Taxman dragged to court over GST by Subway

Taxman dragged to court over GST by Subway

American fast-food chain contests on service tax on intellectual property rights

The American fast-food chain Subway Systems (India) has brought the indirect tax department to the court. It alleged that the tax department forced it to pay differential Goods and Services Tax (GST) on services, even before issuing the firm any notice.

The High Court of Punjab and Haryana has held that appropriate time must be given to Subway to present its case. Subway was asked to submit all facts, subsequent to which, the authorities would pass an order.

In its writ petition filed in the High Court, Subway Systems (India) said that the tax department had issued multiple summonses to its top management over the taxability of intellectual property rights.

The company added that the tax department kept issuing summons without following the due process, which could "traumatize" anyone. The Milford headquartered fast-food company maintained that the summonses were issued in spite of explaining to the tax authorities that an advance ruling application was pending.

Advocate for the petitioner, Abhishek A Rastogi, partner at Khaitan & Co, argued that the investigation could not be initiated when there was no case of tax evasion. He added that no recovery of demand could be done without the issuance of a show-cause notice and speaking order.

"In some cases, while an application for advance ruling was pending for disposal, the tax authorities issued numerous summons without any breathing time to submit data/information and tried to recover tax without the issuance of the show-cause notice," he added.

Legal experts have ruled out tax authorities making any recovery till the matter was adjudicated.

Multinationals including fast-food chains, hotels and technology companies that operate through franchisee models in India have come under the taxman's lens. The tax department has been questioning the nature of the agreement and wanting to levy 18 per cent GST on income or royalty received by the multinationals.

Most multinationals pay about 12 per cent GST on the amount, as they claim they are not transferring the brand name or allowing the Indian entity to use the brand name for perpetuity. They argue that there is a difference between "right to use" and "transfer of right to use" a brand name. Therefore, the GST rates on royalty receipts too should differ. But the tax department claims that it is only a nomenclature aimed at tax arbitrage.

Under the franchisee model, the multinationals allow Indian companies to operate certain stores, hotels, or entities with their global brand name. Against that the franchisor or the multinational firm charges a percentage of profit or royalty or any other income.

In India, several multinationals operate through different franchise models. Most fast-food chains - burgers, pizza, coffee and sandwiches tend to allow micro-geography-based exclusivity. For instance, a burger joint can allow one franchisee at Churchgate in Mumbai, but that does not mean it would not allow another at Nariman Point in the same city.

In most cases, it is mentioned that the contract is for 99 years. However, the tax department claims it is nomenclature. Under the tax framework, the manner in which the contracts are worded tends to decide the tax rate.

The tax department now wants to scrutinize the "substance over form" of these contracts. This would make it clear, whether the contract was drawn in a particular manner to save the tax.