Tds on franchisee fee

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Mikesh Jain (Querist)
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28 February 2014 My client get a franchisee for play school, the school charged a lumpsum fee for that on which they also charged service tax, this fee is other than the royalty, they will get a part of gross receipt too as royalty. so please tell me wether this lumpsum franchisee fee is liable to TDS or not?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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28 February 2014 This is by way of a contract and TDS has to be deducted on the total payment made to your franchiser

Mikesh Jain

Mikesh Jain (Querist)
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28 February 2014 Thanks Aggarwal Sir, then will TDS be deduct U/s 194C ?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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27 July 2025 Great question. Let's clarify the **TDS implications on franchise fees**, especially in your client's case involving a **play school franchise**, where:

* A **lump sum franchise fee** (other than royalty) is paid, **with service tax**.
* Ongoing **royalty payments** will also be made based on gross receipts.

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### ✅ **TDS on Lump Sum Franchise Fee**:

The **nature of the lump sum franchise fee** determines the applicable TDS section. Here’s the correct view:

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### 🔹 **1. If the lump sum fee is for use of brand, trademark, system, know-how, etc.**

➡️ It qualifies as **"Royalty"** under **Section 9(1)(vi)** of the Income Tax Act.

✅ **TDS should be deducted u/s 194J** (Fees for Professional or Technical Services, which also covers royalty).

* **Rate**: 10% (excluding surcharge and cess).
* **Threshold**: ₹30,000 per year.

Even if the school calls it "franchise fee" but it's for **grant of intangible rights**, then it's **royalty**, and **TDS under Section 194J applies**.

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### 🔹 **2. If the fee is purely for business support, operational help, or setup assistance**

➡️ And not for any intellectual property rights or system use — then it **may be considered as contractual in nature**.

✅ In that case, **TDS under Section 194C** applies.

* **Rate**: 1% if payee is an individual/HUF, 2% for others.
* **Threshold**: ₹30,000 per contract / ₹1,00,000 per year.

But this is less likely in most franchise models, especially in education, where **IPR and brand usage is involved**.

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### ✅ **Conclusion for Your Case**:

| Fee Type | TDS Section | Rate | Reason |
| ----------------------------- | ----------- | ---- | ------------------------------------------------ |
| Lump sum franchise fee | **194J** | 10% | Treated as **royalty** due to brand/system usage |
| Ongoing revenue-based royalty | **194J** | 10% | Clearly defined as royalty |

✅ So both payments — lump sum and recurring royalty — **attract TDS under Section 194J**.

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### 📌 Practical Tips:

* Don't rely only on the **label** of the payment — examine the **agreement** to see if it involves brand, IP, or system licensing.
* Exclude **service tax/GST** component from TDS calculation **if shown separately on the invoice** (as per Circular 1/2014).

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Let me know if you'd like a **TDS compliance checklist** or **draft accounting entry** for this transaction.

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