9911796707
TMI Blog2021 (1) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... icant 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 to use its trademark, brand name and other proprietary knowledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 independent business with regularity and permanency. Such transfer of business will comprise comprehensive transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 claimed on inward supplies received at the time of developing the outlet which includes installation of equipment, furniture etc. as the same has been supplied with pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 997336 and as per Notification No. 11/2017, it will be charged @12%. So, they requested to consider the same in good faith and give proper justification to the application. (iv) All other points for Going Conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 third parties whereby the applicant gives 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 franchis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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/ café in various parts of the country, under the brand name "Tea post". D. Pursuant to and in consideration for the Franchise Fee and Security Deposit (as defined in the agreement), the applicant has agreed to grant in favour of the Franchisee, a franchise to set up, manage, run and operate the Café under the brand name "Tea Post" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nchisor. 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 service provided, marketing & selling strategies, etc. (v) Licensing is an arrangement in which a company (licensor) sells the right to use intellectual property, or produce a company's product to the licensee, for a negotiated fee i.e. royalty. Franchising is an arrangement in which the franchisor permits the franchisee to use business model, brand name or process for a fee, to conduct business, as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt) 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, technical and business service. 362 998396 Trademarks and franchises 17.2 We further find that as per the explanatory notes, the Service Code (Tariff)-998396-Trademarks and franchises, includes original trademarks and franchises, i.e. the legally registered ownership of a certain brand name. Further, these products are produced on own account with the intent of deriving benefits from allowing others to use these trademarks or franchises. 17.3 In view of the above, we hold that "Fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: "4. Transfer of business assets: (a) 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; (b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent 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 of Notification No. 12/2017 Central Tax (Rate) would not be applicable in as much as the transaction does not tantamount to 'supply of services'. Accordingly, the answer is in negative. 24. The last question for which a Ruling has been sought is, 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? 24.1 Since the answer to question No. 2 is negative, the question of admissibility of Input Tax Credit is to be examined. In this regard, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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