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No VAT payable by Subway on franchise fees in Maha: HC


No VAT payable by Subway on franchise fees in Maha: HC

Upholds That There Was No Trademark Sale

Mumbai: Franchise and royalty fees received by Sub-way Systems India, a group company of the international fast food chain, cannot be subject to value-added tax (VAT) in Maharashtra, ac-cording to a recent order of the Bombay high court.

Subway India enters into franchise agreements with third party restaurants (ie, franchisees), permitting them to operate sandwich shops by displaying the trademark `Subway’. In return, Subway India receives a one-time franchise fee paid on signing of the agreement and weekly royalty payments linked with the restaurant’s turnover.

Maharashtra state excise authorities sought to impose VAT on such income on the grounds that Subway India had transferred the ‘right to use’ its trademark to the franchisees. Subway India’s contention was that the franchise agreements did not result in a `sale’ or transfer of the ‘right to use’ the trademark. The company was already paying service tax on income received under the agreements.

> The HC upheld that Subway India could not be subject to VAT because there was no transfer of ‘right to use’ trademark
> Rights of the franchisee to display the name ‘Subway’ or use the dress code ended on termination of agreement
> Franchisees did not enjoy any exclusivity as other outlets could be set up in the same area
> Franchisees also did not get the right to sub-franchise the business
> The HC’s ruling is expected to benefit fast food & educational chains in Maharashtra

Even while the writ petition filed by the company, challenging the constitutional validity of VAT levy, was pen-ding before the high court, the company was served show-cause notices aggregating to a VAT demand of Rs 5.3 crore for the years 2006 to 2009.

“This favourable order, setting aside imposition of VAT, will also help other similar transactions that have be-en subject to both service tax and VAT liability. Apart from fast food chains, educational and vocational institutions popularly operate under a franchise model,” says Nihal Kothari, executive director at Khaitan and Co, a law firm which represented Subway.

“Bombay high court has laid down the principles for making a distinction between a ‘permissive use’ and `transfer of right to use’,” adds Kothari.

Source :Times of India

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