2014 (9) TMI 1147 - AT - VAT and Sales Tax

Transfer of right to use - sale or service - Whether in facts and law, the FAA is correct in deciding that the transactions between the appellant-company and the CBUs is one of technical service activity and does not involve the transfer of right to use the trademark or there is no deemed sale of trademark? Held that - he appellant-company has granted only permission to use the trademark which means to say it is only the licence to manufacture the beer as per the terms and conditions of the appellant-company. The permission to use the trademark is inevitable as the beer so manufactured is for the appellant-company only as the label clearly stipulates that it is For United Breweries only i.e., for the appellant-company only. The agreements are of composite nature which involves rendering of services, technical consultancy, monitoring of production and marketing and distribution of the beer manufactured on behalf of the appellant. It is the contention of the AA that there is transfer of right to use the trademark - the necessary concomitant of the plain language of the agreement proves that it is merely the licence to use the goods rather than the transfer of right to use as envisaged under the Act. This is explicitly laid down under Clause 2.2 which states that UBL hereby grants to BDL i.e. CBL s, the non-assignable, non-transferable and non-exclusive right during the term of the agreement. The sub-clauses 2.2.1, 2.2.2 and 2.2.3 makes it clear that it is only the licence to use the trademark in the composite contract transactions. The FAA is correct in deciding the issue that the transactions between the appellant and the CBUs does not involve the transfer of right to use the trademark or brand name and thereby the brand franchisee fee is not liable for tax - decided in affirmative. Whether, the State in cross appeals has established in facts and law that there is transfer of right to use the trademark as per the agreements and the FAA has erred in allowing the appeals in part? - Held that - the trademark is first of all an intellectual property right and permission to use the trademark amounts to intellectual property services. The appellant-company has adduced copies of the returns in Form ST-3, the prescribed form under Section 70 of the Finance Act, 1994 to demonstrate that the service tax has been paid on the payments realised by way of economic surplus in the form of marketing fee during the impugned tax periods - the cross appeals of the State do not sustain and liable to be dismissed - decided in negative. Whether, the FAA is correct in deciding that the royalty realised by the appellant amounts to transfer of right to use the brand name Kingfisher to the licensees to manufacture and sale of packaged mineral water with that brand name? - Held that - the law is clear to the effect if royalty received by the appellant has been offered to the service tax under Finance Act, 1994 then it cannot be construed as transfer of right to use the trademark Kingfisher in favour of water bottling units. As the appellant-company has adduced proof by furnishing the copies of Form ST-3, the prescribed form under Section 70 of the Finance Act, 1994 wherein the entire royalty has been admitted to service tax right from April 2006 to March 2011 i.e. during the impugned tax periods of financial years 2005-2006 to 2010-2011 (six financial years) - decided in negative. There is no need to restore the orders of the AA - appeal allowed in part.

Summary

Issues Involved:

1. Whether the transactions between the appellant and the CBUs involve the transfer of the right to use the trademark or constitute a deemed sale of the trademark.
2. Whether the FAA erred in concluding that there is no transfer of the right to use the trademark to the CBUs.
3. Whether the royalty received for the use of the "Kingfisher" trademark for packaged mineral water constitutes a transfer of the right to use the trademark.
4. What order should be passed.

Issue-wise Analysis:

1. Transfer of Right to Use Trademark with CBUs:

The Tribunal analyzed the agreements between the appellant and the CBUs, highlighting that the agreements are for brewing and distribution of beer, not for the transfer of the right to use the trademark. The agreements include technical know-how, supervision, and control by the appellant over the brewing process, marketing, and distribution. The appellant retains ownership of the trademarks, and the CBUs are granted only a limited, non-exclusive right to use the trademarks under strict conditions and supervision. The Tribunal concluded that there is no transfer of the right to use the trademark, following the principles laid down by the Supreme Court in the BSNL case, which requires five attributes for such a transfer, including exclusive use by the transferee, which is absent here.

2. FAA's Conclusion on Transfer of Right to Use Trademark:

The Tribunal upheld the FAA's decision that the transactions do not involve the transfer of the right to use the trademark. The Tribunal noted that the FAA correctly analyzed the agreements and applied the law declared by the Supreme Court in the BSNL case. The Tribunal also referred to the judgment of the Kerala High Court in Malabar Gold Pvt. Ltd., which supports the view that granting permission to use a trademark under strict control and supervision does not constitute a transfer of the right to use the trademark.

3. Royalty for "Kingfisher" Trademark for Packaged Mineral Water:

The Tribunal examined the technical know-how and license agreements related to the "Kingfisher" trademark for packaged mineral water. It found that these agreements are composite in nature and involve the appellant providing technical know-how and granting permission to use the trademark under strict conditions. The Tribunal noted that the royalty received by the appellant has been offered to service tax under the Finance Act, 1994, indicating that the transactions are considered as providing intellectual property services rather than a transfer of the right to use the trademark. The Tribunal concluded that there is no transfer of the right to use the trademark for packaged mineral water.

4. Order:

The Tribunal allowed the appeals filed by the appellant and dismissed the cross appeals filed by the State. It set aside the orders of the FAA and AA regarding the levy of tax, interest, and penalty on the royalty received from licensees manufacturing packaged mineral water. The Tribunal directed the Registrar to comply with the necessary regulations and communicate the order to the relevant parties. The lower authorities' records were to be sent back immediately.