Court Rules That Subway Does Not Have To Pay Taxes On Franchise Royalties In Maharashtra

Lately, it seems like every time we dine out we’re paying a bomb. Not because menu prices have gone up, but because our bills come embellished with a healthy percentage of VAT and service and now Swachh Bharat taxes. Since the rise in taxes, countless memes have hit the internet. Check out one of our favourites below, which got itself 3.7K retweets and 2.7K likes: 

Just ordered some Service Tax and got a Pizza Free.

— Trendulkar (@Trendulkar) June 1, 2016

However, there appears to be some hope, at least for food chains. In a landmark judgement, the Bombay high court ruled that franchise and royalty fees received by Subway Systems India cannot be subjected to VAT.

Franchisee Fees

Subway Systems India operates by entering into agreements franchisee restaurant, which allow them to sell Subway’s menu and display the Subway logo in the restaurant. After entering the agreement, Subway India gets a one-time fee as well as a weekly amount from the restaurant, calculated according to its sales.

State Excise authorities in Maharashtra wanted to impose a tax on these royalties. However, Subway took this desire to court, arguing that they are already paying service tax on the original agreement fees. The court ruled in Subways favour, preventing the tax authorities from demanding additional tax on franchisee’s weekly royalties which are paid to Subway.  

“This favourable order, setting aside imposition of VAT, will also help other similar transactions that have been subject to both service tax and VAT liability. Apart from fast food chains, educational and vocational institutions popularly operate under a franchise model,” said ihal Kothari, executive director at Khaitan and Co, a law firm which represented Subway India to Times of India.

This judgement can go a long way in helping establish rules for other franchisee agreements.