Service tax on Franchise Services
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
09 March 2011
Is service tax applicable on branded showrooms, where only expenses of employees are reimbursed by the Franchisor and no managerial expertise is provided to Franchisee?
09 March 2011
Details of the arrangement is not clear. Anyway, if you are trading goods supplied by franchiser, no service tax on trading profit. If you sell goods on their behalf for commission, it is liable to service tax under BAS.When they reimburse for manpower, it may be added to the value of the service under BAS.
Querist : Anonymous
Querist :
Anonymous
(Querist)
09 March 2011
It is showroom of branded cloths.
24 July 2025
Thank you for your query regarding **service tax applicability on branded showrooms under franchise arrangements**.
Based on your description — a branded clothing showroom, employee expenses reimbursed by the franchisor, and no managerial services provided — here's a structured analysis:
---
### ✅ **Relevant Service: Franchise Services (Section 65(105)(zze) of Finance Act, 1994)**
**Service Tax is applicable** if your arrangement qualifies as a *franchise agreement*. For it to fall under **"Franchise Services"**, **all** of the following conditions (as per explanation to section 65(47)\*\*) must be satisfied:
#### **Franchise means an agreement by which:**
1. The franchisor **allows the franchisee to use its brand name or process**;
2. The franchisor **retains control** over the manner of operation;
3. The franchisee is **required to pay consideration**;
4. The franchisee **sells goods or services identified with the franchisor**;
5. The franchisor provides **assistance (training, manuals, management support, etc.)**.
---
### 💡 **Your Situation:**
* Branded clothing showroom → ✔️ using brand name;
* Employee expenses reimbursed by franchisor → ✖️ no independent commercial consideration;
* No managerial assistance provided → ✖️ one major condition of franchise missing;
* No explicit franchise fees paid → ✖️ no consideration from franchisee;
* Goods being sold might be on trading basis → could be outside service tax scope.
---
### ⚖️ **Conclusion:**
> Based on what you've described — **if** there is **no payment of franchise fee**, **no ongoing managerial or technical support**, and the **relationship is purely based on trading goods under a brand**, then **this may not qualify as a “franchise service”** under service tax laws.
However:
* If the **employee cost reimbursement is seen as consideration** (i.e., not actual reimbursement but part of business support), or
* If **commission is earned** on behalf of the franchisor,
Then it could fall under **Business Auxiliary Services (BAS)** or **Manpower Supply Service**, both of which **were taxable** prior to GST.
---
### 📌 Key Points to Examine:
* Is there a **formal franchise agreement** in place?
* Is there **any fee/royalty/commission** paid by franchisee to franchisor?
* Are you **acting as an agent** or **buying and selling independently**?
---
### 📅 Post-GST Note:
Since Service Tax has been subsumed by GST from **1 July 2017**, these provisions are historical and apply only to services rendered **before that date**. Under GST, franchise services fall under **supply of services**, and different tax implications exist.
---
If you'd like help reviewing the franchise agreement or need to determine whether a specific arrangement is taxable, feel free to share the terms or nature of payments.
Based on your description — a branded clothing showroom, employee expenses reimbursed by the franchisor, and no managerial services provided — here's a structured analysis:
---
### ✅ **Relevant Service: Franchise Services (Section 65(105)(zze) of Finance Act, 1994)**
**Service Tax is applicable** if your arrangement qualifies as a *franchise agreement*. For it to fall under **"Franchise Services"**, **all** of the following conditions (as per explanation to section 65(47)\*\*) must be satisfied:
#### **Franchise means an agreement by which:**
1. The franchisor **allows the franchisee to use its brand name or process**;
2. The franchisor **retains control** over the manner of operation;
3. The franchisee is **required to pay consideration**;
4. The franchisee **sells goods or services identified with the franchisor**;
5. The franchisor provides **assistance (training, manuals, management support, etc.)**.
---
### 💡 **Your Situation:**
* Branded clothing showroom → ✔️ using brand name;
* Employee expenses reimbursed by franchisor → ✖️ no independent commercial consideration;
* No managerial assistance provided → ✖️ one major condition of franchise missing;
* No explicit franchise fees paid → ✖️ no consideration from franchisee;
* Goods being sold might be on trading basis → could be outside service tax scope.
---
### ⚖️ **Conclusion:**
> Based on what you've described — **if** there is **no payment of franchise fee**, **no ongoing managerial or technical support**, and the **relationship is purely based on trading goods under a brand**, then **this may not qualify as a “franchise service”** under service tax laws.
However:
* If the **employee cost reimbursement is seen as consideration** (i.e., not actual reimbursement but part of business support), or
* If **commission is earned** on behalf of the franchisor,
Then it could fall under **Business Auxiliary Services (BAS)** or **Manpower Supply Service**, both of which **were taxable** prior to GST.
---
### 📌 Key Points to Examine:
* Is there a **formal franchise agreement** in place?
* Is there **any fee/royalty/commission** paid by franchisee to franchisor?
* Are you **acting as an agent** or **buying and selling independently**?
---
### 📅 Post-GST Note:
Since Service Tax has been subsumed by GST from **1 July 2017**, these provisions are historical and apply only to services rendered **before that date**. Under GST, franchise services fall under **supply of services**, and different tax implications exist.
---
If you'd like help reviewing the franchise agreement or need to determine whether a specific arrangement is taxable, feel free to share the terms or nature of payments.
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