TMI Blog2021 (1) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... and franchises, includes licensing services for the right to use trademarks and to operate franchises. As per the statement of facts, the applicant has made a Franchise Agreement and not the License Agreement , therefore, the services in question cannot be said to be Licensing services . 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), fall under Chapter Heading 9983 as Other professional, technical and business services and Service Code (Tariff)- 998396-Trademarks and franchises, attracting GST @ 18%. Transfer of an operational outlet - Services by way of transfer of a going concern, as a whole or an independent part thereof - HELD THAT:- The transfer of business assets is to be considered as supply of goods. The transfer of business assets implies that a part of the assets are transferred and not the whole business. In the applicant s case, only one outlet of his business chain is being transferred/ sold to the recipient. Thus, it is not a case of transfer of an ongoing concern in whole. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty under the franchise agreement. 2. The applicant enters into a franchise agreement 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 franchise agreement with franchisee to use their trademark, brand name and other proprietary knowledge. The applicant is also entitled for monthly Royalty at a pre-determined rate on gross sales revenue of the franchisee or fixed pre-determined amount, whichever is higher, from the franchisee. 3. The applicant 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Purchase agreement , purchaser pays a lump consideration to purchase an operating outlet along with all the equipment installed in the outlet which are required for continuing the outlet s operations with regularity and permanency. As per agreement, 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. 5.2 The applicant further submitted that Section 7 of CGST Act, 2017 defines scope of supply . Section 7(1) provides that Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transfer of a going concern, as a whole or an independent part thereof is exempted from payment of so much Central Tax leviable under Section 9(1) of the GST Act, 2017. 6.3 The transfer of an operational outlet by the applicant to a third party under purchase agreement comprises of transfer of a running business capable of being carried on by the purchaser as an independent business and such transfer has been established by the applicant in paras5 to 5.8 above as transfer of a going concern . 6.4 Thus, as per the understanding of the applicant, the transaction of transfer pf an operating outlet by the applicant as a going concern is covered under the Serial No. 2 of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017. 7. The last Question raised by the applicant is regarding the admissibility of Input Tax Credit of tax paid or deemed to have been paid, as below: 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? 7.1 In this regard, the applicant has submitted that if the answer to Question No.2 is in negative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 997336 is defined as: A uniform format is followed to generate the Service Accounting Code. The first two digits are 99 always for services. The next two digits 73 represent the major nature of service, Leasing or rental services with or without operator in this case. The next two digits 36 represent the detailed nature of service, Licensing services for the right to use trademarks and franchises in this case. And in their case, since they are collecting Franchisee Fee for using their Trademark for limited time period and it is non-refundable and also royalty collected is also for using of Trademark for the brand to the Franchisee to sell the product from franchisee place for limited period only and after completion of Franchisee terms, it will not be allowed to sell the same, thus, for the same, royalty is collected, which is in a nature of Licensing services taken on regular basis for the right to use trademarks and franchises in their case. So, from the above 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant, relevant facts the applicant s interpretation of law. At the outset, we would like to state that the provisions of both the CGST Act and the GGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the GGST Act. 10. The applicant has sought advance ruling on four questions, as below: Question-1: Classification of any goods and services or both for which 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). Question-2: Does transfer of an operational outlet (as mentioned in the Description), would amount to Services by way of transfer of a going concern, as a whole or an independent part thereof ? Question-3: If the answer to question no. 2 is affirmative then, whether 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? Qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of intellectual Property (IP) right in respect of goods other than Information Technology Software. 6 - 11.4 The applicant further submitted that as per the Annexure: Scheme of Classification of Services, the Franchisee Fee and royalty covers under Service Code (Tariff) No. 997336 as Licensing services for the right to use trademarks and franchises . The extract of the relevant Service Code (Tariff) viz. 997336 as per Annexure- Scheme of Classification of Services is reproduced herein below: Sl.No. Chapter, Section, Heading or Group Service Code (Tariff) Service Description 250 Group 99733 Licensing services for the right to use intellectual property and similar products 256 997336 Licensing services for the right to use trademarks and franchises 11.5 From the above, it is clear that Heading 9973 covers the Group 99733 Licensing services for the right to use intellectual property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construed accordingly. 13.1 The Cambridge Dictionary defines Franchise , as under: a right to sell a company's products in a particular area using the company's name . 13.2 The Collins Dictionary defines Franchise , as under: A franchise is an authority that is given by an organization to someone, allowing them to sell its goods or services or to take part in an activity which the organization controls . 14. We further find that there is a difference between licencing and franchising . The difference between licensing and franchising can be drawn clearly on the following grounds: (i) Licensing refers to an arrangement between licensor and licensee where latter party would acquire the right to use products and goods where the ownership remains with the licensor. However, Franchising refers to an arrangement between franchiser and franchisee where the latter will enjoy the ownership of a business on behalf of the franchiser in lieu of a fee where the processes are closely controlled by franchisor. Therefore, it is generally seen that licensing is for products and goods whereas the franchising model is used more in service providing industry. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. However, the franchisor exerts considerable control over franchisee s business and process. 15. From the above, it is amply clear that subject agreement is a Franchise agreement and not a License agreement. 16. We further note that the CBIC has issued the Explanatory Notes to the Scheme of Classification of Services on 12th June, 2018 . The explanatory notes indicate the scope and coverage of the heading, groups and service codes of the Scheme of Classification of Services. As per the Explanatory Notes, the Service Code (Tariff) 997336-Licensing services for the right to use trademarks and franchises, includes licensing services for the right to use trademarks and to operate franchises. As per the statement of facts, the applicant has made a Franchise Agreement and not the License Agreement , therefore, the services in question cannot be said to be Licensing services . 17. We, thus, find that the services in question are Franchising services as the franchisor permits the franchisee to use business model, brand name or process for a fee, to conduct business, as an independent branch of the applicant s parent company (franchisor). Hence, Franchising Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18%. 18. Now, we come to the 2nd Question i.e. whether transfer of an operational outlet (as mentioned in the Description), would amount to Services by way of transfer of a going concern, as a whole or an independent part thereof ? 19. As per the submissions of the applicant, the operating outlet, including the equipment installed, in its running condition is sold. At this juncture, it is pertinent to note that the applicant develops outlet on its own by renting out 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 Purchase agreement or Franchise agreement with them. Thus, it is a case of selling of the equipment/ infrastructure in as much as the land and building is not rented out and not owned by the applicant. Therefore, the question of sale of land and building is ruled out which leaves the only scope of selling the operating equipment/ infrastructure for running the outlet. This is nothing but a sale of goods by the applicant in the form of equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the course or furtherance of his business immediately before he ceases to be a taxable person, unless- (i) the business is transferred as a going concern to another person; or (ii) the business is carried on by a personal representative who is deemed to be a taxable person. In the instant case, the business assets are not supplied for a purpose other than of business and as such the transfer of assets would not be covered under clause (b) above. Further, it is not a case where the applicant ceases to be a taxable person and as such the transfer would not be covered under clause (c). Thus, the transaction is covered under clause (a) which specifies that the transaction would tantamount to supply of goods. Therefore, taking over of assets and liabilities of the applicant by the purchaser is to be construed as supply of goods and the same is liable to GST. 20.2 In view of the above, we find that transfer of business assets is to be considered as supply of goods. The transfer of business assets implies that a part of the assets are transferred and not the whole business. In the applicant s case, only one outlet of his business chain is being transferred/ sold to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. In the instant case, the equipment/ infrastructure of the running outlet is being sold to the recipient as a part of the business activity of the applicant, the same would be covered under Sec. 16(1) of the CGST Act, 2017 and accordingly, the applicant would be eligible for Input Tax Credit subject to fulfilment of all the conditions specified under the Act and the rules made thereunder for admissibility of Input Tax Credit. 25. In light of the foregoing, we rule as under R U L I N G Question-1: 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). Answer : 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 knowled ..... 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