TDS applicability on Franchisee Fees

[Rasik Singhania]

Dear Professional colleagues:

I have a query w.r.t. TDS applicability on Franchisee Fees. Plz provide me the solution for the same:

ABC Private Limited (“ABC or Franchisee”) entered into agreement with Pizza & Pizza (“PP” or “Franchisor”) for exclusive franchisee of Kolkata Region. The agreement is entered for a period of 5 years & onetime franchisee fee is Rs. 10 lacs. ABC is also required to pay royalty @10% on sales on monthly basis.

 

PP will provide all type of technical know, training to the employees of ABC, right to use brand, trademark, trade name etc. Further, ABC needs to purchase raw materials from PP or PP’s approved vendors.

 

ABC is required to setup the premises, equipments and infrastructure at its cost.

 

Taking reference to case law of Career Launcher (India) Ltd. v ACIT (56 DTR 10) (Delhi ITAT), where the matter does not fall u/s. 194C and CIT vs. NIIT Ltd. (184 Taxman 472) (Del.), where it does not fall u/s. 194I, whether TDS is applicable on the Franchisee Fees?

Regards

Rasik Singhania

Mob - 94331 46020 / 93326 89898

[Anand jhunjhunwala]

Dear Ms.  Singhania,

 

As per my view, the payment is squarely covered under more than one clauses of sub-section (1) of  section 194J and accordingly TDS is deductible @10% under that section.

 

Best regards

Anand Jhunjhunwala

9830355460

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[Rahul Gupta]

Dear Mr. Singhania,

This has reference to your query raised in the trailing mail.

In this regard, kindly note that Franchise fee is a payment for usage of trademark, trade name, patent and know how. There are three types of franchise fees

• Lump sum payment of fees (onetime payment);

• Payment as percentage of sales/profit on annual, monthly or quarterly basis; &

• In the nature of both mentioned above

In the current scenario ABC Private Limited has entered into an agreement with Pizza and Pizza for 5 years by payment of one time franchise fee of INR 10,00,000 and royalty of 10% on sales on monthly basis. So here franchise fee is the mixture of both kind i.e. is the third kind of fees.

In this regard, reference may be had to Sec. 9(1)(vi) of Income Tax Act, 1961 which defines royalty. In terms of the said section, royalty includes transfer of all or any rights including the granting of a license in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property. Hence, the franchisee fees is nothing but payment of royalty. Further, reference may be had to Sec. 194J that deals with the witholding provision in respect of royalty payments made to resident.

In case you need further clarification, please let us know.

 

Best Regards,

 

CA. Rahul Gupta

Partner – Taxation

ARVG & Co

M: +91 98308 86543

D: +91 33 4004 6644 / 6050 5593

Email: ra...@arvsolutions.co.in

 

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