American fast food chain Subway has dragged the indirect tax department to court over allegedly forcing it to pay differential Goods and Services Tax (GST) on services before issuing any notices.
In its writ petition filed in the High Court of Punjab and Haryana Subway Systems India said that the tax department had issued multiple summonses to top management over taxability of intellectual property rights.
The company also said that the tax department kept issuing summons without following the due process that could “traumatise” anyone. The Milford headquartered fast food company said that these summons were issued in spite of explaining to the tax authorities that an advance ruling application is pending.
Hearing Subway’s petition the High Court held that appropriate time must be given to Subway to present the case. Subway has been asked to submit all facts, subsequent to which the authorities will pass a speaking order to decide on the issue.
Legal experts say that this would mean that tax authorities will not be able to make any recovery till the matter is adjudicated.
The dispute emanates from the controversy over the taxability of intellectual property rights and royalty.
Multinationals including fast food chains, hotels and tech companies that operate through franchisee models in India have come under the taxman’s lens, ET first wrote on August 29.
The tax department is questioning the nature of agreement and wants to levy 18% GST on income or royalty received by the multinationals.
Most multinationals pay about 12% GST on the amount as they claim that they are not transferring the brand name or allowing the Indian entity to use the brand name for perpetuity. Multinationals claim that there is a difference between “right to use” and “transfer of right to use” a brand name and so GST rates on royalty receipts too should differ. Tax department claims that this is just 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 multinational charges a percentage of profit or royalty or any other income.
Advocate for the petitioner, Abhishek A Rastogi, Partner at Khaitan & Co, argued that investigation cannot be initiated when there is no case of tax evasion and that no recovery of demand can be done without issuance of a show cause notice and the speaking order.
“The recent trend is that numerous summonses are issued to top management and they are forced to pay a substantial amount even before issuance of any show cause notice or an order. In some cases, while application for Advance Ruling is pending for disposal, the tax authorities issue numerous summons without any breathing time to submit data/information and try to recover tax without issuance of the show cause notice,” said Rastogi.
Subway did not respond to an ET questionnaire sent on Wednesday morning.
In India several multinationals operate through different franchise models. Most multinational fast-food chains—burgers, pizza, coffee, sandwiches—tend to allow micro-geography based exclusivity. For instance a burger joint can allow one franchisee in Churchgate in Mumbai, but that doesn’t mean it would not allow another in Nariman Point in the same city.
In most cases the contract mentions that the contract is for 99 years or so. Tax department claims that in essence this is just nomenclature. Under the tax framework the way the contracts are worded tends to decide the tax rate.
Tax department wants to scrutinise “substance over form” of these contracts. That is, whether the contracts are merely drawn in a particular manner to save taxes.
SOURCE: The Economic Times