Tds on franchisee fee
This query is : Resolved
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?
28 February 2014
This is by way of a contract and TDS has to be deducted on the total payment made to your franchiser
28 February 2014
Thanks Aggarwal Sir, then will TDS be deduct U/s 194C ?
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.
* 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
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Current Account Opening for Sole Proprietorship with Udyam Certificate - Zero Turnover
- TDS on Purchase of Immovable Property by NRI from NRI
- INTEREST APPLICABLE ON ITC REVERSAL PORTION
- Capital gain from sale of house property
- Copyright software
- SFT Cash Deposit in Current Account
- Value of property in capital gain
- Regarding TDS Applicability For Director Remuneration
- FORM 26A APPLICABILITY
- When TDS on GST applied
- GST Treatment of Insurance Commission for Existing GST Holder
- Cash gift by grand mother to her grand daughter
- Tax amount diff in Gstr1 and 3B in tax compare reports
- Tds on GST in connection with sale to public company
- Restoration of certificate of practice
- Regarding change in correspondence address in SSP portal
- No Compliences after incorporation
- USEFUL LIFE OF USED/SECOND HAND COMMERCIAL VEHICLES
- Claiming TDS deducted by builder on Hardship compensation and Corpus
- Address Change to another state of a Registered Trust with 12AB approval
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
CAclubindia
