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2017 (5) TMI 999 - HC - VAT and Sales TaxDeemed Sale - Transfer of right to use - Franchise agreement - royalty - levy of VAT - DVAT authorities stated and took the position that royalty payments were liable to levy on the ground that they constituted consideration for the transfer of rights to use the trade mark McDonald s - whether the royalty payable under the franchise agreements signed, is liable to sales tax or VAT under the Delhi Value Added Tax Act, 2004 and under the DSTRTUG Act, 2002? - Whether the Tribunal was right in holding that consideration received under the franchise agreement was for transfer of right to use the goods, i.e., the trade mark, under the Delhi Sales Tax on Right to Use Goods Act, 2002 and under the Delhi Value Added Tax Act, 2004? What is intended to be transferred in the franchise and trade mark licensing agreements? - Held that - when a trade vendor, distributor, establishment or anyone else permitted to sell articles or offer services the trade marks (or brand) which belongs to another, it is incorrect to state that the brand or mark, associated with the product, constitutes the sale rather than from sale of the underlying goods or services that are the subject of the trade mark (dishes in a restaurant) themselves. It would be incorrect, therefore, to conclude what is involved is not the sale of the product, but the intangible property or mark connected with the reputation of the mark, though that reputation guarantees a high demand for the product, from which the seller benefits. Likewise, in the case of distribution, a distribution agent is under an agreement with the manufacturer to sell its good; it also possesses the right to advertise the goods and brands of the manufacturer. This implies a license of the manufacturer s trade mark. In such an event, the distributor need not pay for the right to use the intellectual property under which the goods are sold; he merely pays for obtaining the commercial right to sell the goods he buys from the manufacturer for enabling onward sale. For a transaction to constitute a transfer of the right to use goods, there should mandatorily be a transfer of the exclusive right to use the goods being transferred - The Appellant and the Petitioners grant a non-exclusive license to the franchisees, which can be revoked upon non-compliance of the terms and conditions as stipulated in their franchise arrangement. Clearly, this does not amount to a transfer of the right to use goods. The distinctiveness of a mark, earned through dint of continuous use and brand building, results in the trade mark which is classically known as a badge of origin that assures the user of the products the constancy of the quality associated with it. Only ensuring that others who do not own it are prevented from using or appropriating it ensures its enforcement - In the case of the franchise agreements involved in the present case, none of the franchisees or in the case of the trade mark licensee, are empowered to safeguard violation of the mark, through enforcement mechanisms, such as filing suits for injunction or damages. This underlines that the most important attribute of ownership or transfer (even in the most evanescent sense) is absent. The franchise agreement permit a limited right to use the composite system of the business of the Appellant and the Petitioners to the franchisors/licensee, and the dominant intention, as well as the specific provisions arising from the franchise agreements are not of a transfer of the right to use goods. The Tribunal erred in holding that consideration received under the franchise agreement was for transfer of right to use the goods, i.e., the trade mark, under the Delhi Sales Tax on Right to use Goods Act, 2002 and under the Delhi Value Added Tax Act, 2004 - petition allowed - decided in favor of petitioners.
Issues Involved:
1. Whether the consideration received under the franchise agreement constitutes a transfer of the right to use goods, specifically the trade mark, under the Delhi Sales Tax on Right to Use Goods Act, 2002, and the Delhi Value Added Tax Act, 2004. Issue-wise Detailed Analysis: 1. Nature of Franchise Agreements and Transfer of Rights: The court examined the franchise agreements of McDonald’s, Sagar Ratna, Bikanerwala, and the trade mark licensing agreement of GSK. The agreements were found to be composite contracts involving a bundle of services, including the use of trade marks, know-how, recipes, training, and other intellectual property. The agreements granted non-exclusive rights to the franchisees, allowing the franchisors to retain ownership and the ability to transfer rights to other parties. The court concluded that these agreements did not constitute a transfer of the right to use goods under the DSTRTUG Act, 2002, and the DVAT Act, 2004. 2. Interpretation of Article 366(29A) of the Constitution: The court emphasized that the expanded definition of "sale" under Article 366(29A) should be interpreted strictly. For a transaction to be taxable as a sale, there must be a transfer of the right to use goods. The court found that the franchise agreements did not meet this criterion, as they involved non-exclusive rights and a composite bundle of services rather than a transfer of property. 3. Dominant Nature Test and Composite Contracts: The court applied the dominant nature test from the BSNL case, which requires that the primary nature of the transaction be considered. The court held that the franchise agreements were primarily service contracts, with the use of trade marks being incidental. Therefore, the agreements could not be split to levy VAT on specific aspects, as this would lead to overlapping taxes, which is impermissible. 4. Overlapping of Taxes: The court reiterated that sales tax and service tax are mutually exclusive. Since the franchise agreements were already subject to service tax under the Finance Act, 1994, they could not simultaneously be subject to VAT. The court cited the principle from the Godfrey Phillips case, emphasizing the need to avoid overlapping taxation. 5. Legal Precedents and Transfer of Right to Use Goods: The court referred to various legal precedents, including the 20th Century Finance Corporation and Rashtriya Ispat Nigam Ltd. cases, which established that a transfer of the right to use goods requires an exclusive right, which was not present in the franchise agreements. The court also noted that the franchisees did not have the right to enforce trade mark protection, further indicating that there was no transfer of the right to use goods. 6. Intellectual Property and Trade Mark Law: The court highlighted that under trade mark law, the use of a trade mark by a licensee inures to the benefit of the trade mark owner, and the property in the mark remains with the owner. The franchise agreements did not grant the franchisees the right to enforce trade mark protection or initiate legal proceedings for infringement, reinforcing the conclusion that there was no transfer of the right to use goods. Judgment: The court held that the Tribunal erred in concluding that the consideration received under the franchise agreements was for the transfer of the right to use goods. The findings of the Tribunal were set aside. The court quashed the assessment orders and notices issued under the DVAT Act and DSTRTUG Act, and allowed the appeals and writ petitions filed by McDonald’s, Sagar Ratna, Bikanerwala, and GSK. There was no order on costs.
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