Over a dozen food & beverage companies get notice over trademark usage

New Delhi: The Directorate General of Goods and Services Tax Intelligence (DGGI) has sent show cause notices to more than a dozen food and beverages companies over trademark usage by their franchises and outlets in states other than where they have their registered offices, officials in the know said.

The notices, sent in the first week of August, seek about ₹3,000 crore from the companies for the period starting July 2017 when GST was introduced. According to the DGGI, the franchises and outlets located outside the home states of these companies are registered separately and therefore are liable to pay GST on the use of the trademark. "Tax has to be paid for use of trademark services," a senior official told ET.

While the franchise holders and vendors were paying fees to the companies for the usage of the brands, they were not paying GST on that.

According to Schedule 1, Entry 2 of the Central GST legislation, the supply of goods or services between distinct persons (different registrations of a legal entity) is considered a taxable supply, even when made without a price.

This has led to the tax authorities classifying the use of a brand by a branch office or franchise holder in a different state as a service provided by the head office.

"If this interpretation is adopted, it would be burdensome for businesses operating across multiple jurisdictions," Saurabh Agarwal, a partner at professional services network EY, told ET.

It can also add to undue additional tax cost for businesses where full input tax credit is not available, Agarwal added.

The GST rate is 5% for non-air-conditioned and 18% for air-conditioned restaurants. Those serving alcoholic beverages face GST at 18%.

Experts say the development could increase tax complexities for the industry and inflate their tax burden.

"The key issue is that there is no formal contractual relationship with a registered place of business in another state for the supply of a trademark to a distinct entity, and in the absence of such a contractual relationship, the activity is not subject to GST," explained Abhishek A Rastogi, founder of law firm Rastogi Chambers.

There is a clear distinction between the mere inclusion of a logo for identification purposes and its commercial use under the trademark law, he said.