© Grant Thornton International. All rights reserved. Service Tax All India Institute of Chartered Accountants' Society Deepak Agarwal – Associate Director.

© Grant Thornton International. All rights reserved. 4 Definition of Franchise – present Effective 16 June 2005 – [Section 65(47)] (47) "franchise" means an agreement by which the 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 or logo or any such symbol, as the case may be, is involved;

© Grant Thornton International. All rights reserved. 5 Conditions the agreement must provide the franchisee the right to represent the franchisor the right could be to sell goods or provide services the right could be to manufacture goods the right to use trade mark, logo or symbol of the franchisor

© Grant Thornton International. All rights reserved. 6 Definition of Franchise - erstwhile Definition of Franchise – 1 July 2003 to 15 June 2005 [Section 65(47)] "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 or logo or any such symbol, 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 services or process, identified with any other person;

© Grant Thornton International. All rights reserved. 7 Conditions the agreement must provide the franchisee the right to represent the franchisor the right could be to sell goods or provide services the right could be to manufacture goods the right to use trade mark, logo or symbol of the franchisor the franchisor provides concepts of business operation to franchisee includes know-how, method of operation, managerial expertise, marketing technique or training and standard of quality control without transferring the ownership of any of the above the franchisee pays to the franchisor a fee the agreement prohibits franchisee to carry out selling or providing similar goods or services

© Grant Thornton International. All rights reserved. 8 Change – present vs. erstwhile definition the change in definition has omitted conditions listed in sub-clauses (ii) to (iv) these conditions are not required to be satisfied w.e.f. 16 June 2005 the amended definition has substantially increased the scope of levy the franchise agreement must contain all ingredients mentioned in 65 (47)

© Grant Thornton International. All rights reserved. 9 Definition of Franchisor Definition of Franchisor – effective 1 July 2007 – [Section 65(48)] (48) "franchisor" means any person who enters into franchise with a franchisee and includes any associate of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly;

© Grant Thornton International. All rights reserved. 10 Ingredients - Franchisor the franchisor develops the brand name, concept of operating the business enters into an agreement with franchisee assigns it to other person to carry out the business in the same manner to use his brand name or trade mark franchisor includes any associate of the franchisor or a designated person

© Grant Thornton International. All rights reserved. 11 Definition of Taxable Service Taxable service definition – Section 65(105) (zze) any service provided or to be provided to a franchisee, by a franchisor, in relation to franchise Essential ingredients: services are provided or to be provided to a franchisee in relation to franchise and services must be provided by a franchisor

© Grant Thornton International. All rights reserved. 12 Coverage of Franchise Services License production agreement Right granted for rendering services Operating centers for vocational training Outlets like McDonald's, Pizza Hut, Provogue/ Raymond Showrooms, etc. Pathology labs

© Grant Thornton International. All rights reserved. 13 Valuation of Services no specific provisions for valuation of Franchise Services general provisions under Section 67 read with Service Tax (Determination of Value) Rules, 2006 applicable

© Grant Thornton International. All rights reserved. 14 Person liable to pay service tax franchisor, when both franchisor and franchisee are in India franchisee, when franchisor is outside India and franchisee is in India

© Grant Thornton International. All rights reserved. 15 Point of taxation prior to 1 July 2011 - service tax was payable by 5 th of the following month (for all months) except March, for which it is 31 st March when payment for services is received in case of associated enterprises debit or credit in the books of account or receipt of payment, whichever is earlier w.e.f. 1 July 2011, the point of taxation would be the earliest of: the time when invoice for services provided or to be provided is issued or if the invoice is not issued within 14 days of completion of the provision of services, the date of such completion or the time when the payment is received

© Grant Thornton International. All rights reserved. 16 Point of taxation …contd. POT in case of "continuous supply of service": Continuous Supply (‘CS’) of services are where services are rendered for 3 months or more. POT in case of CS of services would be earliest of: time when invoice is issued if invoice is not issued within 14 days of completion of provision of services, the date of such completion the time when the payment is received where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event shall be deemed to be the date of completion of provision of service

© Grant Thornton International. All rights reserved. 17 Export of Franchise Services when services are provided in relation to business or commerce – it is provided to a recipient located outside India when services are provided otherwise – it is provided to a recipient located outside India at the time of providing such services in either case, where recipient has commercial establishment or any office relating thereto in India – the order for provision of service must be made from any commercial establishment or office located outside India payment is received by service provider in convertible foreign exchange

© Grant Thornton International. All rights reserved. 18 Import of Franchise Services provided by a person who has established a business or has a fixed establishment from which services are provided or has his permanent address or usual place of residence outside India received by a person who has established a business or has a fixed establishment from which services are provided or has his permanent address or usual place of residence in India the recipient of services shall be located in India; and the services are for use in relation to business or commerce

© Grant Thornton International. All rights reserved. 20 Franchise Services – Case law 1 Jetking Information Ltd. v. CCE [2007] 6 STT 444 (Mum. – CESTAT) assessee engaged in business of setting up and operating centers for vocational training in relation to computer-oriented programmes assessee had own centers and entered into agreement with independent parties authorizing them to use its name for operation of centers service tax demanded along with penalty under Franchise Services appeal dismissed by Commissioner (Appeals) Tribunal analyzed the agreement and held it satisfied all four conditions and that assessee liable to pay service tax

© Grant Thornton International. All rights reserved. 21 Franchise Services – Case law 2 Speed & Safe Courier Services (P.) Ltd. v. CCE [2010] 26 STT 139 (Ker.) assessee engaged in rendering courier services assessee engaged agents as its franchisees in terms of the agreement the agents collected service charges and service tax from the customers while accepting articles the agents deposited the said service tax in their own name after taking registration under the category of Courier Services the entire amount received from the customers were passed on to the assessee and the assessee out of it paid the agent an agreed fixed fee

© Grant Thornton International. All rights reserved. 22 Franchise Services – Case law 2 …contd. Speed & Safe Courier Services (P.) Ltd. v. CCE [2010] 26 STT 139 (Ker.) department demanded service tax on differential received by the assessee under the category of Franchise Services the Commissioner confirmed the demand in effect, the service charges collected and shared between the assessee and agents got partly taxed twice – under Franchise Services and Courier Services appeal filed by assessee against Commissioner's order rejected by Tribunal the assessee filed a writ with the High Court

© Grant Thornton International. All rights reserved. 23 Franchise Services – Case law 2 …contd. Speed & Safe Courier Services (P.) Ltd. v. CCE [2010] 26 STT 139 (Ker.) the Hon'ble High held the following: the agent's were merely acting as agents of the assessee the assessee did not grant any representation right to the agents – provisions of section 65(105)(zze) not applicable if a service falls under two heads, no provision allows, to tax the very same service charges twice under different categories services were liable to tax under the category of Courier Services

© Grant Thornton International. All rights reserved. 24 Franchise Services – Case law 3 Dewsoft Overseas (P.) Ltd. v CST [2008] 16 STT 376 (New Delhi – CESTAT) assessee engaged in providing computer education through franchisees franchisee represented assessee and run coaching centers based on concepts of business and know-how provided by assessee on payment of certain fee to assessee revenue demanded service tax from assessee under Franchise Services assessee contended that the 4 th condition of the definition was not satisfied as no evidence had been produced by revenue for the same it was held that if the assessee were not forthcoming with the information, the burden of proving the agreement is covered under Section 65(47) is on the department

© Grant Thornton International. All rights reserved. 25 Franchise Services – Case law 4 Smokin Joe's Pizza Pvt. Ltd. vs. State of Maharashtra 2008 (ST1)-GJX-0291-STMAH Issue: whether consideration charged from Franchisee for use of trade mark and other services shall be liable to tax under the provisions of Lease Act, 1985 the assessee provided various associated services which include providing know- how, training of employees, instructions to Franchisees about layout of premises, kitchen, instructing Franchisees for selection of raw materials and instructing the Franchisees about the method of delivery of pizzas, etc. besides allowing to use the trade mark the transaction is not liable to tax since there is no actual transfer of right to use the trade mark but it is mere licence to use the same and consideration is not merely for the use of trade mark but is composite for various services besides allowing to use the trade mark and no separate consideration is provided for allowing the use of trade mark

© Grant Thornton International. All rights reserved. 26 Franchise Services – Case law 4 …contd. Smokin Joe's Pizza Pvt. Ltd. vs. State of Maharashtra 2008 (ST1)-GJX-0291-STMAH the Hon'ble Tribunal held that to establish the transfer of Right to use, the transfer must be exclusively to the Transferee and the owner should not have right to transfer the same rights to others - relied on the observations of the Apex Court in recently leading judgment in the matter of Bharat Sanchar Nigam Limited 145 STC 91 The Tribunal has held that impugned transaction does not involve the transfer of Right to use the trade mark. It is a Licence granted to use the trade mark simultaneously to various persons. It is a Composite Agreement of providing various services to ensure the standard and quality of the product in order to maintain the reputation of the Franchisor and permission to use the trade mark is an incidental. It is therefore, not covered under the Lease Act and the levy is not justified.

© Grant Thornton International. All rights reserved. 28 Definition – Intellectual Property Right W.e.f. 10 September 2004 – [Section 65(55a)] 'intellectual property right' means any right to intangible property, namely trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright. Essential ingredients: it is a right to intangible property it could be trade mark, designs, patents or any other similar intangible property under any law for the time being in force copyrights are excluded

© Grant Thornton International. All rights reserved. 29 Definition – Intellectual Property Services Present definition w.e.f. 16 June 2005 - Section 65(55b) 'intellectual property service' means,- (a) transferring, temporarily; or (b) permitting the use or enjoyment of, any intellectual property right; Erstwhile definition 10 September 2004 to 15 June 2005 Section 65(55b) 'intellectual property service' means,- (a) transferring, whether permanently or otherwise; or (b) permitting the use or enjoyment of, any intellectual property right;

© Grant Thornton International. All rights reserved. 30 Definition of Taxable Service Taxable service definition – Section 65(105) (zzr) any service provided or to be provided to any person, by a holder of intellectual property right, in relation to intellectual property service Essential ingredients: services are provided or to be provided to any person in relation to intellectual property services and services must be provided by a holder of intellectual property right

© Grant Thornton International. All rights reserved. 31 Exemptions exempt from so much of the service tax leviable thereon as is equivalent to the amount of cess paid towards the import of technology under the provisions of Section 3 of the Research and Development Cess Act, 1986 exemption has been granted to that portion of value of taxable service which is received prior to 10 September 2004

© Grant Thornton International. All rights reserved. 32 Indian laws covered in India, protection to intellectual property rights is offered by the following four Acts: Patents Act, 1970 Trade and Merchandise Marks Act, 1958 Copyrights Act, 1957 and Design Act, 2000

© Grant Thornton International. All rights reserved. 33 Coverage under any law for the time being in force does it imply registered, unregistered, protected, recognized or covered under any law? enacted law or common law? IPR registered outside India but not registered in India – whether covered? undisclosed information or trade secrets? integrated circuits? geographical indications?

© Grant Thornton International. All rights reserved. 34 Coverage – permanent transfer permanent transfer of right is not taxable The department has clarified that – A permanent transfer of IPR does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a 'holder of IPR' so as to come under the purview of taxable service. Thus, there would not be any service on permanent transfer of IPRs.

© Grant Thornton International. All rights reserved. 38 Definition – Goods Sale of Goods Act 'goods' means every kind of moveable property other than actionable claims and money both corporeal and incorporeal both tangible and intangible

© Grant Thornton International. All rights reserved. 39 Value Added Tax/ Service tax Assignment or licensing of IPR if assignment it would be termed as outright sale if licensing – would be a deemed sale being transfer of right use goods assignment and licensing could both attract VAT only licensing could attract service tax

© Grant Thornton International. All rights reserved. 40 Export of IPR services licensing of IPR by a holder in India to a person outside India for use outside India export of services rules recipient located outside India for use in India still export of service?

© Grant Thornton International. All rights reserved. 41 Import of IPR services licensing of IPR by a holder outside India to a person in India for use in India section 66A read with Import Rules service receiver liable to pay service tax for use outside India (overseas operations) are services received in India? section 66A read with Import Rules – whether applicable?

© Grant Thornton International. All rights reserved. 42 Valuation of Services no specific provisions for valuation of IPR Services general provisions under Section 67 read with Service Tax (Determination of Value) Rules, 2006 applicable

© Grant Thornton International. All rights reserved. 43 Person liable to pay service tax IPR holder, when both holder and service receiver are in India IPR service receiver, when IPR holder is outside India and IPR service receiver is in India

© Grant Thornton International. All rights reserved. 44 Point of taxation prior to 1 July 2011 - service tax was payable by 5 th of the following month (for all months) except March, for which it is 31 st March when payment for services is received in case of associated enterprises debit or credit in the books of account or receipt of payment, whichever is earlier w.e.f. 1 July 2011, the point of taxation in case of IPR services would be the earliest of: where the amount of consideration is not ascertainable at the time when services is performed, will be deemed to be provided each time on the date on which the provider of such service receives any consideration from the use or benefit of such rights invoice issued

© Grant Thornton International. All rights reserved. 45 Point of taxation …contd. POT in case of "continuous supply of service": Continuous Supply (‘CS’) of services are where services are rendered for 3 months or more. POT in case of CS of services would be earliest of: time when invoice is issued if invoice is not issued within 14 days of completion of provision of services, the date of such completion the time when the payment is received where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event shall be deemed to be the date of completion of provision of service

© Grant Thornton International. All rights reserved. 46 Consulting Engineer's Services vs. IPR Services consulting engineer's services covers advice consultancy technical assistance in any one or more disciplines of engineering

© Grant Thornton International. All rights reserved. 47 Consulting Engineer's Services vs. IPR Services consulting engineer's services or IPR services transfer of technical know-how available off the shelf customized transfer of designs and drawings available off the shelf customized

© Grant Thornton International. All rights reserved. 48 IPR Services – Case law 1 Modi-Mundipharma (P.) Ltd. vs. CCE [2010] 24 STT 343 (New Delhi - CESTAT) assessee was engaged in manufacture of medicine it entered into a collaboration agreement with a foreign based company to receive know-how for manufacture of P. P. medicines on payment of agreed royalty commissioner confirmed demand of service tax holding that assessee was receiving IPR services the Tribunal set aside the demand and held that there was no evidence of continuous provision of information and know- how and assessee was manufacturing goods in its own branding name; that receipt of know-how was a one time affair and no services were being rendered and received

© Grant Thornton International. All rights reserved. 49 IPR Services – Case law 2 Navinon Ltd. vs. CCE [2007] 6 STT 411 (Mum. CESTAT) appellants remitted the amount to Ciba Geigy – Switzerland as royalty Tribunal held that payments for royalty in the common parlance are not insisted as payment for a service provided it is a share of produce or profit reserved by owner of permitting another user of his property royalty payment is for use of technology and know-how cannot be equated to any services provided by Ciba Geigy therefore the order of lower authority attracting a levy of service tax on royalty payments made are set aside

© Grant Thornton International. All rights reserved. 50 IPR Services – Case law 2 SKOL Breweries Ltd. vs. CCE 2010 (19) STR 839 (Tri. – Mumbai) alcoholic beverages got manufactured under agreement know-how in the form of specifications and formulae supplied for manufacture of beer by using raw material and following quality standards as specified by appellant price of goods fixed by appellant and manufacturer required to use brand name of appellant and obligated to pay specified amount as net proceeds such amount represented profit, not acceptable transaction similar to brand licensing agreement - payment made for transfer of intellectual property and service tax payable thereon

© Grant Thornton International. All rights reserved. 51 IPR Services – Case law 3 In Re: Ashok Enterprises 2007 (5) STR 153 (Commr. Appeal) agreement by appellant allowing use of trade mark on goods manufactured by assignee agreements lacking concept of business operation, managerial expertise and market techniques of franchiser to be followed by franchisee not covered C.B.E. & C. Circular clarifying that mere licence production agreement not to be called franchisee agreement and licence fees paid therefor not liable to service tax agreement clear in granting limited use of intellectual property of trade mark for consideration and covered under Intellectual Property service classification of services - intellectual property service and franchise service - licence production agreement to use trade mark - right assigned for limited use of intellectual property of trade mark for consideration - franchise service not rendered and impugned activity taxable under intellectual property service

© Grant Thornton International. All rights reserved. 53 History SNPeriodTaxability of Import of Services 1.1 April 1994 to 15 August 2002 No specific provision for taxing services provided by non residents 2.16 August 2002 to 31 December 2004 Rule 2(1)(d)(iv) of Service Tax Rules, 1994 amended to introduce the ‘reverse charge’ mechanism for taxable services rendered by a foreign service provider not having an office in India 31 January 2005 to 17 April 2006 Explanation to Section 65(105) introduced vide Notification no. 26/2004. However, service tax could not be levied if services received by Indian resident outside India. 4.April 18, 2006 till dateNew Section 66A introduced along with Taxation of Services (Provided from outside India and received in India) Rules, 2006

© Grant Thornton International. All rights reserved. 54 Import of services – effective 18 April 2006 Separate Section 66A has been introduced whereby taxability of import of services is covered Taxation of Services (provided outside India and received in India) Rules, 2006 (Import Rules) notified The Import Rules have adopted the same categorization as in case of Export of Services Rules, 2005 namely Location of immovable property (Group 1) Performance of Service (Group 2) Location of recipient of services (Group 3)

© Grant Thornton International. All rights reserved. 55 Coverage and impact all such taxable services shall be treated as if the recipient had himself provided the service in India and hence would be taxable the recipient of service would be liable to obtain registration and pay service tax the services would not be taxable in case the services are received by an Individual and is received otherwise than for purpose of use in business or commerce such services could be treated as input services for the purpose of availing credit, when the same are used for providing output taxable services

© Grant Thornton International. All rights reserved. 56 Coverage and impact all such taxable services shall be treated as if the recipient had himself provided the service in India and hence would be taxable the recipient of service would be liable to obtain registration and pay service tax the services would not be taxable in case the services are received by an Individual and is received otherwise than for purpose of use in business or commerce such services could be treated as input services for the purpose of availing credit, when the same are used for providing output taxable services

© Grant Thornton International. All rights reserved. 57 Constitutional validity explanation to section 65(105) has been omitted section 66A has been incorporated in the Finance Act, 1994 section 66A is to be read with the Taxation of Services (Provided from outside India and received in India) Rules, 2006 constitutional validity of section 66A has been upheld by the High Court

© Grant Thornton International. All rights reserved. 58 Deemed provisions permanent establishment of same entity in India and in other country shall be treated as two separate legal entity. provision of services by entity outside India to an entity in India shall be treated as import of service in India entity in India shall be liable to discharge service tax on service received from entity in other country the services which are received in India would not be regarded as output services for the purpose of CENVAT Rules – i.e. service receiver is liable to pay service tax through cash only – CENVAT credit cannot be utilized for such payment

© Grant Thornton International. All rights reserved. 59 Issues effective date of applicability of reverse charge mechanism provisions 16 August 2002 1 January 2005 18 April 2006 service tax paid during the disputed period branch offices being considered as separate legal entity when services are received and consumed outside India whether reimbursement of expenses would attract service tax

© Grant Thornton International. All rights reserved. Service Tax All India Institute of Chartered Accountants' Society Deepak Agarwal – Associate Director.

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© Grant Thornton International. All rights reserved. Service Tax All India Institute of Chartered Accountants' Society Deepak Agarwal – Associate Director.

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