Franchise service and reverse charge tax applied to royalty paid to a foreign franchisor for brand-based training marketing

The appellant's marketing of a training programme under a foreign brand and logo, under an agreement describing the foreign company as franchisor and the appellant as franchisee/master distributor, fell within the substituted definition of franchise because it granted representational rights to market services identified with the franchisor. The royalty paid to the foreign franchisor was treated as consideration for taxable franchise service. Because the service provider was located outside India and had no office or fixed establishment in India, service tax was payable by the appellant under reverse charge. The claim of prior tax payment was rejected for lack of documentary proof.

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Issues: Whether the appellant's activity constituted franchise service, and if so, whether service tax was payable on the royalty paid to the foreign franchisor during the disputed period.

Analysis: The relevant definition of franchise, as substituted with effect from 16 June 2005, covered an agreement granting representational rights to sell or provide services or undertake a process identified with the franchisor. On the facts, the appellant was marketing the training programme under the foreign company's brand and logo, and the agreement described the foreign company as franchisor and the appellant as franchisee/master distributor. The agreement also provided for sharing of compensation and royalty when the appellant marketed the course. Since the foreign company was the franchisor and service provider, the consideration paid as royalty was for taxable franchise service. As the provider was located outside India and had no office or fixed establishment in India, the appellant, as recipient of the service, was liable to pay service tax under the reverse charge mechanism. The contention that the royalty had already suffered service tax was not accepted for want of documentary proof.

Conclusion: The appellant's activity was held to be franchise service, and the appellant was held liable to pay service tax on the royalty paid to the foreign company.

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