2014 (1) TMI 1837 - AT - VAT and Sales Tax

Taxability - brand/franchise fee - transfer of right to use - royalty. Whether, the FAA is correct in deciding that brand franchise and technical fees realised by the appellant from beer Contract Bottling Units (CBUs) are not transactions of transfer of right to use brand name/trade mark and such transactions fall outside the purview of the Act and hence not exigible to tax? - Held that - The franchise fee received by the appellant is nothing but the licence fee and does not involve any transfer of right to use the brand name or trade mark - From the close reading of the all the clauses and sub-clauses of the agreement between the appellant and the CBUs confirms the fact that it is only the permission in the nature of licence to use the brand name or trade mark for which the franchise fee is received which is being reflected in the financials. Therefore, there cannot be any doubt to come to the conclusion that there is no transfer of right to use the brand name/trade mark of the appellant by the CBUs. The brand name of the appellant has been given simultaneously to other CBUs also which by itself proves that there is no transfer of right to use the brand name exclusively by any specific CBU - the brand franchise and technical fees realised by the appellant from beer contract bottling units are not transactions in the nature of transfer of right to use brand name/trade mark and the same is purely a service simpliciter which falls outside the purview of Section 2(1)(t)(iv) of the KST Act, 1957 - answered in the affirmative. Whether, the State has established in the cross appeals that the impugned orders of the FAA is incorrect? - Held that - the ownership of the brand name always wrests with the appellant only - the levy of tax by the AA on franchise fee and technical fee has to be held as incorrect and this Bench comes to the conclusion that the FAA is correct in deciding the said issue while allowing the appeal in part - the cross appeals of the State fails and liable to be dismissed - answered in the affirmative. 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 water with that brand name? - Held that - The clauses present in the licence agreement relating to the use of brand name to manufacture package drinking water, Clauses 1, 2, 4, 5, 6, 7, 11, 12, 13 and 15 clearly establishes that at any point of time, the brand name Kingfisher has not been assigned exclusively to the licensees. Furthermore, it is to be noted that the appellant has not done in the main line of business i.e., manufacture and sale of beer and package drinking water and even not that of sale of its business assets. Therefore by any stretch of imagination to hold that the agreements entered by the appellant with the licensees involved transaction of deemed sales falling under Section 2(1)(t)(iv) of the Act, in the absence of any activity in the lines of business carried by the appellant cannot be held incidental or ancillary to the main lines of business - answered in negative. Appeal allowed in part.

Summary

Issues Involved:
1. Taxability of brand franchise and technical fees received from Contract Bottling Units (CBUs).
2. Taxability of royalty received from licensees for the use of the "Kingfisher" brand name for packaged drinking water.
3. Validity of the First Appellate Authority's (FAA) decision on the above matters.
4. Cross appeals by the State requesting restoration of the original assessment orders.

Detailed Analysis:

Issue 1: Taxability of Brand Franchise and Technical Fees from CBUs
The appellant, a company incorporated under the Companies Act, 1956, did not conduct any business within Karnataka during the financial years 2003-2004 and 2004-2005. The Assessing Authority (AA) assessed the appellant as an unregistered dealer and levied tax on brand franchise and technical fees received from CBUs under Section 5C of the Karnataka Sales Tax Act, 1957. The FAA partially allowed the appeal, ruling that these fees did not constitute a transfer of the right to use the brand name/trade mark and thus were not taxable.

The Tribunal analyzed the agreements between the appellant and CBUs, concluding that the brand name or trade mark was not transferred exclusively to the CBUs. The agreements granted a non-assignable, non-transferable, and non-exclusive right to use the brand name under the appellant's supervision. The Tribunal referenced the Bharat Sanchar Nigam Limited case, emphasizing that for a transaction to constitute a transfer of the right to use goods, the transferee must have an exclusive legal right to use the goods. Since the CBUs did not have exclusive rights, the brand franchise and technical fees were not taxable.

Issue 2: Taxability of Royalty from Licensees for Packaged Drinking Water
The AA levied tax on royalty received from licensees for using the "Kingfisher" brand name for packaged drinking water, treating it as a transfer of intellectual property. The FAA upheld this decision. However, the Tribunal found that the agreements with licensees did not grant exclusive rights to use the brand name. The Tribunal applied the principles from the Bharat Sanchar Nigam Limited case, determining that the royalty payments did not constitute a transfer of the right to use the brand name.

Issue 3: Validity of the FAA's Decision
The Tribunal upheld the FAA's decision that brand franchise and technical fees from CBUs were not taxable. It found that the FAA correctly interpreted the agreements and the relevant legal principles. The Tribunal also set aside the FAA's decision to uphold the tax on royalty payments, ruling that these payments did not involve a transfer of the right to use the brand name.

Issue 4: Cross Appeals by the State
The State's cross appeals requested the restoration of the original assessment orders, arguing that both the brand franchise fees and royalties constituted taxable transfers of the right to use the brand name. The Tribunal dismissed these appeals, finding that the State failed to establish that the FAA's decision was incorrect. The Tribunal concluded that the agreements did not involve exclusive transfers of the right to use the brand name, and thus the fees and royalties were not taxable.

Final Order:
1. Both the appeals by the appellant are allowed.
2. The cross appeals by the State are dismissed, and the original assessment orders are not restored.
3. The impugned appellate orders of the FAA are set aside, including the levy of penalty and interest.
4. The original judgment is to be kept in STA No. 2456 of 2012, with copies in STA No. 2457 of 2012 and Cross Appeal Nos. 1142 and 1143 of 2013.
5. The Registrar of the Tribunal is directed to comply with Regulation 53(b) of Chapter IX of Karnataka Appellate Tribunal Regulations, 1979 by communicating this order to the relevant parties.
6. The office is directed to send back the lower authorities' records immediately.