service tax on franchise
n v sudhakar
(Querist) 26 October 2009
This query is : Resolved
We are franchisors lending our brand image. For this we enter into an agreement and collect franchisee fee. We also collect royalty at certain percentage on the fee collected by franchisee.
As a franchisor are we liable to pay service tax on the above? From the definition under section 65 (47 & 48) we are of the opinion that we need not pay.
Please provide your expert comments on this at the earliest.
Regards
N V Sudhakar
09391399934
nvsudhakar@drsindia.in
Raj Kumar Makkad
(Expert) 26 October 2009
Definitely you are liable to pay service tax because you collect franchisee fee and royalty. What for? What u provide? only service hence keeping in view this simple logic, u are not exonerated from paying service tax as u defined section 65.
Sankaranarayanan
(Expert) 27 October 2009
FRANCHISE SERVICES
Date of introduction : 01.07.2003 – vide Notification No. 7/2003 Dated 20.06.2003
Definition :
a) “Franchise†means an agreement by which-i) franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved; ii) the franchisor provides concepts of business operation to franchisee, including know how, method of operation, managerial expertise, marketing technique or training and standards of quality control except passing on the ownership of all know how to franchisee; iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee and iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person;
b) "franchisor" mean any person who enters into franchise with a franchisee and includes any associate of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly;
c) "taxable service" means any service provided to a franchisee, by the franchisor in relation to franchise; and the term "service provider" shall be construed accordingly.
Value of Taxable Service:
Value of taxable service shall be the gross amount charged by the service provider of such service rendered by him.
Scope of Service:
Service tax is payable on the gross amount charged by the franchisor from the Franchisee in relation to Franchise.
Board's Clarification: Circular No.59/8/2003 dated 20.06.2003
Franchise service is a service provided by Franchisor to a Franchisee. Section 65 of the Finance Act, 1994, (sub section 47) defines franchise as a specific type of agreement. This agreement has various ingredients, which have been specified in the said definition. For removal of doubt it is clarified that unle ss all the ingredients mentioned at (I) to (iv) of the said sub section are satisfied the agreement can not be called as franchise agreement. These ingredients are :
(i) the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved;
(ii) the franchisor provides concepts of business operation to franchisee, including know how, method of operation, managerial expertise, marketing techniques or training and standards of quality control except passing on the ownership of all know how to franchisee;
(iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and
(iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person.
For example, the mere fact that a principal manufacturer has allowed production of goods bearing his brand name by another person under ‘License Production Agreement’, does not make the agreement a Franchise Agreement. A franchise agreement also includes the franchisee being obliged to follow the concept of business operation, managerial expertise, market techniques etc. of the franchisor and is under an obligation not to engage in selling, producing or providing similar goods or service, identified with any other person. Therefore, in the absence of such ingredients, a mere licensed production cannot be called as a franchise agreement and accordingly the license fees paid for such license production cannot be charged to Service Tax.
Sachin Bhatia
(Expert) 07 November 2009
Yes as a franchisor you are liable to pay service tax.
