18% GST on “Franchisee Fees” and “Royalty” received under Franchise Agreement for Right to use Trademark, Brand Name: AAR [Read Order]

The Gujarat Authority of Advance Ruling (AAR) ruled that 18% GST on “Franchise Fees” and “Royalty” received under the franchise agreement for the right to use the trademark, brand name, and other proprietary knowledge.

The applicant, M/s. Tea Post Private Ltd. is a Tea House Chain under the brand name and style of Tea Post, whereby they sell non-alcoholic beverages, snacks and merchandise items either directly or through outlets owned by them or by third parties under the franchise agreement.

The applicant enters into a franchise agreement with third parties whereby the applicant gives the right to use its trademark, brand name, and other proprietary knowledge (Intellectual Property) to the franchisee. Under the franchise agreement, the applicant receives a lump sum Franchisee Fee at the time of entering into the franchise agreement with franchisee to use their trademark, brand name, and other proprietary knowledge. The applicant is also entitled to monthly Royalty at a predetermined rate on the gross sales revenue of the franchisee or a fixed predetermined amount, whichever is higher, from the franchisee.

The applicant has sought advance ruling on the issue in respect of classification of any goods and services or both for which “Franchisee Fees” and “Royalty” received by the applicant under the franchisee agreement from the franchisee for the right to use its trademark, brand name and other proprietary knowledge (Intellectual Property).

The coram consisting of Sanjay Saxena and Mohit Agarwal ruled that “Franchisee Fees” and “Royalty” received by the applicant under the franchise agreement from the franchisee for the right to use its trademark, brand name, and other proprietary knowledge (Intellectual Property), are to be classified under Heading 9983 “Other professional, technical and business services” and Service Code (Tariff) 998396 “Trademarks and franchises” and accordingly, will attract 18% GST.

The AAR further ruled that transfer of an operational outlet would not amount to “Services by way of transfer of a going concern, as a whole or an independent part thereof”.

The Authority clarified that the applicant would be eligible for Input Tax Credit subject to fulfillment of all the other conditions pertaining to the admissibility thereof laid down in the CGST Act, 2017 and the rules made thereunder.

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