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

[Bruce Reddy]

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.

AI Summary

Royalty classification under GST for franchise revenue sharing and brand-use payments raises double taxation concerns. Whether a franchisee's monthly revenue-sharing payment to a foreign franchisor, under an arrangement separate from an initial lump-sum brand-use fee, is to be treated as royalty and taxed as an import of services under GST. The issue turns on the character of payments made for use of the franchisor's brand and the contractual distinction between an upfront royalty-style fee and a continuing percentage share of revenue. A related concern is whether bringing the revenue-share component into the royalty base would amount to double taxation.