30 April 2010
"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;
Service tax is payable on the gross amount charged by the franchisor from the Franchisee in relation to Franchise.
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.
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