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2017 (1) TMI 1015 - HC - VAT and Sales TaxWhether Sales Tax is leviable on the assessee on the amount received by the assessee as brand franchisee fees from CBUs (Contract Bottling Units) in case of manufacture of beer? Held that - no sales tax would be leviable on the assessee on the amount received by the assessee as brand franchisee fees from the CBU in case of manufacture of beer - reliance placed in the case of M/s.United Breweries Limited vs. State of Karnataka 2015 (11) TMI 754 - KARNATAKA HIGH COURT , where it was held that The manufacturers (CBUs) do not get effective control of the brand name for full commercial exploitation. As such, it cannot be considered as sale of intangible goods by the assessee, which would be subject to Sales Tax under the KST Act. Appeal dismissed - decided in favor of assessee.
Issues Involved:
1. Whether Sales Tax is leviable on the assessee on the amount received as “brand franchisee fees” from Contract Bottling Units (CBUs) in the manufacture of beer. Issue-wise Detailed Analysis: 1. Leviability of Sales Tax on "Brand Franchisee Fees": The primary issue revolves around whether the amount received by the assessee as “brand franchisee fees” from CBUs for manufacturing beer is subject to Sales Tax under the Karnataka Sales Tax Act (KST Act). Tribunal’s Decision: The Tribunal, in its order dated 26.9.2014, dismissed the State’s appeals, relying on its previous decision in the case of M/s. United Breweries vs. State of Karnataka. The Tribunal concluded that no Sales Tax would be leviable on the “brand franchisee fees” received by the assessee from the CBUs. High Court’s Analysis: The High Court examined the Tribunal’s decision and the arguments presented by both parties. The Revenue argued that the “brand franchisee fees” amounts to a transfer of the right to use goods in the form of a brand name, which should be taxable under the KST Act. Conversely, the respondent-assessee contended that the CBUs manufacture beer on behalf of the assessee using the know-how and specifications provided by the assessee. The CBUs sell the beer only to customers directed by the assessee at prices fixed by the assessee. The assessee retains the exclusive right to use the brand names, and the CBUs merely carry out the manufacturing process. Legal Provisions and Precedents: The Court referred to relevant provisions of the KST Act, the Finance Act, 1994, and the Constitution of India. It highlighted the definition of "goods" under Section 2(m) of the KST Act and the levy of tax on the transfer of the right to use any goods under Section 5-C. The Court also considered judicial precedents, including the Supreme Court's decisions in State of Andhra Pradesh vs. Rashtriya ISPAT Nigama Limited and 20th Century Finance Corporation Limited vs. State of Maharashtra, which clarified that the levy of tax is on the transfer of the right to use goods, not merely on the use of goods. Conclusion: The Court concluded that in the case of the manufacture of beer, the CBUs do not acquire any right over the brand name/trade mark belonging to the assessee. The CBUs operate under the specifications and control of the assessee, selling the beer only to customers directed by the assessee at fixed prices. The “brand franchisee fees” paid by the CBUs to the assessee do not constitute a transfer of the right to use the brand name/trade mark. Therefore, it cannot be considered a sale of intangible goods subject to Sales Tax under the KST Act. The Court also noted that the assessee pays Service Tax on the “brand franchisee fees” under the Finance Act, 1994, as it falls under the definition of Intellectual Property Service. Citing the principle that double taxation on the same goods is not permissible, the Court upheld the Tribunal’s finding that the “brand franchisee fees” are not transactions in the nature of transfer of the right to use the brand name/trade mark but are purely services. Final Judgment: The High Court found no merit in the appeals and dismissed them, affirming that the “brand franchisee fees” received by the assessee from the CBUs are not subject to Sales Tax under the KST Act. The question was answered in favor of the assessee and against the Revenue.
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