Recently, the Allahabad High Court (Commissioner Commercial Tax vs. Pan Parag India Limited) highlighted the necessity of a sophisticated tax policy on franchise agreements. According to Justice Shechar B. Saraf, taxing franchise agreements and product sales is a complicated, multifaceted matter that is difficult to classify under the tax code.
“Although both involve commercial transactions, they embody different economic realities and legal considerations that necessitate different tax treatment. By recognizing the unique characteristics of franchise agreements, including the prevalence of intangible assets and the importance of intellectual property, tax authorities can develop nuanced tax policies that promote fairness, efficiency and compliance“. said the Court
It further stated that In the end, the integrity and efficacy of the tax system would be guaranteed by a balanced strategy that considers the financial significance of franchise transactions as well as the requirement to stop tax arbitrage and avoidance. The Court noted this while sustaining a tribunal’s ruling that value added tax (VAT) cannot be imposed in cases where a trade mark’s franchise does not include the transfer of an exclusive right to use the products.
Under the UP Value Added Tax Act of 2008, the court was considering a review plea filed by the Uttar Pradesh Commissioner of Commercial Tax in a case against Pan Parag India Limited. The First Appellate Body had earlier decided that this should be regarded as a sale and be liable to VAT since Pan Parag had “sold” its brand name under the franchise agreement.
The Commercial Tax Tribunal decided that a trade mark franchise is merely a license to use the goods, not the exclusive right to use them, because it can be granted to multiple people simultaneously. In front of the High Court, the Commissioner argued that VAT might be assessed even in cases where service tax was paid since franchises and trademarks are considered transfers of the right to use the commodities. The Court is evaluating whether a trade mark’s franchise transfers the right to use the products, subjecting them to VAT, for the purposes of the review.
The Court pointed out that there is a difference between assigning a trademark and transferring the right to use it, according to the Finance Act of 1994. It pointed out that licensing agreements are distinct from direct trademark transfers or sales in that they give the franchisee restricted rights to utilize a trademark or business concept.
“This distinction is crucial for tax purposes because it determines the nature and extent of the tax liability for the parties involved”, said the Court.
Author: Rohit Singh
Rohit Singh is passionate individual currently pursuing a degree in Journalism and Mass communication , driven by a desire to do something in the media industry . Driven by a desire to revolutionize media, I aspire to lead by example and instigate a shift towards more responsible and impactful journalism. I love to learn new things and try to adapt them
