2009 (11) TMI 823 - HC - VAT and Sales Tax

Whether royalty income received by the assessee from the franchisees for the use of the trade mark SKEI on their products (icecreams) is exigible to tax under the Kerala General Sales Tax Act 1963 in the hands of the assessee? Whether under the circumstances of this case it can be said there exists the concept of goods turnover and taxable turnover with reference to the receipt of royalty by the assessee from their franchisees? Held that - In view of the observations made by this court in the case of Mechanical Assembly Systems (India) Pvt. Ltd. v. State of Kerala 2005 (12) TMI 536 - KERALA HIGH COURT which was followed by us in the case of Jojo Frozen Foods (P) Ltd. v. State of Kerala (2008 (6) TMI 564 - KERALA HIGH COURT) we are of the opinion that the questions of law framed by the assessee require to be answered against the assessee and in favour of the Revenue. Accordingly the revision petition is rejected.

Summary

Issues:
1. Taxability of royalty income received by the assessee from franchisees.
2. Existence of the concept of 'goods', 'turnover', and 'taxable turnover' in relation to royalty income.

Issue 1: Taxability of Royalty Income

The case involves an assessee engaged in the manufacture and sale of ice-creams, holding the trademark "SKEI" and receiving royalty from franchisees. Initially, the assessing authority granted exemption for royalty income from tax assessment. However, the Deputy Commissioner, using suo motu powers, set aside the exemption and remanded the matter for fresh assessment. The Tribunal rejected the assessee's appeal, leading to a revision petition questioning the taxability of royalty income under the Kerala General Sales Tax Act, 1963. The court referred to precedents highlighting the broad definition of 'goods' to include intangible property like software programs, emphasizing that once intellectual property is marketed, it becomes goods subject to sales tax. The court cited judgments from other High Courts to support the view that the transfer of the right to use a trademark constitutes a taxable event under relevant tax laws. Ultimately, the court concluded that the questions of law framed by the assessee should be decided against the assessee and in favor of the Revenue, resulting in the rejection of the revision petition.

Issue 2: Concept of 'Goods', 'Turnover', and 'Taxable Turnover'

The court examined whether the concept of 'goods', 'turnover', and 'taxable turnover' applied to royalty income received by the assessee from franchisees. Referring to previous judgments, the court emphasized that intangible property rights, such as trademarks, fall within the ambit of 'goods' for taxation purposes. The court differentiated between the transfer of the right to use a trademark and the assignment of a trademark, highlighting that the former constitutes a taxable event under relevant tax laws. By analyzing the nature of trade marks as intangible goods capable of being merchandised, the court upheld the decision of the Tribunal confirming the taxability of royalty income. The court reiterated that the transfer of the right to use a trademark is considered a transfer of intangible goods, aligning with the broader definition of 'goods' encompassing both tangible and intangible objects. Consequently, the court held that the order confirming the tax liability on royalty income was appropriate and in line with legal provisions.

In conclusion, the Kerala High Court upheld the taxability of royalty income received by the assessee from franchisees under the Kerala General Sales Tax Act, 1963. The court's analysis focused on the broad interpretation of 'goods' to include intangible property like trademarks, affirming that the transfer of the right to use a trademark constitutes a taxable event. The court's decision was based on precedents and legal principles, ultimately rejecting the revision petition and ruling in favor of the Revenue.