Understanding Franchise Agreements

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Introduction of Franchise Agreements

A franchise agreement serves as a contractual bond between two parties: the franchisor and the franchisee. The franchisor, retaining possession of a trademark, emblem identity, and business model, presents the franchisee the privilege to make use of these intellectual belongings assets and manipulate an enterprise consistent with the franchisor’s mounted strategies and protocols.

Legal Definition

In accordance with Section 65(47) of the Finance Act, 1994, a ‘franchise’ is described as an agreement wherein the franchisee is provided with representational rights to vend or produce goods, offer services, or execute processes associated with the franchisor. This applies whether or not trademarks, service marks, trade names, logos, or similar symbols are involved in the agreement.

Key Attributes

Grant of Rights: The franchisor authorizes the franchisee to employ its trademarks, trade names, logos, and proprietary business methodologies within a specified geographical territory.

Non-Exclusive Rights: Per Section 65(47), the franchise agreement extends representational rights rather than exclusive rights to the franchisee for selling or manufacturing goods.

Territorial Restrictions: The agreement delineates the geographical region where the franchisee can operate under the umbrella of the franchisor’s brand.

Operational Standards: The franchisor establishes benchmarks for the franchisee to adhere to regarding product quality, service delivery, marketing strategies, etc., to ensure uniformity in brand presentation.

Fees and Royalties: The franchisee is obligated to pay an initial franchise fee and ongoing royalty fees to the franchisor, typically calculated as a percentage of sales or revenue.

Term and Renewal: Franchise agreements are structured with a defined term, often containing provisions for renewal subject to specified conditions.

Training and Support: The franchisor provides initial and continuous training, operational assistance, and support to the franchisee.

Significant Legal Precedents

Bharat Sanchar Nigam Ltd. v. Union of India (2006): The Supreme Court established criteria for determining whether a transaction constitutes the transfer of the right to use goods, which include:

  • The presence of goods ready for delivery.
  • Agreement on the specific identity of the goods.
  • The transferee possessing the legal right to utilize the goods.
  • The exclusion of the transferor from using the goods during the transfer period.
  • The owner’s inability to transfer the same rights to others during that period.

McDonald’s India Pvt. Ltd. v. Commissioner of Trade Taxes (2017): The Delhi High Court clarified that a franchise agreement, granting a non-exclusive right, does not amount to the transfer of the right to use goods.

Malabar Gold Private Limited v. Commercial Tax Officer (2013): The Kerala High Court affirmed that a franchise agreement does not constitute a deemed sale under the Kerala Value Added Tax Act, emphasizing the franchisor’s retention of control and possession.

Godfrey Phillips India Limited v. State of Uttar Pradesh (2005): The Supreme Court clarified the taxation status of activities as either services or sales, ensuring non-overlapping taxes as mandated by the Constitution.


In conclusion, a franchise agreement is an important contract that establishes a cooperative relationship between the franchisor and the franchisee. It gives the franchisee the right to use the franchisor’s intellectual property and business model within specific parameters, while adhering to business standards and paying fees and royalties Legal examples, such as Bharat Sanchar Nigam Ltd. v. Union of India v. McDonald’s India Pvt. Ltd. v. Commissioner of Business Tax, plays an important role in clarifying the legal complexities of franchise agreements. These agreements are important elements of operations, driving collaboration and growth in the franchise business.

frequently asked questions

What is a franchise agreement?

A franchise agreement is a legally binding agreement between the franchisor (trademark, brand name and business process owner) and the franchisee. It entitles the right holder to use the franchisor’s intellectual property and to perform the work in accordance with the franchisor’s procedures and policies.

Are franchise agreements subject to renewal?

Yes, franchise agreements typically have a defined term with provisions for renewal subject to certain conditions as agreed upon by both parties.

What are the key components of a franchise agreement?

The key components include the grant of rights to use trademarks and business methods, non-exclusive rights for the franchisee, territorial restrictions specifying the operational area, operational standards for maintaining brand consistency, fees and royalties payable by the franchisee, term and renewal provisions, and training and support provided by the franchisor.

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