Service tax on franchisee agreement

This query is : Open

Pooja (Querist)
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05 June 2013 I have a urgent query. the issue is that the asseesee is a franchisee and is providing commercial coachin of computer software and hardware.Now the fees are not collected by the franchisee. The fees are deposited in the bank account of franchisor who retains 20% of the fees collected and then transfers 80% of fees to the franchisee's account. and this ratio is as per the franchise agreement

Hence, the franchisee has paid service tax on 80% of the amount recived by it. and the franchisor has paid service tax on its 20%. But the problem is that service tax dept is demanding tax on 20% also.

Kindly help me with this issue.

Pooja

Pooja (Querist)
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05 June 2013 Also, the additional point to be noted here is that the fee recipts are issued in the name head of franchisor and not franchisee. So as per my opinion the franchisee is not liable to pay tax on 100%

Ankit

Ankit (Expert)
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05 June 2013 Poonam,

According to me, since the franchisee is providing services worth Rs. 100 and not 80(post retention, ST should be computed on Rs. 100 and not on 80.

as far as the retention goes, the Rs. 20 is nothing but royalty paid to the franchisor for the use of the brand name and hence, even TDS should come on that amount.

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Pooja

Pooja (Querist)
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05 June 2013 thanx Ankit. but in the franchise agreement it is clearly written that the 20% is towards training of staff and permission to use the name of franchisor.

And, can we take the credit of the service tax on 20% on royalty in that case?

And, the most imp point is that we were never in a position to receive 100% of the fee. We have only received 80%. So how do we pay tax on 100 when that particular amount has not been received by us.If we pay service tax on that 20%, it would have to been paid out of our own pockets. Isint it?

Kindly help with the same.

Madhukar N Hiregange

Madhukar N Hiregange (Expert)
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05 June 2013 Since the franchisee is provding the receipt / services to the students- he would be liable on 100. The fact that the frnachisor is charging 20% as royalty, representation rights would require the franchisor to pay ST on 20% and chrge ST to the franchisee. The franchisee can avail the credit of the same.
As far as the demand from dept is concerned, the same maybe argued on revenue neutrality.

The liability maybe reworked considering the credits and submitted to the revenue also and the diffrential duty + interest maybe paid by the franchisee.

Pooja

Pooja (Querist)
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05 June 2013 thank you sir. Sir franchisee has paid service tax under "Commercial coaching and training" But Sir, the franchisor has paid the service tax on 20% under the "commercial training only"

So the department has earned the tax. So how do we proceed now