Franchise services

Where on facts, it was noted that the assessee, (jewellery company) granted a licence to various retail shops (franchises) to sell jewellery of its brand / trademark, and the license to use was not exclusive (i.e. to the exclusion of the assessee who retained the right to licence others also), it was held that the consideration/royalty for transfer of right to use the trademark is not liable for sales tax as a deemed sale under article 366(29A)(d), but was a service liable for service tax under the category of “franchise services” [Malabar Gold Pvt. Ltd. vs. CTO (2013) 32 STR 3 (Ker.)]

The appellants imported technology from a Chinese company for production of cotton in the form of mother seeds containing “Fusion BT” genes, multiplied the same and gave it to its customers with a sublicence for further multiplication of the seeds and onward sale of seeds to farmers in consideration for a royalty. The sub-licencees sold the seeds in packages containing the mark “Fusion BT”. The Revenue contended that the appellants are liable for service tax on the royalty received from the sub-licencees under the category of “franchise services” since they granted the sub-licencees a representational right to sell their products. The Tribunal observed that —

• The appellants did not receive any representational right from the Chinese company and did not grant any such right to the sub licencees;

• The mark “Fusion BT” only denoted technology and did not identify the product with the appellant.

Hence it held that the royalty would not be liable for service tax under the category of “franchise services”. [Global Transgene Ltd. vs. CST 2013(32) STR 86 (Tri-Mum.)]

The assessee in the present case had entered into agreement (termed as joint venture agreements) with distinct entities to establish and manage school and provide quality education in different areas under its brand name. Under the terms of the agreement:

• The other party was granted a right to establish a school representing the assessees name, motto and logo;

• The assessee would provide its established concepts of imparting education, managerial expertise and operational techniques and standards of imparting education to the other party;

• The other party was obliged to pay a fee to the assessee;

• The other party was obligated not to establish or administer an English Medium School identified with any person other than the assessee;

• All assets and liabilities including the entire financial responsibility was that of the other party.

The Revenue sought to levy service tax on fees received by the assessee under the category of franchise services which was challenged by the assessee. On appeal the Tribunal observed as follows:

• The assessee’s contention that it had entered into a Joint Venture agreement with the other party and hence the service provided by the assessee is to itself is not acceptable since under the agreement the entire burden of establishing and maintaining the school, including the liability to fund the entire capital and noncapital expenditure, underwriting the entire financial liability, liability arising out of any obligation was on the other party and not the assessee. Further on determination of the agreements, all available and remaining assets too would revert to the other party alone. Also the inherence of risk and reward is on the franchisee and not the assessee. Hence regardless of the description of the arrangement as a Joint Venture or a collaborative arrangement, the same would not tantamount to a joint venture arrangement. The facts that the assessee was remunerated for services provided to the other party clearly showed that there is a service provided by the assessee to the other party for consideration.

• the agreement in the present case satisfied all the conditions of franchise agreement and hence the services were in the nature of franchise services.

• the contention that the services rendered by the appellants are in the nature of Intellectual Property right services is not acceptable since the assessee apart from merely allowing the use or enjoyment of the assessee’s intangible property (in its name/ motto/ logo) provided several services for management and administration of the schools and considered as a whole, its services more appropriately fall under ‘Franchise Services’ and not under intellectual property right services.

Accordingly the Tribunal held that the appellant would be liable for service tax under the category of franchise services [Delhi Pubic School Society vs. CST (2013) 32 STR 179 (Del.)]