copy for information and necessary action to: -

¶520

The Member, GS;T, CBIC, CBIC, North Block, Block, Nerv Dejhi-11tj001

¶521

1 The Member, GS;T, CBIC, CBIC, North Block, Block, Nerv Dejhi-11tj001 2 The Special Secretary, Goods and Services Tax (:ouncil, 5th [.loor, Tourer-Ii, Jecvan Bharti Buiiding, Connaught Place, New Delhi- 110001

¶522