The franchisee is required to pay to the franchiser, directly or indirectly, a fee,

Indian Service Tax

Franchise Service

Effective date: 1/7/2003.

Authority: Notification No. 7/2003-ST, dt. 20/6/2003 (For full text see under "Business Auxiliary Service").

Rate of Service Tax: 8% upto 9/9/2004. 10% nom 10/9/2004 - Cess 2% of 10% = 0.2. Total ST = 10.2%.

Definitions

''Franchise'' means an agreement by which -

• Franchisee is granted representational right to sell or manufacture goods or to provide service or ,undertake any process identified with franchiser, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved

• the franchiser 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

• The franchisee is required to pay to the franchiser, directly or indirectly, a fee, and

• The franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person, [Section 65 (47)]

"franchiser"means any person who enters into franchise with a franchisee and includes any associate of franchiser or a person designated by franchiser to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly, [Section 65(48)]

Taxable Service: Services provided by a franchiser to a franchise relating to franchise

Value of Taxable Service: Gross amount charged by a franchiser to a franchisee for such services

Exemption: Mere licensed production

Person liable to pay: Franchiser or his authorised agent.

Head of A/c: Tax Collection - 00440237, Other Receipts - 00440238, Deduct Refund - 00440239

Questions & Answers

Q. 10.1 What is the taxable service under Franchise Service?

Ans. Franchise Service is a service provided by franchisor to a franchisee under a specific type of agreement known as franchise agreement. This agreement 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 services, identified with any other person. The franchisee is required to pay to the franchisor, directly or indirectly, a fee which is chargeable to Service Tax.

Q. 10.2 If the franchisor is not normally resident of India, who has to pay Service Tax?

Ans. As per Service Tax Rules in all such cases the service receiver in India would be liable to pay Service Tax on behalf of the service provider.

[Source: Directorate of Publicity and Public Relations, Customs & Central Excise, New Delhi, October, 2003],

Main text of Department Circular/Trade Notice

[Para 2.4 of Cir.No. 59/8/2003, dt. 20/6/2003]

2.4 Franchise Service:

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 unless 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,­

• 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,

• the franchisor provides concepts of business operation to franchisee, including knowhow, 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, .

• The franchisee is required to pay to the franchisor, directly or indirectly, a fee and

• 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 Productiqn 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 services, 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.