Tds on franchisee fee

This query is : Resolved

Mikesh Jain (Querist)
Follow

28 February 2014 My client get a franchisee for play school, the school charged a lumpsum fee for that on which they also charged service tax, this fee is other than the royalty, they will get a part of gross receipt too as royalty. so please tell me wether this lumpsum franchisee fee is liable to TDS or not?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
Follow

28 February 2014 This is by way of a contract and TDS has to be deducted on the total payment made to your franchiser

Mikesh Jain

Mikesh Jain (Querist)
Follow

28 February 2014 Thanks Aggarwal Sir, then will TDS be deduct U/s 194C ?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

27 July 2025 Great question. Let's clarify the **TDS implications on franchise fees**, especially in your client's case involving a **play school franchise**, where:

* A **lump sum franchise fee** (other than royalty) is paid, **with service tax**.
* Ongoing **royalty payments** will also be made based on gross receipts.

---

### ✅ **TDS on Lump Sum Franchise Fee**:

The **nature of the lump sum franchise fee** determines the applicable TDS section. Here’s the correct view:

---

### 🔹 **1. If the lump sum fee is for use of brand, trademark, system, know-how, etc.**

➡️ It qualifies as **"Royalty"** under **Section 9(1)(vi)** of the Income Tax Act.

✅ **TDS should be deducted u/s 194J** (Fees for Professional or Technical Services, which also covers royalty).

* **Rate**: 10% (excluding surcharge and cess).
* **Threshold**: ₹30,000 per year.

Even if the school calls it "franchise fee" but it's for **grant of intangible rights**, then it's **royalty**, and **TDS under Section 194J applies**.

---

### 🔹 **2. If the fee is purely for business support, operational help, or setup assistance**

➡️ And not for any intellectual property rights or system use — then it **may be considered as contractual in nature**.

✅ In that case, **TDS under Section 194C** applies.

* **Rate**: 1% if payee is an individual/HUF, 2% for others.
* **Threshold**: ₹30,000 per contract / ₹1,00,000 per year.

But this is less likely in most franchise models, especially in education, where **IPR and brand usage is involved**.

---

### ✅ **Conclusion for Your Case**:

| Fee Type | TDS Section | Rate | Reason |
| ----------------------------- | ----------- | ---- | ------------------------------------------------ |
| Lump sum franchise fee | **194J** | 10% | Treated as **royalty** due to brand/system usage |
| Ongoing revenue-based royalty | **194J** | 10% | Clearly defined as royalty |

✅ So both payments — lump sum and recurring royalty — **attract TDS under Section 194J**.

---

### 📌 Practical Tips:

* Don't rely only on the **label** of the payment — examine the **agreement** to see if it involves brand, IP, or system licensing.
* Exclude **service tax/GST** component from TDS calculation **if shown separately on the invoice** (as per Circular 1/2014).

---

Let me know if you'd like a **TDS compliance checklist** or **draft accounting entry** for this transaction.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now