FRANCHISE SERVICES UNDER SERVICE TAX

By | December 9, 2013

FRANCHISE SERVICES UNDER SERVICE TAX

Franchise Service – Franchise service is a service provided by franchiser to a franchisee.

“Franchise” means an agreement by which 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;

“Franchisor” means any person who enters in to franchise with a franchisee and includes any associates of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term “franchisee” shall be construed accordingly;

 “Taxable Service” means any service provided or to be provided to a franchisee, by the franchisor in relation to franchise;

Franchise Service – Franchise service is a service provided by franchiser to a franchisee. Section 65 of the Finance Act, 1994, 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 in the said sub-section are satisfied, the agreement cannot be called as franchise agreement. These ingredients are,-

  • The franchise 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 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;
  • 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 of process, identified with any other person.

 License production agreements – Scope of franchise services enlarged-

With effect from 16-6-2005, amendments have been made to define “franchise” as an agreement by which the franchisor grants representational rights to franchisee to sell or manufacture goods or provide service or undertake any process identified with the franchisor, by any symbol such as a trade mark, service mark, trade name or logo. No other condition is required to be fulfilled for levy of service tax.

 In view of the amended definition, License Production Agreements

Where principal allows production of goods bearing his brand name by another person would be covered under the purview of service tax under this category.

Similarly, if rights are granted for rendering services identified with the principal on his behalf, such services by the principal to the service recipient would be taxable.

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