AT HYDERABAD.

F.A. 1743/2005 against C.D. 1/2005, Dist. Forum, Medak at Sanga Reddy

Between:

1. M/s. S. Kumars Online Ltd.,

Regd. Office at ‘Avadh’

Avadesh Parisar, GK Marg

Worli, Mumbai-400 018.                                      

2. Mr. Kumar

Head, Franchise Operations

S. Kumar.Com Ltd.

Regd. Office at ‘Avadh’

Avadesh Parisar, GK Marg

Worli, Mumbai-400 018.                                      ***                         Appellant/

Opposite Parties.           

                                                                    And

C. Ravi Kumar, S/o. C. Prakash

Age: 27 years,

R/o. H. No. 4-7-25/17B,

Balajinagar,

Opp. Venkateswara Temple

Sanga Reddy Medak Dist. .                         ***                        Respondent/

                                                                                                Complainant.

Counsel for the Appellant:                          Mr. K. Visweshwara Rao

Counsel for the Resp:                                 M/s. Gopi Rajesh Associates.

QUORUM:

                          HON’BLE SRI JUSTICE D. APPA RAO, PRESIDENT     

                                          SMT. M. SHREESHA, MEMBER

&

                                          SRI G. BHOOPATHI REDDY, MEMBER

FRIDAY, THIS THE TWELFTH  DAY OF SEPTEMBER TWO THOUSAND EIGHT

Oral Order: (Per Hon’ble Justice D. Appa Rao, President)

                                                          *****

          This is an appeal preferred by the  opposite parties against the order of the Dist. Forum, Medak at Sanga Reddy in directing them to pay  Rs. 1,42,898/- with interest  and Rs. 50,000/- towards compensation besides costs of  Rs. 1,000/-.

          The case of the complainant in brief is that he is an educated unemployed  having completed his MBA.   R1/Appellant herein  sought to establish  and maintain a net work of computers through  Very Small Aperture Terminals (VSAT)  and intends to provide  all the services to the customers  through franchisee.  The franchisee offers to sell the services by providing access to the networking.  On that he applied for  franchisee of R1 at Sanga Reddy.  As per the terms and conditions  of brochure he paid Rs. 500/- towards application which was accepted by the appellant and through their letter Dt. 10.5.2000 directed him to pay Rs. 2 lakhs  towards the cost of machinery, VSAT dish.  Both of them accordingly executed an agreement  on 28.7.2000 at Sanga Reddy.  He paid the entire amount.   R2 is the head of franchisee and he also promised to supply the machinery.  On repeated demands they  supplied the machinery worth Rs. 51,102/-.  They did not supply VSAT dish  costing around Rs. 1,50,000/- without which he could not start the net working.  By 13.11.2000  he paid the entire Rs. 2 lakhs.   In view of the fact that the appellant could not supply the dish etc., he could not earn any amount.  On the other hand he was burdened with  payment of  interest for the amount borrowed in this regard.  Despite his persistent efforts he could not get the machinery.  He sent a letter terminating the agreement and requested the appellant to refund balance of Rs. 1,42,898/- along with interest and loss of profit.  In fact, the appellant assured that he would earn  Rs. 26,000/- per month.  Therefore, he filed the  complaint for refund of Rs. 1,42,898/-  towards balance of deposit with interest,   and Rs. 3,38,000/- towards damages  together with costs.

          The appellants/Opposite Parties filed counter resisting the case.   While denying the averments made  in the complaint, it was alleged that  the Dist. Forum has no jurisdiction.  The complainant is not a consumer, but a business associate,  a franchisee.  The agreement provides for reference  to  arbitration in case of dispute.  The territorial jurisdiction  has been restricted to Mumbai Courts.   The complaint was also barred by limitation.  Since there was no hiring of  any service  as stipulated u/s 2(i)(o) of the Consumer Protection Act, the complaint  was not maintainable.   On the other hand, they hired the services of the complainant for the purpose of  promoting their business. In fact they were  the consumers  and not the complainant.  The various Fora  in this regard opined that  franchisee is not a consumer.  They were not aware that the complainant was an un-employee and searching for self employment.   They never induced him to apply for franchisee.   While admitting  payment of Rs. 500/-  towards application fee  and Rs. 5,000/- towards EMD  alleged  that  there was delay of one month in payment of remaining instalments of Rs. 74,500/-.   So also in payment of second instalment of Rs. 1,20,000/-.  By the time of payment there was change in the government policy  in supplying VSAT.  Due to delay in releasing the KU band which was in use for operating V-SAT earlier in India.  In fact most of the franchisees  are doing business even without VSAT but with terrestrial connection.  The complainant was also doing business all through.  Therefore, he never offered for return of  equipment given by them.   Since the non-supply of VSAT  was beyond their control  they cannot be  blamed, consequently the complainant was not entitled to  any amount.   There was no negligence on their part.   The contention that he would have earned  Rs. 26,000/- per month  has no basis.  Since the complainant was a defaulter, he was not entitled to seek any of the amounts,  and therefore prayed for dismissal of the complaint with costs.          

          The complainant in proof of his case filed his affidavit evidence and Exs. A1 to A24. The  respondents/appellants filed affidavit evidence but did not file any documents.   The Dist. Forum after considering the evidence placed on record opined that  the appellant did not provide the equipment as per Clause 2.3 of the agreement as such he  could not become a franchisee.  Sine the dispute arose at the stage of supply of equipment  and not for activation of service, it would amount to deficiency in service.   The Dist. Forum has jurisdiction  and therefore directed the appellants to pay Rs. 1,42,898/- with interest @ 12% p.a. besides Rs. 50,000/- towards compensation  and Rs. 1,000/- towards costs.

          Aggrieved by the said decision the appellants preferred this appeal contending that the Dist. Forum did not appreciate the facts or law in correct perspective.  It did not appreciate that the  franchisee agreement stands altogether  in a different footing from that of  an ordinary agreement.  Franchisee  agreement is for providing services to the customers.  Therefore a franchisee can never become a customer/consumer entitled to raise the dispute before the Consumer  Fora  more so when it is for commercial purpose.  Moreover, the parties intend that the dispute is to be resolved by an arbitrator.   Therefore they  prayed for dismissal of the complaint.

          It  is an undisputed fact that the complainant entered into  agreement entitled ‘Franchisee Agreement’ with the appellant to  establish and maintain a network of computers spread across India connected through VSAT or  of such other means of connectivity  (the network) for the purpose of providing the services to the customers.

          Clause ‘C’ makes it clear that the appellant “company intends that the franchisee shall offer for sale to the customers the services by providing access to the network.”

          Clause ’E’ further makes it clear that the appellant ‘Company relying on the representations of the complainant, agreed to appoint the  complainant as its franchisee for the purposes as stated in the terms and conditions.

          Clause-2 concerns with the appointment and responsibilities of the franchisee. Schedules were appended to the agreement.   Annexure-A consists of  services that would be provided by the appellant company.

             I.      e-commerce, purchase and sale of goods and services through the network.

           II.      Dissemination of information

        III.      Education

        IV.      e-offering services including, without intimation, electronic mail, publication of classified advertisements, financial products and services, and

          V.      other products and services.

In Annexure-B payment schedule was made, wherein it was mentioned that :

In Annexure-C the equipment that would be provided is made a mention.  They are:

1.                 V SAT:  a) Dish   b) Cable   c)  Transmit/Receive Box with USB Port.

2.                 Computer: (a)  CPU  (b)  Monitor  (c)  Keyboard  (d)  Mouse (e) Speakers (f)  Microphone.

    3) WEB Camera with built in microphone, cable and related software, 4) UPS, 5) Scanner with cable and related software 6) Printer with cable and related software.        

          It is not in dispute that the complainant had paid Rs. 2 lakhs for supply of computer system and VSAT Dish etc.  It is also not in dispute that the appellant  has supplied the system without VSAT Dish,  and as such he  could not  able to start functioning.  The cost of  equipment that was supplied to the complainant was  Rs. 60,000/-, while the appellant had to supply the equipment worth Rs. 1,40,000/-.  Since the appellant did not supply the equipment viz., VSAT dish he called upon the appellant to pay Rs. 1,40,000/- towards refund of the deposit, Rs. 3,38,000/- towards damages and loss of profits  by issuing legal notice under Ex. A13.  In one of the statements of account Ex. A22,  the appellant itself admitted that VSAT dish was not supplied  including the activation.

          The learned counsel for the appellants contended that the Dist. Forum  did not understand the concept of franchisee agreement.  The franchisee could not be termed as a consumer.  It cannot maintain a complaint against its principal.   The franchisee is only doing service  to the public on behalf of the principal.   It is also contended that   it has given alternative connection through terrestrial mode.  Therefore no deficiency in service could be attributed against it.   At any rate the Consumer Fora   have no jurisdiction, in view of the clause wherein it was mentioned that the disputes have to be resolved by an arbitrator.  The questions of jurisdiction as well as maintainability were not considered by the Dist. Forum.

          Admittedly as per clause 6.1 of the agreement the complainant got whatever equipment it received from IBM computers.  It was not supplied by the appellant.  The invoice was in his name,  issued by the manufacturer.  Learned counsel for the appellant contends that  the contention that it has provided the equipment to the complainant is not correct.  It has only negotiated  and  provided mass purchase benefits to the complainant and other franchisees.  Though the appellant   has  negotiated  the   prices  from  various  

vendors,  evidently  the appellant  had received the money.  The contention that it was a mediator for negotiating the price and   the equipment was directly supplied by the vendors and therefore it has nothing to do cannot be countenanced, since  the appellant has received money, this contention does not sustain.

Under the agreement all the franchisees were required to pay  WPC and DOT charges  of Rs. 30,000/-.  The same was mentioned in the brochure.  It is part of the agreement.   Besides that the franchisees were required to pay  Rs. 36,000/- towards  Annual Maintenance Charges for VSAT.  The complainant did not pay the said amount.   The next contention of the appellant is that  VSAT was delayed due to delay in sanction by Government of India and it was beyond its control.  Clause 16 of the franchisee agreement ‘Force Majeure stipulates  that  corrective steps  should be taken as soon as force majeure conditions are applied.  At any rate, it has taken immediate steps  by offering terrestrial mode instead of VSAT  mode to all its franchisees.   In fact, recital clause-A of the franchisee agreement  provides ‘maintaining network of computers through VSAT or “such other means of connectivity” for providing services to the customers.   When VSAT could not be given it has provided terrestrial connectivity.  The complainant was also provided with temporary ID and temporary Pass Word.   Since he was using these services he did not return the equipment that was supplied by it.  As  the  complainant was using the alternative mode,  he was not entitled to any relief that was prayed.

Except contending that it has supplied terrestrial  mode, it did not file any proof to show that the complainant was using the alternative mode.  There was no proof that the appellant or  any of the officials  ever visited the premises of the complainant,  nor it could show any evidence such as internet account of the  respondent.  It  never demanded its share of profit.   Therefore, we are unable to  agree that alternative mode of  connectivity was given to the complainant.   

The important contention that was taken by the appellant is that the complainant cannot be termed as consumer under the  franchisee agreement,    and he cannot maintain  the complaint against his principal.   The franchisee is only doing the services to the public in general  on behalf of the principal, and the franchisee is not a consumer. 

          In support of his contention he relied the decision  in  General Manager, Madras Telephones & Ors. v. R. Kannan, reported in  I (1994) CPJ 14 (NC), National  Commission held that a franchisee  holder is only a licensee of the grantor of the franchise. In that case National  Commission while examining the relationship between the operator of STD/PCO and the Telecom Department, observed :

“A franchise holder is only a licensee of the grantor of the franchise for operating in this case the STD/PCO and collecting the call charges on behalf of the franchiser. It is the franchise holder who is rendering service to the grantor of the franchise inasmuch as he runs and maintains STD/PCO relieving the Telcom Department of the responsibility for providing and maintaining Public Call Offices. The franchise holder performs two functions; (a) establishes and runs a Public Call Office; and (b) collects the call charges on behalf of the department. For rendering these services the franchiser, the franchise holder, gets a commission. The mere fact that the franchise holder has been described as the hirer of the PCO does not make him a person who renders service to the revision petitioner, Telecom Department. Consequently, the fact that he has been described as hirer in the agreement would not mean that he is rendering a service to the Telecom Department for consideration. A franchise holder renders service to those who use the Public Call Office which is performed by the Telecom Department directly wherever there is no franchiser to manage a Public Call Office. Consequently it is erroneous to hold in this case that the franchise holder who is maintaining and running a STD/PCO Office, is a consumer vis-a-vis the Revision Petitioner, Telecom Department.”

In Prof. P. Narayanankutty v. Uptron India Ltd. & Ors., I (1996) CPJ 340 (NC), the National  Commission again examined the question of the right of franchise holder and said :

“We are of opinion that in the present case the complainant cannot be said to be a consumer qua the opposite parties under the agreement dated 29th March, 1990 for running a Franchise Centre in Calicut. The opposite parties were only supposed to provide technical know-how and other materials to the franchisee  as per the terms of the said agreement on payment.

A franchise holder cannot be held to have hired the services of the principal. In the case of Telephone Public Call Offices, this Commission has repeatedly held that a franchisee  of the Telephone Department cannot be said to be hirer of services of the Department. Reference can also be made to The General Manager, Madras Telephones & Ors. v. R. Kannan, 1994 CPJ 14 (NC). The same principal applies to the present case.”

In Mysore Sales International Ltd. v. M.N. Misra, II (1996) CPJ 64 (NC), National Commission examined the consequences of failure to appoint the complainant as a selling agent and observed :

“There is no hiring of service of the petitioners herein by the complainant for consideration. Failure to appoint the complainant as a selling agent is a breach of contract for which remedy lies in Civil Court and not before the Consumer Forum... Even if it was a transaction, as the case of the petitioner herein, of the sale of oil, it will be hit by the fact that it was a commercial contract and case relating to non-supply of the oil. The complainant will not be consumer being purchaser of goods in which no defect is alleged.”

The National Commission in  Sofspec software Pvt. Ltd., Vs. Digital Equipment (India) Ltd., & Ors reported in II (2002) CPJ 5 (NC) observed that

          The definition of word ‘franchise’ was considered in Wharton’s Law Lexicon.  It is stated that ‘Franchise’ means an incorporeal hereditament synonymous with liberty. A royal privilege or branch of the Crown’s prerogative subsisting in the hands of a subject. It arises either from royal grant, or from prescription, which pre-supposes a grant. The kinds are almost infinite, but the principal are : bodies corporate, the right to hold Courts-leet, fairs, markets, ferries, forests, chases, parks, warrens, fisheries. The remedy for disturbance is an action. Also, the right of voting at an election for a member of Parliament.

That was a case where the complainant claims to be carrying on business of computer training and an agreement was entered into between  the three  parties  the parties were to provide diverse support services to the complainant by way of consultation, training staff, technical assistance, course material, support material etc.   There were internal agreements between the complainant and others for use by the complainant of the  Logo Digital.     By letter the other party gave notice to the complainant of termination of the Logo Agreement.  Complaining deficiency in service on account of  unilateral termination of the agreement  he claimed compensation.   The National Commission after considering the terms of agreement opined that  it was a franchise agreement. 

          Learned counsel for the respondent contended that the terms of the agreement have to be looked into to find out as to what is the actual relationship between the grantor and franchisee holder. The nomenclature of the document would not determine the nature of  the transaction.

             Coming to the case on hand Ex. A1  is described as Franchisee  Agreement.  The complainant has agreed to pay Rs. 2 lakhs to the appellant  and the appellant in turn agreed to supply the equipment mentioned in  Schedule ‘C” and provide  service through VSAT.  This is to enable the complainant to   provide service to the customers and receive part of collection received by him from its customers.   Evidently, there is  buying of goods coupled with service.  The learned counsel for the complainant/respondent contended that  even if it is assumed that it is  a franchise agreement, it is only with respect to subsequent service to be provided viz.,  connecting internet through appellant network,   and not at the stage of  supply of material.   We are unable to subscribe to the said contention.   The agreement  cannot be dissected  in parts and find out as to which part  it could be termed as consumer and to which part it could be termed as franchise holder, and to which part it could apply to grantor of  franchise.  

             A holistic reading has to be given to an agreement.   A perusal of  Ex. A1 agreement show that the complainant was termed as  franchisee.   The appellant company intends to establish and maintain  a network of computers spread  all over India connected through VSAT or such other  means  of connectivity through the complainant and other franchisees.  In fact the complainant himself  has to provide services to the customers.  The Franchisee Agreement  at clause ‘c’  makes it clear that  “the Franchisees shall offer for sale  to  the  customers  the services  by providing   access to  the  network.” 

The appellant company is not a service provider and the complainant cannot be said to be a consumer.  All through the complainant was described as ‘Franchisee’.    Importantly at Clause 3.4 it was mentioned that the “The Franchisee shall retain a commission of 33.33% or such other percentage as may be notified through the operating instructions of the transaction costs in respect of each transaction effected by the franchisee.  In the teeth of the above, it cannot be said that the complainant is a consumer.

             Learned counsel for the respondent vehemently argued that in an agreement when there are two parts, one supply of material and the other providing service, the franchise agreement should be  construed only to the services provided and not  to  the supply of material.   This distinction was not brought to the notice either before the State Commissions or the National Commission.  Therefore, the aforesaid decisions should not  be made  applicable to the facts of the case.   He further contended that since this difference was not brought to the notice of National Commission resulting in incorrect conclusion.  He further contended that  under Article 141 of  Constitution of India only the  judgments of  Supreme Court and High Courts are binding precedents to the lower courts  and tribunals.   A State Commission is entitled to differ with any other State Commission and National Commission,  if it is seen that the correct position was not brought to their notice.  

             In this context it is useful to note that  in Assistant Collector, C.E. Chandan Nagar Vs. Dunlop India Ltd., (1985) 1 SCC 260 = AIR 1985 SC 330, wherein  the Supreme Court observed : 

       “We desire to add  and as was said in Cassel & Co. Ltd.,  Vs. Broome, 1972 AC 1027, we hope it will never be necessary for us to say so again that “in the hierarchical system of Courts”  which exists in our country, “it is necessary for each lower tier’”, including the High Court, “to accept loyally the decisions of the higher tiers.  “It is inevitable in hierarchical system of Courts that there are decisions of the  Supreme Appellate Tribunal which do not attract the unanimous approval of all members of the judiciary. … But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted.”

       The better wisdom of the Court below must  yield to the higher wisdom of the Court above.  That is the strength of the hierarchical  judicial system.  In Cassel & Co. Ltd. Vs. Broome (supra),  commenting on the Court of Appeal’s comment that  Rookes v Barnard, 1964 AC 1129, was rendered perincuriam.  Lord Diplock observed :

       The Court of Appeal found themselves able to disregard the decision of this House  in Rookes v Barnard, by applying to it the label per incuriam.  That label is relevant only to the right of an appellate Court to decline to follow one of its own previous decisions, not to its right to disregard a decision of a higher appellate Court  or to the right of a Judge  of  the High Court to disregard a decision of  the Court of  Appeal. “

          Recently the National Commission in  NCDRC Bar Association (Regd) Vs. Davinder Malhotra & Ors. In R.P. No. 2916/2008 observed that the decisions of National Commission are binding on all the  State Commissions.

          In view of the above settled law, we do not intend to differ from the opinion expressed by the National Commission in this regard.   The Dist. Forum cannot extend  its jurisdiction to determine the dispute in regard to a franchisee agreement.  We do not agree with the finding of the Dist. Forum in this regard.   We hold that the complainant was not a consumer under the franchisee agreement.

          Learned counsel for the appellant contended that  in view of the terms of the franchisee agreement under Clause 19.1 the dispute shall be referred to  arbitration and the Dist. Forum has no jurisdiction. This contention is no longer sustainable in the light of decision of Supreme Court in  Fair Engineers Pvt. Ltd., Vs. N. K. Modi  reported in 1996 (6) SCC 385 held:

The Legislature intended to provide a remedy in addition to the consentient arbitration which could be enforced under the Arbitration Act or the civil action in a suit under the provisions of the Code of Civil Procedure.  Thereby, as seen, Section 34 of the Act does not confer an automatic right nor create an automatic embargo on the exercise of the power by the judicial authority under the Act.  It is a matter of discretion.  Considered from this perspective, we hold that though the District Forum, State Commission and National Commission are judicial authorities, for the purpose of Section 34 of the Arbitration Act, in view of the object of the Act and by operation of Section 3 thereof, we are of the considered view that it would be appropriate that these Forums created under the Act are at liberty to proceed with the matters in accordance with the provisions of the Act rather than relegating the parties to an arbitration proceedings pursuant to a contract entered into between the parties.  The reason is that the Act intends to relieve the consumers of the cumbersome arbitration proceedings or civil action unless the forums on their own and on the peculiar facts and circumstances of a particular case, come to the conclusion that the appropriate Forum for adjudication of the disputes would be otherwise those given in the Act.

          Learned counsel for the appellant contended that by virtue of Clause 24 of the  franchisee agreement the jurisdiction was confined to Mumbai Courts.  It is settled proposition of law that when the cause of action arises at two places, the party can choose the jurisdiction of one of them for pursuing his claim vide 2004 (4) SCC 677.  It is also settled proposition of law that the parties cannot confer the jurisdiction on a court not  having jurisdiction vide 1992 CPJ 830 (SC).   Undoubtedly, the franchisee agreement was executed at Sanga Reddy, the equipment was also delivered at Sanga Reddy and the services were to be provided at  Sanga Reddy.   The cause of action has undoubtedly arose at  Sanga Reddy.   Therefore, it cannot be said that Clause 24  would  restrict the territorial jurisdiction of Mumbai Courts.  This contention  has no legs to stand.

          In the result the appeal is allowed and the order of the Dist. Forum is set-aside.  However, in the circumstances of the case no costs.

                   PRESIDENT                  LADY MEMBER            MALE MEMBER

                                                          Dt. 12.09.2008.