GST Ruling: Franchisee Fees & Royalties Taxable at 18%, Sale of Business Assets, Input Tax Credit Eligibility

The ruling classified "Franchisee Fees" and "Royalty" under Heading 9983, attracting GST at 18%. The transfer of an operational outlet was deemed a sale of business assets, not a transfer of a going concern. Consequently, the transaction did not qualify for tax exemption under Notification No.12/2017-Central Tax (Rate). However, the applicant was eligible for Input Tax Credit under Section 16(1) of the CGST Act, 2017, and related rules.

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Issues Involved:
1. Classification of Franchisee Fees and Royalty under GST.
2. Determination if the transfer of an operational outlet constitutes "Services by way of transfer of a going concern."
3. Applicability of tax exemption under Notification No.12/2017-Central Tax (Rate) for transfer of a going concern.
4. Admissibility of Input Tax Credit if the transfer of an operational outlet is not considered a transfer of a going concern.

Issue-wise Detailed Analysis:

1. Classification of Franchisee Fees and Royalty under GST:
The applicant, a Tea House Chain, enters into franchise agreements where they grant the right to use their trademark, brand name, and other proprietary knowledge to franchisees for a lump sum fee and monthly royalty. The applicant argued that these fees fall under Serial No. 17, Heading 9973 (Leasing or rental services with or without operator) of Notification No.11/2017-Central Tax (Rate), attracting GST at 12%. However, the ruling determined that the services provided under the franchise agreement are "Franchising services" and not "Licensing services." Consequently, these services are classified under Heading 9983 (Other professional, technical, and business services) with Service Code (Tariff) 998396 (Trademarks and franchises), attracting GST at 18%.

2. Determination if the transfer of an operational outlet constitutes "Services by way of transfer of a going concern":
The applicant sells operational outlets, including equipment, to purchasers who continue the business. The ruling clarified that this transaction is the sale of business assets and not the transfer of a going concern. The transfer of assets is considered a supply of goods under Section 7(1) of the CGST Act, 2017, and not a transfer of a going concern. The ruling emphasized that the transaction involves the sale of equipment/infrastructure necessary for operating the outlet and does not include the transfer of land or building.

3. Applicability of tax exemption under Notification No.12/2017-Central Tax (Rate) for transfer of a going concern:
Given that the transfer of an operational outlet is classified as the supply of goods and not services, the exemption under Serial No. 2 of Notification No.12/2017-Central Tax (Rate), which pertains to the supply of services, does not apply. Therefore, the transaction is not exempt from GST.

4. Admissibility of Input Tax Credit if the transfer of an operational outlet is not considered a transfer of a going concern:
Since the transfer of an operational outlet is classified as the supply of goods, the applicant is eligible for Input Tax Credit (ITC) on the tax paid for supplies received during the development of the outlet. This eligibility is subject to fulfilling all conditions specified under Section 16(1) of the CGST Act, 2017, and the rules made thereunder.

Ruling:
1. "Franchisee Fees" and "Royalty" are classified under Heading 9983 (Other professional, technical, and business services) and Service Code (Tariff) 998396 (Trademarks and franchises), attracting GST at 18%.
2. The transfer of an operational outlet does not constitute "Services by way of transfer of a going concern."
3. The transaction is not covered under Serial No. 2 of Notification No.12/2017-Central Tax (Rate) and is not exempt from GST.
4. The applicant is eligible for Input Tax Credit subject to fulfilling all conditions of the CGST Act, 2017, and related rules.

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