Pakistan – Case Law: Court defines franchising while ruling on taxable royalties

Honda Atlas Car Pakistan Limited v Federation of Pakistan & Others [2016 PTD 1328]

The Lahore High Court in Pakistan has for the first time in Pakistan’s jurisprudence defined the concept of franchising that:

Franchise is the right to produce, manufacture, sell or deal in any product or business or service for a fee or consideration including a technical fee or royalty. Therefore, a franchise agreement will grant the franchisee the right to operate its business in the name and style of the franchisor’s business. So in essence it is a way to do business. A franchise agreement allows the franchisee the right to use the mark or patent of a franchisor for a royalty or fee. The franchisee must ensure that the goods or services maintain the uniformity and standard of the franchisor’s goods or services. The franchisor provides the technical assistance and the Know How to protect its mark or patent so as to ensure uniformity in quality. Therefore, a franchisor shares its business model with all relevant details so that the franchisee can use the patent, logo or mark of the franchisor and maintain the standard, style, quality and look of the product or services provided, as if it is given by the franchisor itself. The franchisor must grant the franchisee the right to use its patent or mark or logo, that is its intellectual property, to the extent necessary to operate the franchisee business. In addition to this the franchisor also provides the assistance and Know How in support of the business and helps to solve problems along the way. Therefore, franchising is a business relationship between the parties where the franchisor services and facilitates the business of the franchisee within defined parameters.

The same decision also provides that excise duty applies to the license fee paid by Honda Atlas Car Pakistan Limited (Licensee) to Honda Japan (Licensor) because pursuant to the license agreement, the Licensee gets access to intellectual property rights, technical assistance and know-how for manufacturing and sale of Honda automobiles. The fact that the technical assistance and know-how is the proprietary right of Licensor does not mean or suggest that it is not a service provided by Licensor. Also the fact that Licensee manufactures the automobiles does not take the license agreement out of ambit of franchise services as the Licensee manufactures and sell automobiles in Pakistan and also provides after sale services to its customers. The franchise services provided by Licensor are for manufacture, sale and all related services provided by the Licensee. These all fall within the ambit of franchise and services under the domestic excise law of Pakistan, and the payments for such services are accordingly taxable.