TaxTMI 
TaxTMI 
2021 (1) TMI 424
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....igher, from the franchisee. 3. The applicant is also in the business of developing an outlet on its own by renting out a premises, carrying out necessary interior work, purchasing and installing required equipment for operating the outlet and operates the outlet for a certain period, till they find the purchaser who agrees to carry forward the outlet's operations by entering into two different agreements viz. "Purchase agreement" and "Franchise agreement" with them. 3.1 Under the "Purchase agreement", an operating outlet is sold to the purchaser along with all of its assets which are necessary for continuing the outlet's operations with regularity and permanency and purchaser shall be liable for all the duties and obligation in respect to operating the outlet, along with liabilities towards employees, creditors and government authorities. 3.2 Franchise agreement shall be same as discussed above. 4. In view of above backdrops, the applicant raised 1st Question, as below: Question 1: Classification of any goods and services or both: (a) Franchisee Fees: The applicant enters into a franchise agreement with third parties whereby the applicant gives right t....
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....r both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course and furtherance of business. This implies that transfer of operating outlet shall qualify for "Supply". 5.3 Para 4(c) of the Schedule-II provides that when the business is transferred as a going concern then it does not amount of supply of goods. Activities which constitute supply of services are also described in the Schedule-II. However, the transaction involving the transfer of a going concern is not covered under this Schedule. 5.4 However, the Serial No. 2 of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 provides for "Services by way of transfer of a going concern, as a whole or an independent part thereof". This indicates that the activity of transfer of a going concern constitutes a supply of services. 5.5 The applicant further submitted that a going concern is a concept of accounting and applies to the business of the company as a whole or a single unit. Transfer of a going concern means transfer of a running business unit which is capable of being carried on by the purchaser as an indepen....
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.... regarding the admissibility of Input Tax Credit of tax paid or deemed to have been paid, as below: Question-4: If the answer to Question No.2 is negative then, whether the Input Tax Credit of tax paid on the supplies received at the time of developing the outlet is admissible or not? 7.1 In this regard, the applicant has submitted that if the answer to Question No.2 is in negative, which implies that the transfer of operational outlet would not constitute as "Service by way of transfer of a going concern, as a whole or an independent part thereof" and, thus, Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 is not applicable then, such supply shall be liable to payment of tax and shall be treated as supply of goods as per the provisions of Schedule II of the CGST Act, 2018, Para 4(a) which states- where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person. 7.2 The applicant understands that the Input Tax Credit can be cla....
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....same, thus, for the same, royalty is collected, which is in a nature of Licensing services taken on regular basis for the right to use trademarks and franchises in their case. So, from the above detailed analysis, they came to conclusion that their Services will fall under SAC 997336 instead of SAC 998396. (iii) The point that has been further discussed during the hearing is that the sample agreement which they have submitted shows collection GST at 18% instead of 12%. On this, they have represented that since, they sought for Advance Ruling and awaiting for decision of Advance ruling, on a safer side, client is collecting GST @ 18% and also depositing the same in Govt. treasury through its return, because it may occur that client is collecting 12% and Ruling comes negative and in case of Department checking and they conclude to pay 18% at that time, they will unable to ask their clients (i.e. Franchisee) to pay remaining 6%, since, they will deny at that time and it will result into huge loss, and there may be interest and penalty leviable at that time, thus, it is the reason they are collecting 18% instead of 12%. But, since product is going to fall under SAC 99....
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....-2: Does transfer of an operational outlet (as mentioned in the Description), would amount to "Services by way of transfer of a going concern, as a whole or an independent part thereof"? Question-3: If the answer to question no. 2 is affirmative then, whether the said services are covered under Sl. No. 2 of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 and exempted from payment of tax? Question-4: If the answer to Question No.2 is negative then, whether the Input Tax Credit of tax paid on the supplies received at the time of developing the outlet is admissible or not? 11. In this case, the first point is to be decided regarding classification of services for which "Franchisee Fee" received in lump sum by them at the time of entering into the Franchise Agreement with franchisee and "Royalty" amount received on monthly basis, at a pre-determined rate on gross sales revenue of the franchisee or fixed pre- determined amount, whichever is higher, from the franchisee, for right to use their trademark, brand name and other proprietary knowledge (Intellectual Property). 11.1. We find that the applicant entered into franchise agreements with th....
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....s for the right to use intellectual property and similar products". Further, the Group 99733 covers the service code (Tariff) 997336-"Licensing services for the right to use trademarks and franchises". Thus, the Heading 9973 does not cover the "Franchise services" provided by the applicant to the franchisee under the Franchise Agreement. 12. The applicant also furnished the sample copy of some agreements. One of the Franchise Agreement made on 18th June, 2018 between the applicant and Anjali Ashishkumar Pandya. Said Franchise Agreement envisages that: A. the applicant is engaged in the business of manufacturing, processing, marketing, selling, exporting of tea inter-alia under the brand name "Tea Post". B. Tea Post is a concept developed by the applicant for providing a wide variety of food and beverages more particularly, tea beverages prepared by means of a specific methodology and offering such beverages through refreshment cafés and also providing 'take away' and 'home delivery' services to its C. customer. With a view to develop new business models across the country, the applicant is now desires of opening and setting up various franchises....
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....cts and goods whereas the franchising model is used more in service providing industry. (ii) Franchising is an agreement between two parties where the, one party (henceforth referred as the franchisor), permits another party (henceforth referred as the franchisee) to use its brand name or business model for a fee in order to conduct the business as an independent branch of the franchisor. However, Licensing is an agreement between two parties where the, one party (henceforth referred to as the Licensor), sells another party (henceforth referred to as the Licensee) the rights to use its intellectual property or manufacture the licensor's products in exchange of royalty. (iii) Licensing deals with Products & Goods like software patented technologies etc. However, Franchising is mostly related to service businesses like food chains, Service Centres of automobiles, etc. (iv) The licensee is governed by the licensor's terms of use as prescribed in the licensing agreement for the licensed product. Licensor, however, has no autonomy over the business of the licensor Franchisor exercises enormous control over the business of the franchisee in terms of quality of ....
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....o conduct business, as an independent branch of the applicant's parent company (franchisor). Hence, Franchising Services in question are classifiable under Heading-9983-Other professional, technical and business services, as per the Serial No. 21 of the Notification No.11/2017-Central Tax (Rate) dated 28.06.2017, as reproduced herein below: Sl.No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of services Rate (Percent) Condition 21 Heading 9983 (Other professional, technical and business services) (i) Selling of space for advertisement in print media. 2.5 - (ii) Other professional, technical and business service other than (i) above. 9 - 17.1 We further find that as per the Annexure: Scheme of Classification of Services, the Franchisee Fee and Royalty covers under Service Code (Tariff) No. 998396 as "Trademarks and franchises". The extract of the Service Code (Tariff) No. 998396 as per Annexure- Scheme of Classification of Services is reproduced herein below: Sl. No. Chapter, Section, Heading or Group Service Code (Tariff) Service Description 356 Group 99839 Other professional, technica....
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....ices or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business Needless to mention here that the goods have been supplied in the course or furtherance of business in as much as the running outlet has been supplied to the recipient for the purpose of running the 'Teapost' outlet on a commercial basis. 20. Further the purpose of classification of the activity i.e. whether it is supply of goods or services, the provisions of sub-section 1A of Section 7 of CGST Act, 2017 come into play and the relevant text of the same reads as under: "where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II." 20.1 Section 7(1) (d) of the CGST Act, 2017 stipulates that activities referred to in Schedule II shall be treated as supply of goods or supply of services. The entry at serial number 4 of Schedule II to the CGST Act, 2017 deals with "Transfer of business assets" and the same reads as under: ....
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....h a certain portion has been transferred to other entity. The applicant is engaged in the business of running outlets in the name of 'Teapost' and the business activity is one and only one but is merely having more than one branches for the same business. A branch of the same business vertical can be by no stretch of imagination considered as an independent part of the concern. Thus, we find that the transfer of business assets is covered under the category of 'supply of goods' and in no way is covered by the clause 'transfer of a going concern, as a whole or an independent part thereof'. Thus, the transaction becomes a taxable event in terms of the provisions of Sec. 7 read with Sec. 9 of the CGST Act, 2017. 21. The next question for which a Ruling has been sought is whether the transaction would cover under Serial Number 2 of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017? 22. It is pertinent to note that the exemption under Notification No. 12/2017 Central Tax (Rate) dated 28.6.2017 pertains to exemption granted to supply of services. As amply discussed hereinabove, the transaction is in the nature of 'supply of goods' and, therefore, the provisions o....