2013 (12) TMI 743 - HC - VAT and Sales Tax

Liability to sales tax - Transfer of right - Petitioner contends that it only gave franchisee right and there was no sale hence no sales tax is leviable - Revenue contends that transfer of trade mark and a trade mark is a property right, intangible or incorporeal goods and would fall within the definition of goods hence liable to tax - Whether receipts pursuant franchisee agreement are liable to sales-tax - Held that - petitioner has transferred their right to use their trade mark, good will, reputation exclusively to the franchisee in respect of a particular outlet and any misuse of such exclusively licensed right rendered, the franchisee open to action which meant to include the termination of agreement in terms of XIV of the said agreement. Therefore, it is a case where goods which are in the nature of intangible or incorporeal goods were available for delivery there were consensus adidem to the identity of such goods as the transferee has a legal right to use the goods and during the period when the agreement was in force, namely for a period of 10 years it was an exclusive right given to the transferee by the petitioner in respect of a particular store and consequently a transfer of right to use and not merely a licence to use the goods and during the period when the agreement was in force, the petitioner as the transferor could not transfer such goods with particular reference to the exclusive right given in respect of a particular store to any other party. Thus, all the attributes to constitute transfer of right to use the goods have been fulfilled - Right given by the petitioner is undoubtedly a transfer of right to use incorporeal or intangible goods and therefore, exigible to sales-tax - Following decision of BSNL vs. Union of India 2006 (3) TMI 1 - Supreme court and Sunrise Associates vs. Government of NCT of Delhi & Ors. 2006 (4) TMI 118 - SUPREME COURT of INDIA - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the franchise agreement constitutes a sale of goods or a provision of services.
2. Whether the franchise fee is subject to sales tax under the Tamil Nadu General Sales Tax Act, 1959.
3. Whether the franchise agreement involves a transfer of intangible property rights.

Issue-wise Detailed Analysis:

1. Nature of Franchise Agreement: Sale of Goods or Services:
The petitioner argued that the franchise agreement is purely a service transaction and does not involve the sale of goods. The agreement was for the operation of a supermarket under the name "VITAN A/C Supermarket," with the franchisee paying fees for the use of the VITAN system and trademarks. The petitioner contended that the fee received is for services rendered and not for the sale of any tangible or intangible goods.

2. Applicability of Sales Tax on Franchise Fee:
The Assessing Authority, First Appellate Authority, and Tribunal concluded that the franchise fee is taxable under the TNGST Act. They held that the franchise agreement involved the transfer of trade name and goodwill, which are considered intangible goods. The Tribunal referenced the case of S.P.S. Jayam and Co. v. Registrar Tamil Nadu Taxation Special Tribunal, where it was established that trademarks are intangible goods and their transfer is subject to sales tax. The Tribunal dismissed the appeal, affirming that the franchise fee is taxable at 4%.

3. Transfer of Intangible Property Rights:
The petitioner argued that the franchise agreement did not involve the transfer of any property rights, but merely allowed the franchisee to use the VITAN system and trademarks. They cited the Supreme Court's decision in Sunrise Associates v. Government of NCT of Delhi, which distinguished between actionable claims and goods. However, the court found that the agreement did transfer intangible property rights, such as the right to use trademarks and goodwill, which are considered goods under the TNGST Act. The court held that the transfer of these rights constituted a sale of intangible goods, making the franchise fee subject to sales tax.

Conclusion:
The court concluded that the franchise agreement involved the transfer of the right to use intangible property, such as trademarks and goodwill, which are considered goods under the TNGST Act. Consequently, the franchise fee is subject to sales tax. The court dismissed the petitioner's appeals, affirming the Tribunal's decision that the franchise fee is taxable at 4%. The court emphasized that the petitioner had transferred exclusive rights to the franchisee, satisfying the criteria for a transfer of intangible goods and making the transaction taxable under the TNGST Act.