Revenue shared with franchisor by the franchisee is considered as Royalty or not?

[Bruce]

A company ABC registered in the USA grants franchise rights to an Indian company XYZ to operate under the ABC brand. Initially, XYZ pays royalty under RCM for using the ABC brand name.

The agreement also provides that XYZ will pay ABC(USAT), a monthly percentage of the total revenue generated, under a revenue sharing arrangement.

My query is:

1. Should this revenue share be treated as part of royalty (import of services) and taxed accordingly, or

2. Would taxing it result in double taxation?

Given that the agreement mentions (i) an initial lump-sum fee for use of the brand name, and (ii) monthly revenue sharing, does the revenue share also form part of 'royalty' or not?

Experts, your opinion please.

[YAGAY andSUN]

Your situation turns on classification of the second payment (revenue share) under GST, not merely how the agreement labels it.

1. Legal framework (import of service)

Under CGST Act, 2017 and IGST Act, 2017:

• Any service supplied by a foreign entity (ABC, USA) to an Indian entity (XYZ) is considered as 'import of service'
• Taxable in India under Reverse Charge Mechanism (RCM) if:
  • Supplier is outside India
  • Recipient is in India
  • Place of supply is India

2. Whether revenue share will be considered as royalty or not?

The key test is "what is the consideration for?"

If the monthly revenue share is linked to:

• continued use of brand
• franchise rights
• trademark / know-how / business model

then it is nothing but variable royalty.

In GST, royalty is not limited to lump sum. It includes:

• fixed fee
• variable fee (e.g., % of revenue)

So in most franchise models, both components are treated as a single supply of "franchise/brand licensing service."

3. Tax position

• Initial lump sum fee - Royalty - Taxable under RCM (18% GST)
• Revenue share (% of turnover) - Also royalty / consideration for same service - Taxable under RCM (18%)

4. Is there double taxation?

No-this is not double taxation, because:

• GST is applied on each consideration paid for the supply
• The lump sum and revenue share are two parts of the same supply consideration, not the same amount taxed twice

Think of it as:

One service (franchise rights)
Two pricing mechanisms (fixed + variable)

Both are taxable independently.

5. When could revenue share be treated differently?

Only if it is genuinely not linked to IP/brand rights, e.g.:

• Pure profit-sharing in a joint venture (no service relationship)
• ABC has business risk participation, not just licensing
• Payment is for something else (like reimbursement or separate service)

In typical franchise agreements, this argument is rarely sustainable.

6. Practical conclusion

In your case, based on facts stated:

• The revenue share will be treated as royalty (import of service)
• XYZ must pay GST @ 18% under RCM on the revenue share also

No double taxation issue arises legally.

[Pinnacle Tax Advisor]

At the outset, it is essential to examine the terms of the agreement to determine whether the second payment qualifies as royalty. From your explanation, it appears that the revenue share component is also considered royalty. The company located in the USA is charging royalty in two parts:

1. A fixed lump sum amount, and

2. A percentage of revenue earned.

If both charges are levied solely for the use of the brand, then they constitute royalty, and GST must be paid under the Reverse Charge Mechanism (RCM).

GST is payable on the entire consideration charged for the service you have availed. Since you are making payments in two forms-one lump sum and one monthly installment-GST will apply to both. This does not amount to double taxation, as both payments form part of the same taxable consideration.

Furthermore, you will be eligible to claim Input Tax Credit (ITC), subject to compliance with the conditions prescribed under Section 16 of the CGST Act, 2017.

[KASTURI SETHI]

On the issue of double taxation in this scenario, the querist may go through the following case laws pertaining to Service Tax law (Pre-GST era):-

"Service Tax cannot be charged twice on the same service (transaction). Any service (transaction) can be taxed only once, even if it appears to fall under two or more categories."-------- CESTAT in the case of Speed & Sale Courier Service Pvt. Ltd. Vs. CCE reported as 2009 (11) TMI 471 - KERALA HIGH COURT,

And also read [2008] 13 STT 257 in the case of same party.

[Shilpi Jain]

Whatever you term the payment to be of it is for use of brand name it would be liable to GST under rcm.

Why would this be a double taxation? This is a GST on the expense.

AI Summary

Royalty on franchise revenue share may attract GST under reverse charge when tied to brand licensing and use rights. Revenue sharing paid by a franchisee to a foreign franchisor for continued use of a brand, trademark, know-how, or business model may form part of royalty and be taxable as import of service under the reverse charge mechanism. Royalty is not limited to a lump-sum fee and may also include a variable percentage of revenue where both payments are for the same franchise or brand licensing service. Taxation of both components is treated as tax on separate parts of the same consideration, not double taxation, unless the payment is genuinely unrelated to brand rights or forms a pure profit-sharing arrangement.