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2016 (8) TMI 717 - HC - VAT and Sales TaxLevy of service tax or sales tax - legislative competence - Subway franchise - scope of franchise agreement - Article 366 (29A) read with Item 54 of List II of constitutions of India - Held that - The agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark Subway and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sub- licensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement. We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use. We do not mean to suggest that every franchise agreement will necessarily fall outside the purview of the amended MVAT Act. There is conceivably a class of franchise agreements that would have all the incidents of a sale or a deemed sale (i.e., a transfer of the right to use). - the Subway franchise does not meet these tests. - There is no such exclusivity. The introduction of the word franchise in the amended MVAT by notification will have to be read to mean those franchises that can reasonably and plausibly be construed to have the effect of a sale; it cannot be widened to include agreements styled as franchise agreements simply because of the nomenclature. Indeed, it seems to us clear that if we accept that a franchise agreement is, by definition, one that requires territorial exclusivity, then the Subway agreements are not franchise agreements at all, but purely licensing agreements. Subway s franchise agreement grants to the franchisee nothing more than mere permissive use of defined intangible rights. It is therefore a service, and is not amenable to VAT. We also hasten to clarify that we are not determining whether any particular kind of arrangement is or is not a franchise. Any examples we have given are merely illustrative, and not binding or final findings. Provisions of the MVAT Act are not applicable in respect of the franchisee given by the 1st Petitioner or in respect of the franchise fee or royalty received by it from the franchisees.
Issues Involved:
1. Whether the transactions in question are liable to service tax or sales tax. 2. Interpretation of Article 366(29A)(d) of the Constitution regarding the transfer of the right to use goods. 3. Applicability of the Maharashtra Value Added Tax Act, 2002 (MVAT Act) to the transactions. 4. Distinction between a transfer of the right to use goods and a mere permissive use. 5. Situs of the transaction for tax purposes. Detailed Analysis: I. Introduction: The judgment addresses two writ petitions involving the issue of whether the transactions are liable to service tax or sales tax. The facts of the Monsanto Petition and the Subway Petition are distinct, but the reasoning in one case impacts the other. II. Constitutional & Legislative Framework: Article 366(29A) of the Constitution includes various forms of deemed sales, including the transfer of the right to use any goods. The MVAT Act defines "sale" to include the transfer of the right to use any goods for valuable consideration. The Finance Act, 1994 defines "intellectual property service" and includes the temporary transfer or permitting the use of intellectual property rights as a taxable service. III. Facts in the Monsanto Petition: Monsanto India sub-licenses hybrid cotton seed technology to seed companies, which use the technology to produce and sell genetically modified seeds. Monsanto India claims this transaction is a service subject to service tax, not a sale under the MVAT Act. The company challenges the applicability of VAT on these transactions, arguing that the transaction involves permissive use rather than a transfer of the right to use goods. IV. Submissions & Findings in Monsanto: Monsanto India argues that its transactions are services, not sales, as they involve permissive use of technology. The transactions do not meet the criteria for a transfer of the right to use goods, as Monsanto retains control over the technology. The court, however, finds that the sub-license agreements involve a transfer of the right to use the technology embedded in the seeds, satisfying the criteria for a deemed sale under Article 366(29A)(d). The court rejects Monsanto's argument that the seeds are merely a medium and irrelevant to the transaction. The court also dismisses Monsanto's alternative arguments regarding the exemption for seeds under the MVAT Act and the double taxation issue. V. Facts in the Subway Petition: Subway franchises sandwich shops in India, granting franchisees the right to use its trade marks and confidential information. Subway argues that these transactions are services subject to service tax, not sales under the MVAT Act. The company challenges the applicability of VAT on franchise fees and royalties received from franchisees. VI. Submissions & Findings in Subway: Subway argues that its franchise agreements involve permissive use of trade marks and confidential information, not a transfer of the right to use goods. The agreements are limited in duration and do not grant franchisees exclusive rights. The court agrees with Subway, finding that the franchise agreements involve mere permissive use and are therefore subject to service tax, not VAT. The court rejects the argument that the inclusion of "franchises" under the MVAT Act automatically subjects all franchise agreements to VAT. The court also finds that the situs of the transaction is in Delhi, where the agreements are executed, not in Maharashtra. VII. Conclusion: The court rules against Monsanto, finding that its transactions are liable to VAT as they involve a transfer of the right to use goods. The court rules in favor of Subway, finding that its franchise agreements are subject to service tax, not VAT. The court declares that the provisions of the MVAT Act do not apply to Subway's franchise fees and royalties and quashes the assessment orders and notices of demand issued by the Maharashtra tax authorities.
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