Dismissed

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

GST AAAR23 Nov 2023HAAAR/2021-22/ 04

Case brief

AI extract

What is this about?

The Haryana Appellate Authority for Advance Ruling dismissed an appeal filed by M/s. Subway Systems India Private Limited against an Advance Ruling that classified licensing services at 18% GST. The appeal was inadmissible because the Appellant failed to pay the mandatory appeal fee of Rs. 20,000 as required by the GST Act, despite having paid only Rs. 10,000.

What did the court decide?

The appeal filed by the Appellant is not admitted and is disposed of in above terms.

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

¶1

HARYANA APPELLATE AUTH ORITY FOR ADVANCE RULING

¶2

(Constituted under Section 99 of the Haryana Goods and Services Tax Act, 2Ol7 read with Central Goods and Service Tax Act,2Ol7)

¶3

BEFORE THE BENCH OF

¶4

Sh. Upender Gupta, IRS (C&IT) Sh. Ashok Kumar Meena, IAS Chief Commissioner Commissioner Central Goods and Service Tax Zone Excise& Taxation Depa rtment Panchkula Ha ryana Member, Appellate Authority for Member, Appellate Authority for Advance Ruling, Ha ryana Advance Ruling, Haryana

¶5

HAAAR Order-In-Appeal No.:-HAAAR/2O21-22lO4

¶6

Date: 23.LL,2023

¶7

(Passed by Haryana Appellate Authority for Advance Ruling under Section 101(1) of the Haryana Goods and Service Tax Act, 2017 read with Central Goods and Service Tax Act, 2017)

¶8

Preamble

¶9

1 In terms of Section 7O2 of the Central Goods & Service Tax, Act 2077 /Haryana Goods & Service Tax Act 2017 ('the Act', in Short), this Order may be amended by the Appellate Authority, so as to rectify any error apparent on the face of the record, if such error is noticed by the Appellate Authority on its own accord, or is brought to its notice by the concerned officer, the^{jurisdictional} officer or the Appellant within a^period of six months from the date of the Order.

¶10

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

¶11

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

¶12

(b) on the concerned officer or the jurisdictional officer in respect of the

¶13

Appellant.

¶14

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 Advance^Ruling have cha nged.

¶15

4 In terms of Section 104(1) of the Act, where the Appellate^{Authorityfinds} that advance ruling pronounced by it under sub-section⁽¹⁾ of^Section101 has been obtained by the Appellant by fraud or suppression^{of materialfacts} or m isre p resentatio n 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 apply to the Appellant as if such advance^{rulinghas never been} made

_l 2-3 Ir ,7

Lof28

DETAILS OF THE APPELLANT:

¶20

	M/s. Subway SystemsIndia^{PrivateLimited,}
Nameand Addressofthe Appellant	(NowEversubIndiaPvt.Ltd.) UnitNo.20-24, 3rdFloor,^{MGFMetropolis,MG} Road,Sector-28,Gurugra^m-122Oo2,^Haryana
GSTIN/U5er idofthe Appellant	O6AAGCS5SOBIq1ZZ
Advance Ruling Order againstwhichappealis filed	HRIARL/07/2027-22 datedtO.O1.2022 (receivedbythe'Appellant'on 09.02.2022)
DateofFillng of ,\ppeal	03.o3.2022
RepresentedBy	Sh.AbhishekA.Rastogi&Sh.^{PratyushpravaSaha,} Advocates
Other Office^(Jurisdiction -Centre)	CGSTCommissionerate, Gurugram
AdministrativeOFfice (Jurlsdiction-State)	DeputyExcise&TaxationCommissioner^(ST), Gurugram (East),Ward-5
Whether paymentoffees forfilingappealis discharged.Ifyes,the amountand ChallanNo.	JfrtrE'frN No,Paid?10,000/-undertheHeadof Tqx IGST videCIN No. HDFC22020600173423 dated

¶21

Vtv %

¶22

2of28

¶23

Gtrder under Section 1O1 of Central^{Goodsand Service Tax Act, 2Ol7} / Haryana Goods and Service Tax Act, 2017

¶24

The present appeal has been filed^{by lY/s. Subwaysystems India Private Limited} (Now Eversub India Pvt. Ltd.,)^(hereinafter referred to^as 'the^{Appellant')under} section 100 (1) of central Goods^{and service Tax Act,2077} /Haryana^Goodsand Service Tax Act, 2017^{(hereinafter referred to as "the Act") against the AdvanceRuling} No. HR/ARL/07 /2O2t-22 dated 10.01.2022.

¶25

A copy of order of the Advance^{Ruling Authority (hereinafter referred to as} 'AAR') issued on 10.01.2022 was received by the^'Appellant' on^{09.O2.2O22 and the} appeal has been filed on 03.03.2022^{which is within timein terms of section 100(2) of} the Act.

¶26

1. BRIEF FACT OF THE CASE:

¶27

1.1 M/s Subway Systems India Private Limited, Gurugram^{(Now Eversub India Pvt.} Ltd.,) a Company registered under HGST^{Act, 2Ol7 in the State of Haryanavide} registration number 06AAGCS5808MIZZ and having its^{business situated at Unit No} 20-24,3rd floor, MGF Metropolis, MG Road, Sector^{28, Gurugram l22OO2,Haryana.}

¶28

1,2 This appeal is^preferred by the Appellant,^{who is the authorizedlicensee in India} of a "system,, developed for establishing and^{operating quick servicesrestaurant} featuring sandwiches and salads.

¶29

1.3 The system preferred above is an intellectual^{property developed by 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 beenlicensed to} establish, operate and franchisee others to operate SUBWAY^{restaurants in India usinq} the System.

¶30

L.4 The aforesaid license has been^granted to the^{Appellant by way of a Master} License Agreement dated October 2OO2^('MLA') by^{subway International 8.V.,} Netherlands. The said MLA also authorized the Appellant to further^{license the System} and the brand name 'subway' to franchisees in India. The relevant^{extracts of the MLA} are reproduced below:

¶31

"1.0O The Company hereby grants to Master Licensee the right to franchise itself and others to establish and operate Sandwich Shops in the^{Territory,Master} Licensee shall use the System and the Proprietary Marks solely in^connection with the development and franchising of Sandwich Shops^pursuant to^this Bl,f /lr Agreement. The Company grants to Master Licensee the^license to^{use all of the} )<sup>Pl Company's rights in and to the System and the Proprietary^{Marks,and to license} W Jllu the System and the Proprietary Marks to Franchisees in^the Territory......"

¶32

1.5 The Appellant has also been^granted the^right to^{use and sub-license othersto} use the system and trademark in^{India by way of TrademarkLicense Agreement}

¶33

3of2a

¶34

("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 reproduced below:

¶35

"WHEREAS t,he parties wish to grant SSIPL the right to use the Trademarks in India under the terms and conditions set forth in this Agreement.

¶36

(...)

¶37

GRANT OF LICENSE

¶38

SIP, through a series of license aEreements described above, has granted SSIPL a non- exclusive right to use and sub-license others to use the System, the Systenr 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"

¶39

1.6 The TLA makes it clear that only a limited license and right to use the System and Trademarks, and to sub-license 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:

¶40

"3. TRADEMARK RIGHTS AND OWNERSHIP

¶41

SSIPL agrees and acknowledge that;

¶42

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.

¶43

b) except as provided in this Agreement, SSIPL acquires no right, title or interest in or to antl of the System IP and the Trademarks;

¶44

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

¶45

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 any other asset^pertaining to the franchise.

¶46

1.8 In consideration of the licensing services rendered by SIBV to SSIPL, classifiable under CTH 9973, the Appellant is required to remit 33o/o (Thirty-Three Percent) of all fees and royalties collected from franchisees in India, to SIBV.

¶47

1.9 As a Master Licensee in India, for granting license to the franchisees for the right to use the System, the Appellant inter alia, charges; royalty calculated at a specified percentage of the gross sales made from the restaurant operated bv the franchisee

¶48

@ r,t't

¶49

4of28

¶50

vide a Franchis e Aoreement. In the^{agreement,royaltyhas been statedto be payable} by the franchisee on a^periodic basis, at the^{rate of 8oloof grosssales.}

¶51

1.10 Such permissive use of IPR constituted^{a supplyof taxable servicesand fell} within the fold of taxability by virtue^oF Section^{7 of the CentralGoodsand Services Tax} Act, 2017^("CGST Act") read with Entry 5(c) and^{Entry 5(f) of ScheduleII to the CGST} Act. Relevant extract of Entry SC of Schedule II^{of the CGST Act is as under:}

¶52

Supply of services

¶53

The following shall be treated as supply of services,^{namely: -}

¶54

¶55

(f) transfer of right to use any goods for any^{purpose (whether} or^{not for} specified period) for cush, deferred^{paYmentor other valuable consideration-}

¶56

1.11 The Appellant is liable to^pay Integrate^{Tax ("IGST") on import of services from} SIBV, under reverse charge in terms of^{Section 5(3) of the Inteqrated Goods and} Services Tax Act^("IGST Act") read with Sl.^No. 1of^{Notification No. lO/2077-} Integrated Tax (Rate) dated 28.06.2017^{("Reverse Charge Notification").}

¶57

Classification of services and applicable^{GST rate}

¶58

SERVICE CODE ADOPTED BY THE APPELLANT:

¶59

1.12 The Appellant classified the licensing services^{receivedfrom SIBV underMSA} read with the TSA under service code 997336^{(hereinafter referred to as "Entry 1"),} The classification is based on the extant Scheme of Classification^{of Servicesannexed} to Notification No. 8/2017-Integ rated Tax^(Rate) dated 28^{June 2017 (the "Rate} Notification") for the^purpose of^payment under^{reverse-charge.}

¶60

1.13 The relevant extract of the scheme is reproduced^{below (showingthe service} code adopted by the Applicant):

¶61

Chapter, Section,	Service code(Tariff)	Service Description
HeadingorGroup
Chapter99		AllServices
Section7		FinanciaIandrelated realestateservices; SCTVICCS; andrenta^I
		and leasingservices
Heading9973		Leasingorrentalservices without operator
Group 99733		Licensingservicesfortherightto

a L3lnlL)

5of28

	useintellectualpropert similarproducts	yand
997336	Licensing servicesfor the	right
	to usetrademarks	and
	franchises,	l

¶66

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.

¶67

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

¶68

Chapter, Section,	Service code(Tariff)	Service Description
HeadingorGroup
Chapter99		All Services
Section7		Financialandrelated realestateservices; andleasing services servlces; andrentaI
Heading9973		Leasingorrentalservices without operator
Group99733		Licensingservicesfortherightto useintellectualpropertyand similarproducts
	997339	Licensing servicesfor theright
1.15 As perNotificati ('ServiceRateNotificati l2o/oupto30Sept.emb below:	onNo.8/2017-Integra on), boththeaforesaid er 2O21.The relevant	to use otherintellectual propertyproductsandother resources nowhereelse classified. tedTax(Rate) dated28June2 service codescarriedaCGSTrat extractof theNotificationis^provi
Chapter,Sectionor De	scriptionofService	Rate Condition
Heading		(Percent)
Heading 9973 (1)	Temporaryorperman	ent transfer 72
(Leasing orrental or	permittingtheuseore	njoymentof

¶69

1.15 As per Notification No. 8/2017-Integ rated Tax (Rate) dated 28 June 2017 ('Service Rate Notification), both the aforesaid service codes carried a CGST rate of l2o/o up to 30 Sept.ember 2O21. The relevant extract of the Notification is^provided below:

¶70

-Nh^q'"

¶71

6of28

¶72

servrce without Intellectual Property (IP) rightⁱⁿ operator) respect of goods other than Information Technology Software

¶73

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

¶74

1.16 Vide Notification No. 06/2021-Integ rated^{Tax (Rate)dated 30 september 2021} (the "Amending Notification"), Government has elfectuated certain changes^{in the} Service Rate Notification. By virtue of^{the amendingNotification, Entry 17(i) has been} omitted from the Service Rate Notiflcation with effect^{from1.10.2021.Asa} consequence, Entry 17(i) ceases to exist with^{effect from1 october2021.}

¶75

7.17 A tabular summary of the legal^{position prior} to^{1 october 2o2land the position} pursuant to the amending Notification is set out below:

¶76

TaxingEntry	Ill 30.09.2021(Before operationofAmending Notification)	01.10.2021 operationof Notification Post (After Amending )	ApplicableTax Rate
Entry17(i)	Temporaryorpermanent transferor^permittingthe use ofenjoymentof IntellectualProperty(IP) rightinrespectofgoods otherthanInformation Technologysoftware	Entryomitted,ceases toexist	t2o/o
Entry17(ii)	Temporaryor^permanent transferorpermittingthe use ofenjoymentof IntellectualProperty(IP) right inrespectof InformationTechnology software	Temporary or permanenttransfer or permittingtheuseof enjoyment of Intellectual Property(IP)right	18^o/o

¶77

1.18 It is pertinent to note that Entry No. 17(i) was a specific^{entry dealing with} licensing of Intellectual Property (IP) right in respect of Subway^{Systemand the} Subway Trademark. Post amendment, vide the Amending^{Notification,Entry No. 17(i)} ceases to exist and the only specific entry that deals with^{IP rights is Entry No. 17(iii)} read with entry No. 243 of Notification No. 1/2017-i^{nteg ratedTax (Rate),dated} 28.06.2017 (the "Goods Rate Notification"),^{which exclusively dealswith Intellectual} Property (IP) rights. Relevant extracts of the said entries^{are as under:}

xl ,rl 9

@ )Bl'r

7 of 28

Entry No.17(iii) of Service Rate Notification

¶82

(i.e. Notification No. 8/2017-IT(Rate) dated 28 June 2017)

¶83

sl.	Chapter,	Sectionor	DescriptionofService	Rate(percent)	Condition
No.	Heading
(1)	(2)		(3)	(4)	(s)
t7	Headi	ng 9973	(iii)Transfer oftheright	Samerateof
	(Leasing	orrental	touse anygoodsfor	integratedtax
	service	s,withor	anypurpose(whether or	asonsupply of
	withouto	perator)	not for aspecified	like goods
			period) for cash,	involving
			deferredpaymentor	transferoftitle
			other valuable consideration	ingoods

¶84

Entry No. 243 of Goods Rate Notification

¶85

Ii.e.^{Notification No. 1/2017-IT(Rate)dated28 June 2017]}

¶86

Sl.No.	Chapter/Heading/Sub-	DescriptionofGoods
	heading/Tariffitem
(1)		(3)
243	AnyChapter	PermanenttransferofIntellectual
		Property(IP) right inrespectof^goods
		otherthanInformationTechnology
		software

¶87

1.19 It appears that the Amendment Notification has been issued^{withoutsanctionof} the GST Council as mandated under Article 279A of the Constitution and^accordingly, such amendment is arbitrary. The Appellant understands that this forum may^{not have} jurisdiction to decide on constitutional matters. However, the unconstitutiona lity of government action may be recorded by way of absence of minutes of meeting of the 45th GST Council Meeting. in public domain,^pursuant to which the Amending Notification came to be issued. It is also evident from the^press release of the 45th. GST Council meeting, that there is nothing to suggest that amendment of^{the ratehas} been recommended by the GST Council vis-a-vis licensing services^{in respectof} Quick Service Restaurants, as the Amending Notification^purports.

¶88

1.20 The Appellant has therefore^preferred this application to ascertain^whetherwith effect from 1 October 2021, licensing services received by it from S ,^{underthe MLA}

¶89

8of28

¶90

¶91

and the TLA will be taxable at^18o/o under^{Entry17(ii) or continue to be taxable at l2o/o} under Entry 17(iii) of the Service Rate^{Notification, with effect from 1st October 2021.}

¶92

STATEMENT CONTAINING THE^APPLICA NT'S^{INTERPRETATION OFLAW} AND/OR FACTS AS THE CASE IYAY BE ]N RESP CT OF THE AFORESAID OU ESTION(S)

¶93

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

¶94

Services received under codes 997336/99 39 were taxable at 72o/o DTIor to7 October 2027

¶95

7.21 From 01.07.2017 till 30.09.2O2L lax rate covering^{royaltypaymentsin respect} of licensing of Intellectual Property Rights^{("IPR") was determinable at 12olo under} Entry 17(i) oF the Service Rate Notification which covers temporary or^permanent transfer or permitting the use or enjoyment of Intellectual^{Property ("IP") in respectof} "goods" other than Information Technology software^(CTH 9973).

¶96

7.22 It is well settled that intellectual^property rights are considered^{as "goods" for} the purpose of tax legislations. Rellance in this regard^{is placedon the decisionof the} Supreme Court in Vikas Sales Corporation vs. Commissioner of Commercial^Taxes, [1996]^{102 STC 106 (SC) and Tata ConsultancyServices vs. Stafe of Andhra Pradesh,} (2oo4l 137 STC 620 (SC).

¶97

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

¶98

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

¶99

b) Temporary transfer or^permitting the use or enjoyment of any^intellectual property right [Para 5(c)]:

¶100

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 IPara^5(f)]

¶101

1.24 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.

¶102

1.25 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 template a

¶103

3lrrl>) @ rflt^t

¶104

9 of 28

¶105

permissive use of the underlying IP and in that sense. confer a very limited and conditional right.

¶106

1.26 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, which covers licensing to third parties.

¶107

1.27 By way of the Master License Agreement dated 1 October 2002^("N4LA') and the Trademark License Agreement dated 18 November 2019^("TLA'), the Appellant has been g ra nted/assig n ed the right the license to sub-license use of the System^(including the brand name, trademarks, proprietary and confidential information) for setting up and operating a SUBWAY restaurant franchise in the Indian territory. The said license or permission is a very limited right and subject to various conditions and restrictions.

¶108

1.28 As per the MLA and TLA, the Appellant enjoys only the right to sub-license^the "System" and the 'SUBWAY@ trademark to franchisees in the territory for limited permissive use to operate respective sandwich restaurants. It is well-settled that a person cannot transfer a better title than he himself has (as enshrined ln the Latin maxim nemo dat quod non habet).

¶109

Accordingly, the question of the Appellant transferring such right to use to franchisees does not arise.

¶110

1.29 The Bombay High Court, in the Appellant's own case examined franchise agreements of the Appellant [Subway Systems Indla Private Limited^v Union^{of India&} Ors, 2016 (8) TMI 717-Bombay HCl. The Hon'ble Bombay High Court has held that the franchisee Agreement entered into by the Appellant merely^{granted permissive} use of defined intangible rights to the franchisees. The relevant extracts of the^judgment are reproduced below:-

¶111

"69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a^bare permission to use. It is, therefore, subject only to service tax. In our opinion, the iact that the agreement between Subway and its franchisee is limited to the 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 there was any breach of its terms, the right of the franchisee to display the mark 'Subway' and its trade dress, and all other^permissions would also end... In Subway's case,^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 nothing else....

¶112

72... The sa-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 not all) of the inq redients- breads, salad dressings and other ey' items are to be

¶113

¶114

10 of 28

¶115

sourced from subway or subway-authorised^{vendorsand nowhereelse. This} gives Subway deep and pervasive control and dominion^{over the franchisee's} daily operations, without, al the same time,^{ceding to the franchiseethe} slightest hint or latitude in what it^{may do with the permitted marks and} technology. . .

¶116

73... Indeed, it seems to us clear that if we accept that^{a franchise agreement} is, by definition, one that requires territorial^exclusivity, then^{tire Subway}

¶117

agreements are not franc/rise agreements at all, but^{purely licensing} agreement.

¶118

74... What must be looked at is the real nature of tire^{transaction and the actual} intention of tire parties. Tire agreement must be considered^{holistically, and} effect must be given to tire contracting^{parties'intentions.Tire label or} description of tire document is irrelevant. An agreement^{styled as a franchise} might, on a^proper examination, turn out to be^{nothing more than a mere} license (as in Subway's case)...

¶119

As discussed above, we find that Subway's franchise agreement^{grants to tire} franchisee nothing more than mere permissive use of defined intangible^rights."

¶120

1.30 Further, the Delhi Hiqh 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 2077 in McDonalds India Private Limited v. Commissioner^{of Tradeand} Taxes, New Delhi, 2017 (5) TMI 999 - Delhi HC, which had held that the^franchisee agreements entered into by the petitionels therein^permitted a Iimited right to^usethe system of the^petitioners to the franchisees and the intention therein^was not^to transfer the right to use goods.

¶121

1.31 The relevant extracts of the^judgment delivered by the Delhi High Courtⁱⁿ Subway Systems (supra) are reproduced below:

¶122

"This Court is of the opinion that it would be appropriate to follow the^judgment of 17.05.2017 because the lssues 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 similar judgment was delivered by the Bombay High Court [Subway Systems India Private Limited^vs. State of Maharashtra, W.P. (C) No.497/2015 decided/ 01111.O8.2016.

¶123

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. 3404/201s."

¶124

1.32 The relevant extracts of the^judgment delivered in McDonalds Indi upra) are reproduced below:

¶125

@ rlttr vt l\13

¶126

of 28

¶127

"46. Far a :ransfer of the right to use goods to be effective, such transfer of right shoulrl 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's right to transfer the composite bunch of services to other^parties, apart from it rer'aining ownership to the same. The ownership in the trade mark, logo,, service marks, and brand name is solely vested in Appellant and the Petitioners and has not been transferred; as is^clearly manifesteat in the various clauses of the franchise agreements.^The Appellant amt the Petitioners grant a non-exclusive license to the franchisee:;, which can be revoked upon non-compliance of the terms and conditions as stipulated in their franchise arrangement.^Clearly, this does not amount to a transfer of the right to use^goods.

¶128

47...ln the case of the franchise agreements involvedⁱⁿ the^{present case, none} of the franchisees or in the case of the trade^{mark licensee(or in GSK'spetition} the trade mark licensee), are empowered^{to safeguard violation of the mark,} through enforcement mechanisms, such as filing suits^{for injunctionor} damages. This underlines that the^{most important 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 building which accrues on^{accountof increased volume of} business because of the franchise/licensing^{arrangement, continuesto be with} the owner. No brand building or brand^{benefit accntes or arises to the} franchisee/licensee.

¶129

From the above analysis, what irrefutably^follows is^{that the} franchise agreements in the three cases^(and trade^{mark licensing} agreement in GSK's^petition ) Permit a^limited right to^{use the} composite system of the respective businesses of^{the Appellant and the} Petitioners to the franchisors/ licensee, and^the dominant^intention,as well as the specific^provisions arising from the franchise^agreements are not of a transfer of the right to use^goods."

¶130

1.33 The Bombay High Court has clearly^{held that the Franchise Agreemententered} into by the Applicant is essentially a license^since it^{involves a merepermissionto use} of defined intellectual^property rights.^{Similarly,the Delhi High Court, 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 nonexclusive conditional right to use the System and no transfer^{of right to} use goods had taken^place. The Franchise^{Agreement betweenthe Appellant and the} SIBV is nothing but a result of assignment of right to^{sub-license IPR received by the} Appellant from SIBV through the MLA and TLA.

¶131

L2 of 28

¶132

Services received under codes 997336/997339 should^{continue to be} taxable at 7 2o/o under Entry 17(iii) of the Service^{Rate Notificationread with} Entry 243 of the Goods Rate Notification with effect from^{7 October 2O27.}

¶133

1.34. Entry No. 17(iii) of the Service Rate^{Notification read with Entry 243 of the} Goods Rate Notification, ls the only specific entry^{in the Service Rate Notification that} deals with the service of licensing of IPR in respect of^{goods other than InFormation} Technology Software.

¶134

1.35. Entry No. 17(ii) is a general entry that deals with^{temporary or permanent} transfer or permitting use or enjoyment of all^IPR.

¶135

A specific entry should prevail over a general entry when classifying^a product for a particular entry.

¶136

1.36. It is well-settled that when one entry/ code is specific and the other^is genera l/resid uary, the concerned product or service should be classified in the specific entry/ code. Reliance in this regard is^placed on the decisions of^{the SupremeCourt in} Moorco (India) Ltd., Madras v. Collector of Customs, Madras, L994^{(74) ELT 5 (S.C.)} and Speedway Rubber Co. v. Commissioner, Central Excise, Chandigarh^{and Ors, 2002} (143) ELr 8 (s.c.).

¶137

1.37. 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. Relianceⁱⁿ this regard is placed on the decision of the Supreme Court in Commissioner^{of Central} Excise v. M/s Wockhardt Life Sciences Ltd, 2Ol2 (3) TMI 40-SC.

¶138

1.38. 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.

¶139

1.39. Relying on the above, the Appellant submits that the services received by the Appellant should be classified under Entry 17(iii) which is a specific entry,^{instead of} Entry 17(ii), which is a general entry for all IPRs (including Information Technology related IPRs) and therefore, must continue to be taxable at 72o/o.

¶140

2. QUESTTON(S) ON WHICH ApVANCE RULTNG WAS REOUTREp:

¶141

Whether with effect from 1 October 2021, licensing services received by the Appellant from SIBV, under the MLA and the TLA will be taxable at^18o/o under Entry 17(ii) of the Service Rate Notification or continue to be taxable at^l2o/o under Entry 17(iii) of the Service Rate Notification.

¶142

q r: [r,/B^q

¶143

13 of 28

¶144

ADVANCE RULTNG AUTHORITY PASS D ORDER ON ABOVE OUESTION AS NDER:

¶145

We have gone through the records of the case and considered the submissions made by the Appellant at the time of virtual hearing. The matter was examined in detail keeoing in view the^provisions of GST, we rule that licensing services received by the applicant from SIBV, under the MLA and the TLA will be taxable at 18%o under Entry 17(ii) of the Service Rate Notification and^{will not be taxable} at l2o/o under Entry 17(iii) of the Service Rate Notification.

¶146

4. PRAYER OF^.APPELLANT':

¶147

a) To quash the impugned ruling from advance ruling^{Authority dated10.O1.2O22} for being passed without application of mind and^{without consideringfacts,} records, arguments presented before the Authority in the Advance^{Ruling. and} for going beyond the remit of^question before the^{Authority, throughthe} Advance Ruling;

¶148

b) In the alternative, modify the impugned^{advance ruling passedby the Authority} for Advance Rulings and hold that the services^{received by the Appellantunder} the MLA and TLA, for which a^{periodic considerationis charged by SIBV,are} liable to IGST at the rate of l2o/o under Entry^{17(iii)of Notification No. 8/201-7-} IT(Rate) dated 28 June 2017 read with the^{Entry No. 243 of the Notification No.} 1/2017-IT(Rate) dated 28 June 2017;

¶149

c) Grant a personal hearing through^{videoconferencingmode in view of CoVID} pa ndem ic;

¶150

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

¶151

5. GROUNDS OF AI)PEA!.:

¶152

A. AUTHORTTY HAD VERY LIMITED QUESTION^{TO DEAL WITH:}

¶153

5.1 It is submitted that the Appellant^{had preferredthe Application to ascertain} whether with effect. from 01.10.2021, licensing^{services received by it fromSIBV,} under the MLA and TLA will be taxable at^{18o/ounder Entry 17 (ii) or continueto be} taxable at l2o/o under Entry 17(iii) of the^{Service Rate Notification,w.e.f. 01.10.2021.}

¶154

5.2 In view of the foregoing, it is^indicated that,^{the Appellantapproachedthe} Authority to seek limited clarification on the^{applicability of said Notification on the} licensing services received by it from SIBV^pursuant to^{01.10.2021. However,the} authority has failed to^provide any discussion or flnding in^ruling in^respect to^the specific clarification requested. More so, the Authority acted^{beyondthe limit of the} Application and prorrided a ruling in respect of classification^{which was not asked for.} The Authority transgressed the limit of application^{which was restrictedto the question} of applicability of a specific entry over a^{generalentry with effectfrom} ctober 2021,

¶155

#^W Us

¶156

1.4 of 28

¶157

which was not discussed at all in the Impugned^{Ruling. A ruling on classification was} completely needless and shows non-application^{of mindon part of the Authoritywhile} assessing the Appellant's Application.

¶158

5.3 The subject query of the Application filed by the Appellant^{has been neglectedby} the Authority as the requested clariflcation has not been addressed^{by the Authority} which has frustrated the^purpose of the Application. It is submitted that the^basic purpose of seeking advance ruling from the authority with the aim to provide certainty to with respect to their obligations and^provide an expeditious^ruling,so that^the relationship between the taxpayer and administration is smooth and transparent^{and in} fuftherance, to avoid unnecessary litigation.

¶159

B. AMENDMENT NOTIFICATION AND ITS IMPACT IGNORED

¶160

5.4 Vide Notification No. 06/2021-Integrated Tax^(Rate) dated 30 September²⁰²¹ (the "Amending Notification"), Government effectuated certain changes in the Service Rate Notification. The Appellant submits that the Amendment Notification was issued without sanction of the GST Council as mandated under Afticle 279A of the constitution and accordingly, such amendment is arbitrary.

¶161

5.5 By the way of amending Notification, Entry 17(i) has been omitted from the Service Rate Notification w.e.f 1.10.2021. Consequently, Entry 17(i) ceases to exist w.e.f 01.10.2021. A tabular summary of the legal position prior to 1 October 2021 and the position pursuant to the amending Notification is set out below:

¶162

Taxing Entry	Till30.O9.2027(Before operationofAmending Notification)	Post Ol.7O.2O2l (Afteroperationof AmendingNotification )	Applicable Rate	Tax
Entry17(i)	Temporaryorpermanent transferorpermittingthe use ofenjoymentof IntellectualProperty(IP) rightinrespectofgoods otherthanInformation Technology software	Entryomitted,ceases toexist	l2o/o
Entry17(ii)	Temporaryorpermanent transferorpermittingthe use ofenjoymentof IntellectualProperty^(IP)	Temporary or permanenttransferor permittingtheuse of enjoyment of	1B^o/o
	right inrespectof InformationTechnology	IntellectualProperty (IP)right	a
			r:	Ir,lE	\l 0. 1,'

15 of 28

soft\va re t_

5.6 The Appellant understands that this forum^may not^have the^{jurisdictionto} decide on the constitutional matters. However, the^{u nconstitutiona} lity of^the government action may be recorded by way of absence of minutes of meeting^of the 45th GST Council Meeting, in^public domain,^pursuant to^which the^amending Notification cannot be issued. It is also evident from the^{press releaseof the 45th GST} Council vis-a-vis licensing services in^respect of^{quick Services Restaurants,as the} Amending Notification^purports.

¶167

C. SEVERAL SUBMISSIONS HAVE NOT^{BEENCONSIDERED BY AAR;THE} RULING HAS BEEI! PASSED WITHOUT ANY INDEPENDENT^APPLICATION OF MIND AND THIS RENDERS THE ORDER A^{NON- SPEAKINGORDER:}

¶168

5.7 It is submitted that the^{Impugned Ruling dated]-}.O]-.2o22 passedby the} Hon'ble AAR is a non-speaking order^{and has hence been passed in violation of the} principles of natura I^justice.

¶169

5.8 The Impugned Ruling in^{paragraph2.4 notes that the licensein question} received by the Appellant was^granted by^{way of a N4aster LicenseAgreement. In} paragraph 2.5 of the Impugned Ruling, it is further observed^{that the Appellanthas} been granted the right to use and sub-license^{othersto use "System and Trademark" in} India by way of a Trademark License^{Agreement.In Para 2.6 of the ImpugnedRuling,} the AAR notes that the Trademark^{LicenseAgreement makes it clear that only a limited} license and right to use the "system and^{Trademark" and to sublicense 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. In Para 2.7 of lhe Impugned^{Ruling, the AAR notesthat the Appellanthas} been authorized on^y to^{license or sub-license the Systemto the Franchisesin India} and the Appellant had not been authorized^{to transferthe right to use any otherasset} pertain ing to the franchise.

¶170

5.9 It is submitted that the submissions^{of the Appellantwere ignoredby the AAR,} while some of the submissions are^{reproduced in the ruling,there is no finding givento} that effect in the impugned order.^{To this extent,the impugnedorder is violative of} natural^justice being non-speaking^{and is liable to be set aside on this ground alone.}

¶171

5.10 The AAR has conveniently^{ignoredcritical terms of the MasterLicense Agreement} and the Trademark license Agreement to^{bring out the true nature of the transaction} the Appellant is involved in.^{The Appellant submitsthat AAR has summarily rejected} the submissions made by it without^giving any^{independentfindings' That the} impugned ruling does not discuss the correct factual^{posltion, legal} osition or^jud icia^I

¶172

..v 9n*

¶173

16 of 28

¶174

decisions relied upon by the Appellant in its submission. Therefore, the^{impugnedorder} passed by AAR non-speaking.

¶175

5.11 The Appellant submits that the impugned ruling has been^passed by the^Hon'ble AAR without providing adequate reaso ns/justification s for holding that the licensing services received by the Appellant from SIBV under the^I\4 LA and TLA will be taxable^at 18o/o under Entry 17(ii) of the Service Rate Notification and will not be taxable at^72o/o under Entry 17(iii) of the Service Rate NotiFication. Therefore, it is^evidentthat elaborate and critical facts that have been duly recorded in the^{'Background'section} were completely neglected while arriving at Conclusion.

¶176

5.12 Further, the conclusion drawn in the impugned order, that^"licensing services received by the Appellant from SIBV under MLA and TLA will be taxable at 187o under Entry 17(ii) of the Service Rate Notification and will not be taxable at l2o/o under Entry 17(iii) of the Service Rate Notification." is not backed by any reason, independent discussion or finding.

¶177

5.13 Reliance in this regard is placed on the decision of Hon'ble Supreme Courtⁱⁿ case of Kranti Associates Pvt Ltd vs. Masood Ahmed Khan [2011⁽²⁷³⁾ ELf 345^(SC)], wherein the Hon'ble Supreme Court, relying several landmark decisions'relating to the principles of natural justice. laid down comprehensive guidelines as follows:

¶178

"51. Summarizing the above discussion, this Court holds

¶179

a) In India the^judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially.

¶180

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

¶181

c) Insistence on recording of reasons is meant to serve the wider^principle 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.

¶182

e) Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations.

¶183

f) Reasons have virtually become as indispensable a component of a decision making process as observing principles of natural^justice by^{judicial,quasi-} judicial and even by administrative bodies.

¶184

g) Reasons facilitate the process of judicial review by superior Courts.

¶185

h) The ongoing judicial trend in all countries committed to rule of law and constitutional governance is in favour of reasoned decisions on relevant facts. This is virtually the Life blood of^judicial decision making^justifying the principle that reason is the soul of justice.

¶186

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 fact have been

¶187

@. D\ tzlr lt]

¶188

L7 of 28

¶189

objectively considered. This is important for sustaining^{the litigants'faith in the} justice delive'ry system.

¶190

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

¶191

k) If a Judge or a quasi-judicial authority is not candid enough about^his/her decision-making^process then it is impossible to^knowwhether the^person deciding is faithful to the doctrine of^precedent or to^principlesof incrementalisim.

¶192

l) Reasons in support of decisions must be cogent, clear^and succinct.^Apretense of reasons or rubber-stamp reasons is not to be equated^{N/f/ha valid decision-} making procatss.

¶193

m) It cannot be doubted that transparency is the sine^{qua non of restrainton} abuse of^judicial powers. Transparency in decision^{making not only makes the} judges and decision makers less prone to errors but also makes them subject to broader scrutiny.^"

¶194

No reference has treen^placed on MLA or^TLA

¶195

5.t4 It is submitted that authority has^{failedto even consider the MLA and TLA flled} along with the Application. The authority^{has acted in complete ignorance of the} Agreements while ruling against the Appellant's in the^{present case.} It^{is submitted} that, authority is of the opinion that they^{have carefully analysed the records however,} the ruling completely fall to consider the^clauses of the^{MLA and TLAextracted and} submitted along with the application.

¶196

5.15 Therefore, the AAR ought to have^{recorded reasonsand relevant provisions for} holding as to how licensing services^{received by the Appellant from SIBV underthe MLA} and TLA witl be taxable at 18o/o under^{Entry 17(ii) and not at 12olo under EntrylT(iii)} without sanction of tlre GST Council as mandated^{underArticle279A of the Constitution.} The AAR has merely^proceeded mechanically^{and denied} the^{Appellant's contention} without recording any reasons. On this aspect.^reliancein this^{regard is also placed} u pon the following^judgments:

¶197

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

¶198

"In Alexander Machinery^{(Dudley)Ltd. v. Crabtree (1974 ICR 120) (NIRC)it was} observed: "Faiture to^give reasons^{amounts to denial of justice". Reasonsare live} links between the mind of the decision-taker^{to the controversyin question and} the decision or conclusion^arrived at".^{Reasonssubstitute subjectivity by} objectivity. The emphasis on recording^{reasonsis that if the decisionreveals the} "inscrutable face of the sphinx", it^{can, by ifs silence,render itvirtually} impossible for the Cou rts to^{perform theirappellatefunction or exercise the} power of judicial review in adjudging the validity of the decision.^{Right of reason} is an indispensable^part of a sound^{judicial system, reasonsat least sufficientto} indicate an apptication 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} for the order

¶199

Uso

¶200

18 of 28

¶201

made,' in other words, a speaking^{out. The "inscrutable face of a sphinx" is} ordinarily incongruous with^{a judicialor quasi-judicial performance'"}

¶202

b. Oryx Fisheries Pvt. Ltd. V' Union^{of India,} [2011(266)^{8.LT.422(S.CTI}

¶203

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

¶204

(c) Insistence on recording of reasons is meant to serve the wider^principle of justice that justice must not only be done it must also appear to be done as well.

¶205

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

¶206

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

¶207

(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 -m a ki ng process....

¶208

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

¶209

5.16 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 principles of natural justice. The action of the Hon'ble AAR in making such classification the Appellant without adducing an y reason/ relying upon any provisions for the same is grossly in violation of the principles of natural justice.

¶210

5.17 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.

¶211

D. THERE IS NO FRANCHISEE FEE FOR SIBV ONLY ROYALTY IS PRESENT:

¶212

5.18 As per the findings of impugned advance ruling dated 10.01.2022 the classification of services for which "Franchisee Fee" received in lump sum by them at the time of entering into Franchise Agreement with franchisee and "Royalty" amount received on monthly basis, at a pre-determined rate on gross sales revenue of the franchisee or fixed pre-determined amount, whichever is higher from the franchisee, for right to use their trademark, brand name and other proprietary knowledg e (Intellectual Pro pe rty ) .

¶213

,l El,[u^@. t)'

¶214

19 of 28

¶215

5.19 However, it is submitted that there is no franchise fee for SIBV in the^present case, instead there is only collection of Royalty. The same fact was made immensely clear in the Application filed by the Appellant; however, the AAR has failed to even 90 through the facts provided by the Appellant and has mechanically^passed a ruling on the last day of the statutory time limit. The impugned ruling evidences that the same^has been passed in a haphazard manner as the reasoning,^{facts and submissions made in} the Application has not been addressed by the^{AAR. The impugned ruling has been} passed in a mechanical manner without attempting to understand the ambiguity which is prevalent in respect of the^genuinequery of the Appellant. It^{is furthersubmitted that} the services under MLA and TLA are^{not professional,technical and business servicesin} relation to trad€marks and franchises.

¶216

SIBV doesn't enter into franchise agreement

¶217

5.20 The finding of the impugned ruling^{that the Appellanthas enteredinto franchise} agreements with the third^parties whereby^{the Appellanttransfers the right to use its} trademark, brand name and other^{proprietary knowledge (IntellectualProperty) to the} franchisee is entirely erroneous and^illogical.

¶218

5.27 It is submitted that, both^{franchiseefee and royalty are covered underthe Serial} No. 17, Heading 9973^(Leasing or^{rentalserviceswith or without operator) of the} Notification No. 11/2017-Central Tax^{(Rate)dated 28.06.2017attracting GST at 12%. It} is humbly submittec that the scheme^{of classification of services,under service code} 997336 as "Licensing services for^{the right to use trademarks and franchises" has been} erroneously lifted from the^{previous Advance Ruling Order dated 8 December2021'The} transaction is not^qua SSIPL and^{FranchiseeAgreement.}

¶219

Definition of "franchise" irrelevant in^{presentcontext}

¶220

5.22 The advance ruling has^{delved into defining the term "franchise"whichis} meaningless considering the facts in the^{presentmatter. It is submittedthat. since} there is no franchisee fee^{collected by the Appellant,it is utterly futile and irrational to} define the term "franchise" under^law.

¶221

5.23 The elaborate reference^{of "franchise" services in the impugnedruling evidence} that it has been^{preparedin a mechanicalmanner,without going in depthof the issue} involved. The impugned^{ruling is merely based on the initial ruling soughtby the} Appellant on a separate issue.^{The AARhas failed to acknowledgethe essenceof flling} of two separate applications^{by the Appellant. Further. the AAR hasfailed to understand} the time and resources invested^{by the Appellant to receive a well- reasonedrulingto} be able to make^{pragmaticbusiness decisionsaccordingly.However,the Impugned} Ruling makes the attempt of^{timelyapproachingthe AAR frivolousand no effort of} providlng a reasoning or analysis has been attempted^{by theAAR.}

e^.*.

20 of 28

E. GROSS FAILURE OF THE^{MACHINERY OF ADVANCERULING AUTHORITY IS} ATTRIBUTED TO ABSENCE OF A JUDICIAL^MEMBER:

¶226

5.24 ln absence of a^judicial member, the constitution^{of Authorityfor Advance} Rulings, (Respondent No. 2) ls u nconstitutio na^l.

¶227

5.25 In support of this contention, the Petitioners rely on the^judgment of the^Hon'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,^19.-12 is a^'tribunal' within the meaning of Article t36/227, as it is exercising^{judicialpowerc.} In terms of the test laid by the Hon'ble Supreme Court in Columbia Sportswear Cr,.^(supra), the Respondent No.2 is also a Tribunal as it is determining the rights and liabilities of various sta keholders.

¶228

5.26 It is submitted that appointment of a^judicial member is a sin^qua nQn for any authorlty which is performing judicial functions of determining rights and liabilities of a person. To the extent an authority undertakes such functions, it i6 acting in the capacity of a'court'and therefore it becomes imperative to appoint a^judicial m;"nber with expertise and experience in dealing with legal and interpretatio na I issues. Reliarrce is placed on the judgments oF the Hon'ble Supreme Court in Madras Bar Associatiot\ vs. Union of India, reported at (2075) I SCC 583, and Madras Bar Association vs. Union of India, reported at 2O7O (11) SCC I and L. Chandra Kumar vs Union of India and Others, reported at 7997 (3) SCC 267.

¶229

5.27 It is thus submitted that the constitution of Ld. Authority is against the judgment of the Hon'ble Supreme Court as all members appointed are technical members.

¶230

5.28 Constitution of Ld. Authority ls 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 under 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.

¶231

5.29 Appointment of a judicial member to create and maintain the balance in 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 nconstitution a I and it liable to be quashed.

¶232

F. APPELLANT'S INTERPRETATION OF LAW AND FACTS:

¶233

Scope of service code 997336,997339 and 998396

¶234

5.30 It is well settled that intellectual property rights are considered as the purpose of tax legislations. Reliance in this regard is placed on the

¶235

goods" for ion of the

¶236

@ )D\ 231t,l2?

¶237

2L of 28

¶238

Supreme Court in Vikas Sales Corporation vs.^Commissioner of^Commercial Taxes, [7996] 7O2 STC 7OG^(SC) and^{Tata Consultancy Servicesvs. State of} Andhra Pradesh, [2OO4] 737 STC 620^(SC).

¶239

5.31 However, it is equally well settled^{that temporarytransferor permitting the use} of intellectual^property rights is a supply of^{"services". In the contextof GSTlaws,} reference ln this r,:gard is made to Schedule II of^{the CGSTAct, which deems the} following transactions to be supply of services:

¶240

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

¶241

(b)Temporary transfer or permitting the use or enjoyment of any^intellectual property right Ipara 5(c)];

¶242

(c)Transfer of the rlght to use any^goods for any^{purpose(whether} or^{not for a} specified period) for cash, deferred^payment or^{other valuableconsideration} Ipara^s(f)].

¶243

It is the case of the ,\ppellant that:

¶244

-transaction (b) above i.e.^permitting the use or^{enjoymentof intellectual property right} (in other words, licensing the right to use^{intellectualproperty right, beingthe} Appellant's services under the^{FranchiseAgreement) is covered underservicecodes} 997336 (Entry 1.)/997339^{(Entry 2); and}

¶245

-transactions (a) and^(e) above, i.e. transfer^{of right to use goods or in goods, in the} context of trademark:s and^{franchises,are covered under service code 998396 (Entry3).}

¶246

-transactions (a) and (e) 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 (Entry 3).}

¶247

5.32 The term^,'license" means "permitting^{someone to do something".Accordingly, the} services covered under the said^{codesinvolve a permissible usecertalnIP productswith} certain conditions and restrictions.^{The said service codes contemplate a permlssiveuse} of the underlying IP and in that^{sense, confer a very limitedand conditional right.}

¶248

5.33 This is furtherr substantiated^{by the fact that the explanatorynote to Group} 99733 specifically s1-ates that^{the groupincludes permitting, granting or otherwise} authorizing the use of^{intellectual property products, which coverslicensingto third} parties.

¶249

5.34 It is submitte,l^{that as per the MLAand TLA, the Appellant enjoys only the right} to sub-license the^{"system" and the 'suBWAY@ trademarkto franchisees in the} territory for limited^{permissive use to operaterespective sandwichrestaurants'It is} well-settled that a^{person cannottransfer 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 right to use to franchisees does not arise.}

¶250

22 of 28

¶251

Judgment of the Bombay and^{Delhi High Courts in the Appellant's owncase:}

¶252

5.35 The Bombay High Couft, in the Appellant's own case [Subway^{Systems India} Private Limited v Union oF India & Ors. 2016 (8) TMI 7L7-Bombay HCl,^{has held that} the Agreement entered into by the Appellant merely^{granted permissive} use^{of defined} intangible rights to the franchisees. The relevant extracts of the^judgment are reproduced below:

¶253

"69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, 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 Subway and its franchisee is limited to the 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 there w'as any breach of its terms, the right of the franchisee to display the mark Subway and its trade dress, and all other permissions would also end...In Subway's case, 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 nothing else...

¶254

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 not all) of the ingredients - breads, salad dressings and other'key' items 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...

¶255

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

¶256

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 holistic; y, and effect must be given to the contracting parties" intentions. The label or description of the document is irrelevant. An agreement styled as a franchise might, on a proper examination, turn out to be nothing more than a mere license (as in Subway's case).,,

¶257

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

¶258

5.36 Further, the Delhi High 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 p s decisiondecision

¶259

s decisiondecision @'vlv Elqlti'

¶260

23 of 28

¶261

dated 17 May 2Ol7 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 usethe} system of the petitioners to the franchisees and the^{intention therein was not to} transfer the right to use^goods.

¶262

5.37 The relevant extracts of the^{judgmentdelivered} by the^{Delhi High Court in} Subway Systems^(supra) are^{reproducedbelow:}

¶263

"This Court is of the opinion that it would be appropriate to follow^the judgment of 77.05.2077 because the issues are identical, however, in the event the final^judgment is in^{any way set aside. modifiedor clarified by the} supreme Cotr r-t in the^{pending proceedingsbeforeit, that decisionwill be binding} upon the parties... It is^{pointed out on behalf of the petitioner that similar} judgment was delivered by the Bombay High Court [Subway Systems India Private Limited^vs, State of^{Maharashtra,W.P, (C) No-497/2O15} decided I on 1 1. 08.²⁰ 76.

¶264

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

¶265

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

¶266

,,46. For a transfer of the right to use goods to be effective, such transfer of right should be one that^{the transferee can exercise in exclusionof others; which is} not the case in the^{present appeatsand petitions,as the franchiseagreement} only grants a non-exclusive^{right, retaining the franchisor'sright to transferthe} composite bunch of^{services to other parties, apart from it retaining ownership} to the same. The ownership^{in the trademark,logo, servicemarks, andbrand} name is solely^{vested in Appeltantand the Petitionersand has not been} transferred; ,ts is^{clearly manifested in the various clauses of the franchise} agreements. The Appellant^{and the Petitioners grant a non-exclusivelicense to} the franchisees, which^{can be revokedupon non-complianceof the terms and} conditions as stipulated^{in theirfranchisearrangement.clearly, this does not} amount to a transfer^{of the rightto use goods.}

¶267

47...In the case of^{the franchise agreements involvedin the presentcase, none} of the franchisees^{or in the caseof the trademark licensee(or in GSK',s petition} the trade mark^{licensee),are empoweredto safeguard violationof the mark'} through enforcement^{mechanisms, such as filing suits for injunction or damages'} This underlines that the^{most important attribute of ownership or transfer(even} in the most evanescent^{sense)is absent. Furthermore,by reason of Section48} oftheTradeMarksAct,theutilizationofthemarkbythefranchisee/licensee would accrue to the^{trade markowner.Therefore,the} utation or brand

¶268

¶269

24 of 28

¶270

building which accrues on account of increased^{volumeof business becauseof} the franchise/licensing arrangement, continues^{to be with the owner. No brand} building or brand benefit accrues or arises^{to the franchisee/licensee.}

¶271

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

¶272

5.39 The Bombay High Court has clearly held that the Franchise Agreement entered into by the Appellant is essentially a license since it involves a mere^permission to use of defined intellectual property rights. Similarly, the Delhi High Court, by following the decision in McDonalds India (supra) and recording an observation that 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 use the system and no transfer of right to use goods had taken place. The Franchise Agreement between the Appellant and the SIBV is nothing but a result of assignment of right to sub-license IPR received by the Appellant from SIBV through the MLA and TLA.

¶273

Services received under codes 997336/997339 should continue to be taxable at 72o/o under Entry 17(iii) of the Service Rate Notification read with Entry 243 of the Goods Rate Notification with effect from 7 October 2O27

¶274

5.40 Entry No. 17(iii) of the Service Rate Notification read with Entry 243 of the Goods Rate Notification, is the only specific entry in the Service Rate Notification that deals with the service of licensing of IPR in respect of goods other than Information Technology Software.

¶275

5.41 Entry No. 17(ii) is a general entry that deals with temporary or permanent transfer or permitting use or enjoyment of all IPR.

¶276

A specific entry should prevail over a general entry when classifying a product for a particular entry.

¶277

5.42 It is well-settled that when one entry / code is specific and the other 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 (lndia) Ltd., Madras v. Collector of Customs, Madras, 1994 (74) ELf 5 C.) and

¶278

n L3l rl "y

¶279

25 of 28

¶280

Commissioner, Central Excise, Chandigarh and Ors, 2002

¶281

Speedway Rubber Co (143) ELr 8 (s.c.).

¶282

5.43 Further, a commodity cannot be classified^{in a residuaryentry, in the presence} of a specific entry. A residuary entry can^{be takenrefugeof onlyIn the absence of a} specific entry; that is to say, the latter^{will always prevail over the former.Retiancein} this regard is placed on the decision of^{the SupremeCourtin Commissionerof Central} Excise v. M/s Wockhardt Life Sciences^{Ltd,2012 (3) TMI 40-SC.}

¶283

5.44 Moreover,^para 3 of the^preface to^{the Explanatory Notesstates that wherea} service is capable of differential treatment^{for any purposebasedon its description, the} most specific description shall be^{preferred over a moregeneral description.}

¶284

5.45 Relying on the above, the^{Appellantsubmits that the services received by the} Appellant should be classified under^{Entry 17(iii) which is a specificentry, instead of} Entry 17(11), which is a^{general entry for all IPRs (including InformationTechnology} related IPRs) and therefore,^{must contlnueto be taxable at l2o/o.}

¶285

6. Record of Personal Hearing:

¶286

6.1 As per the records available,^{an enquiry was initiatedby the DGGI-GurugramUnit} against the Appellant and^{DRC-o1Abearing CBIC DIN 202307ADGEE000000ACAdated} 17.07.2023 issued lbr Tax amount 7^499918567 /-^{for the period July-2o17to March-} 2022 due to m is-classification of^{servicesprovided and received, shortpaymentof} IGST on import of servlces under^{RCM and nonpayment of GST on accountof not} raising the invoices in respect of^{services provided to distinct entitieswithout} consideration for sr.rpply of^{Tradema rkllicense fees. In reply to the DRc-o1A, the} Appellant submitted that^{the Liability is not acceptable because their submissionshave} not been considered and GST on the said^{transactionshas alreadybeen discharged.As} connected AAAR was^{pending on the issue and wrlt petition was coming for hearingon} 03.o7.2023, they requested^{for a virtual hearing on 09.07.2023. The Appellant,} received letter bearing^{CBIC DIN 202308ADGEE000210645 dated03.08.2023for} Personal Hearing before^{issuance of SCN on 16'08.2023.}

¶287

6.2 The Appellant:^{filedCWPNo. 23895 of 2O23 in the High court of Punjab&} Haryana for directions to^{disposethe appeals 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 proceedingswithin 6 weeksand that the notice of hearing} be given in 10 days^{advance to the Appellant.}

¶288

6.3 The Appellant was offered^{the opportunityof Personal Hearingon 27.L0.2023vide} letter dated 20.1IO.2023 and the^{Appellantvide their e-Maild} 27.tO.2023

¶289

IN, +\

¶290

26 of 28

¶291

submitted^{that they have no obiection for appearingon 27'10'202:1;Oer the} * nu"unu^{High Court's Orderdated 19'10'2023'} directions^{of the Hon'ble} ""'"i

¶292

6.4 Sh.^{AbhsihekA' Rastogi& Sh' PratyushpravaSaha'Advocates appearedon behalf} of the^{'Appellant' for put'onul hearing on 27 'tO '2023 and reiterated the written} submissions^{made earlier' They also submittedthe paper bookof case laws reliedby} them in their^{favour during the hearing proceedings'}

¶293

7. Discussions^{and Findinqs:}

¶294

7.r We have^{gone through the recordsof the case and consideredthe submissions} made by^{the Appellant in the grounds of appealas well as at the time of personal} hearing.

¶295

7.2 Before^{going into the merits of the case' lt is noteworthyto mention that} perusal of records^{of the case reveal that the pre-requisiteof payment of fee for filing} appealhasnotbeenfulfilled.AsperSection20oflGSTAcl,2o1IT,certainprovisionsof CGST Act,^{including Advanceruling, Appealsand Revision' shall' mutatis mutandis'} apply, so far^{as may be. in relationto IntegratedTax as they apply in relationto} Central Tax.^{The correspondingprovisions of CSGTAcl' 2Ol7 which governappeal} against advance^{ruling are Section 100 (3) and Rute 106 (1) which are reproduced} below for readY^reference:

¶296

Sectionloo(3):Everyappealunderthissectionshatlbeinsuchform' accompanied by such^{fee and verifiedin such manneras maY be prescribed'} Rute 7O6 (1) An appeal^{against the advance ruling issuedunder sub-} section (6) of section 98^{shalt be made by an applicanton the common portal} in F,RM GST ARA-O2 and shalt^{be accompanied by afee often thousand} rupees to be deposited in the^{manner specifiedin section 49.}

¶297

The corresponding Section 100^{(3) and Rule 106 (1) of HGSTAct, 2017also} have not been adhered to by the appellant.

¶298

7.3 After the concurrent reading of both^{the provisions,it transpiresthat the} Appellant was mandated to deposit a total of^{? 20.000/-as fee underIGST Act asa} mandatory statutory^precondition for^{filing appeal againstthe order of the Authorityfor} Advance Ruling, Haryana. However, it is found that^{vide challan No. 22020600773423} dated 23-O2-2022, the Appellant has^paid only^{? 10,000/-as Tax under IGSThead and} not the required fee. Since the application of the Appellant^{is incompletefor want of} deposition of requisite fee (which is to be deposited in the manner^{specified in Section} 20 of the IGST Act read with Section 4e of the CGST and HGST Act resp tlte appeat of the Appeltant is not admitted.

Lllt@ la L- vllr

27 of 28

---\

ORDER

In view oF the abov or th e Appe r a n r, b e n s,.:i:::,': il' ;::,';'::::,ff :1 [:: ;: :"] : :,ffi,"": under the GST raw, deserves to be rejected. Therefore, the appear fired by M/s. subway systems India private Limited (Now Eversub India pvt. Ltd.,) Gurugr am-722002, Haryana, is not admitted.

¶304

The appeal fited by M/s Subway Syst ems India private Limited (Now Eversub India Pvt. Ltd.,) Gurugra m_t22OO2 Ha rya na, is disposed in above terms.

¶305

31,r1)dL3 t
(Upender Gupta), rRs (c&rr) (Ashok Kuma
r Meena ), IAS
Memtqrgql Member
chief CorHmilt$iffF
Com m iss ione ,+ ,e.rl
Centra I Good s6tr1ffip,5gjg6r,1p x Zo n e Excise & Taxation D
pfi,fornu d< fu r ci
Haryana t ',
iEIc 3 ?? !(r -r cttlr
ccsr a cx ,onc prnAnlrt
//
ntace: -nanc6g$ffitr *.#fH.

¶306

Cooy to (Reod AD/lioeed post/Email):-

¶307

M/s. Subway Systems India^private Limited. (Now Eversub India Pvt. Ltd.,) Unit No. 2O-24, 3rd Floor, MGF Metropolis, N4G Road. Sector-28, t3urugram- 122OO2, Haryana GSTIN : 06AAGCS580[}N4IZZ

¶308

Copy for informatiorr and necessary action to: -

¶309