FINANCIAL SERVICES

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[2 Services]

Sr Provider Franchisor

Sr Receiver Franchisee

Service shall be in relation to FRANCHISE FRANCHISE

Old Definition: [Since the time of introduction in FA, 2003 till FA, 2005 coming into force]

Franchise means an agreement by which :(i) franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name, as the case may be, is involved; (ii) the franchisor provides concepts of business operation to franchisee, including know-how, method of operation, managerial expertise, marketing technique or training and standards of quality control except passing on the ownership of all know-how to franchisee; (iii) the franchisee is required to pay to the franchisor directly or indirectly, a fee; AND (iv) the franchisee is under an obligation not to engage in selling or providing similar goods or service or process, identified with any other person.
New Definition: [Substituted by FA, 2005 (w.e.f. 16th June, 2005]

Franchise means - an agreement by which franchisee is granted representational right to sell or manufacture GOODS or to provide SERVICE identified with franchisor. whether or not a trade mark, service mark, trade name, as the case may be, is involved] . Concept of FRANCHISE Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor. By, FA, 2005 Franchise has been assigned broad meaning by FA, 2005. Prior to FA, 2005, franchise services were liable to ST only when all the 4 conditions are satisfied. But FA, 2005 has amended the definition and thereby deleting 3 conditions. In view of the new definition, for Taxability under this head, it is not necessary that The franchiser should provide any concepts/methods/techniques of business operation or managerial expertise, or standards of quality control, etc.; or  The franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person. However, student shall note that gor taxability under this service, the franchisee must be granted representational right i.e. the goods produced or service provided by the franchisee must be able to be identified with the franchisor. A limited right to use the trademark, etc. where the user of trademark is independent manufacturer, is not covered under this service; the same is covered under Intellectual Property Service.

 FINANCIAL SERVICES

[2 Services]

Discuss the taxability of the following: Sr provider Nature of Service 1) McDonalds McDonalds, leading fast food joint, is doing business by franchise mode. It is premier franchising company around the world. 1) Individual interesting in taking McDonalds franchise shall apply for franchisee. [The application so submitted is known as FRANCHISEE REQUEST FORM] 2) McDonald (the franchisor) will interview the person. If the person has demonstrated successful ownership or management skills, then he will be selected. Further, he shall have funds enough to invest in the business. 3) Franchisee will be provided requisite training so that he understands the business model and can run Restaurant Business proficiently. 4) McDonalds owns the property and give it to franchisee. It acts as landlord in that respect and charge rental for that (Rent may be monthly fixed rent or as a percentage of monthly sales). 5) Franchisee will pay Franchisee Fee of Rs 20,00,000 (for 5 year period) for grant of representational rights to sell the product (fast food items) identified with the McDonalds. The fee is linked to the sales. 6) Franchisee shall be contractually bound not to carry restaurant business- neither of his own nor of some other person.

Taxable or Not Taxable

Taxable Value Franchisee Fee: Rs 20,00,000

[The rentals charged from franchisee shall also be subject to ST but under category of Renting of Immovable Property Service]

2)

IndiaCan [ETEN CA]

Educomp Tele Education Network for CA coaching is an initiative by Professional Education & Training division of IndiaCan to address the coaching needs of CA students. IndiaCan's initiative is aimed to help CA students get advanced, scientific and personalized coaching from acclaimed faculty, at their home town, and at a lower cost compared to what they would have incurred if they took face-to-face classes from the same faculty. It also offers franchisee subject to following terms and conditions: 1) Franchisee shall have property of minimum size of 1500 square feet (preferably owned or leased commercial property). 2) Franchisee shall pay Rs 10 lakhs in center set-up cost. [Recovery of cost of requisite equipments and training costs]. 3) Franchisee will run the centre. It will enroll the students. It will collect the fees from students. Out of gross fee, it will retain 40% with it and will remit 60% to IndiaCan (ETEN CA). IndiaCan will provide recorded lectures and study material to the franchisee. 4) Franchisee shall be required to pay FRANCHISEE FEE of Rs 5,00,000 for grant of representation rights to provide coaching service associated with service mark of ETEN CA. 7) Franchisee shall be contractually bound not to run any competitive business.

Taxable

Franchisee Fee: Rs 5,00,000

 FINANCIAL SERVICES
ST Liability Services provided under Franchise Agreement:
[Franchisor] Franchise Agreement [Franchise e]

[2 Services]

IndiaCan [ETEN CA]

Mr A

Students

Franchisee Fee = Rs 5,00,000 (3 Years Right) Centre-Set up cost= Rs 10,00,000 (one-time basis) Revenue Sharing= 60% of Tuition Fee= 30 Lakhs Gross Fee = 50 Lakh (exclusive of ST)

3)

. . M/s. Speed & Safe Courier

M/s. Speed & Safe Courier appointed franchisees all over India and the franchises were providing courier services in the name of M/s. Speed & Safe Courier. It also offers franchisee subject to following terms and conditions: 1) Franchisee shall have property of minimum size of 200 square feet (preferably owned or leasedresidential or commercial property). 2) Franchisee shall pay Rs 20,000 in center set-up cost. [Basic design or layout of premises will be uniform of all th efranchisee]. 3) Franchisee will run the business. It will collect and distribute the students. It will collect the courier and courier charges. Out of gross charges, it will retain 70% with it and will remit 30% to M/s. Speed & Safe Courier.
[Note: M/s. Speed & Safe Courier doesnt engage itself in collection/distribution of parcels/posts, which is done by the franchisees of the respective locations].

Taxable

Franchise Service: Taxable Value Franchise Fee 50,000 Revenue Share 12,00,000

[ST liability of M/s XY] M/s. XY : Courier Services

Taxable Value Service Tax @10.3% Less : CCr of Input Sr (Franchise Sr - ST paid by M/s Speed &. Safe courier) Net ST payable 40,00,000 4,12,000

4) 5)

Franchisee shall be required to pay FRANCHISEE FEE of Rs 50,000 for grant of representation rights (for 2 years) to provide service in name of M/s. Speed & Safe Courier.

(1,23,600) 2,88,400

 FINANCIAL SERVICES
ST Liability Services provided under Franchise Agreement :
[Franchisor] [Franchisee] Franchise Agreement

[2 Services]

M/s. Speed & Safe Courier

Mr A

Clients

Franchisee Fee = Rs 50,000 (2 Years Right) Centre-Set up cost= Rs 20,000 (one-time basis) Revenue Sharing= 30% = 12 Lakhs Gross Charges= 40 Lakh (exclusive of ST)

. .. . .