2018 (12) TMI 611 - HC - VAT and Sales Tax

Location of sale - transfer of property in goods - where the situs of a sale is, when the sale is of a trade mark or patent, admittedly assessable to tax as a sale of intangible, incorporeal goods? - penalty. Held that - In the present case, there is no fiction created so as to bring within the concept of sales, a transaction which ordinarily would not have been termed to be sale of goods. In this context, the submission of the assessee that they had been using the trademark or patent rights in their products which could be sold all over India has to be dealt with. It was also pointed out that, just as the transferor, the transferee also gets the right to use the trademark or patent rights on specified goods which could be marketed and sold anywhere in the country. The consideration of situs of sale insofar as the parties to the transaction herein, the seller and the purchaser, whose principal place of business exist in two different States offers no difficulty insofar as the specific provisions under the CST Act. We are also of the opinion that the amendment to the definition of sale in the CST Act though relevant for the six instances where there is a deemed sale of goods, has no effect insofar as the subject transaction. Dehors the amendment, the sale would come within the concept of sale as available under the CST Act, in which instance we have to look at Section 3, having accepted the sale of a trademark or patent rights as a sale of goods. The situs of the principal place of business, from where the owner of such trademark exercises his right to sell specified goods, under the trademark or enforces his patent rights, which has been obtained by them as a statutory right, is the place where the goods exist. Section 3 of the CST Act, applies on all fours and the agreement of transfer of the intangible, incorporeal rights; nay goods, occasions the movement of the said goods from Kerala to that other State where the transferee has their principal place of business. The agreement executed in Gujarat and Puducherry does not make the sale within that State or Union Territory, as Section 4 of the CST Act provides that sale of goods is deemed to take place in a State, only when the goods are within the State. Otherwise any goods could be taken by the seller to another State and delivered to the purchaser making it an intra-State sale. Assessment of non-competition fee - Held that - There is no sale of goods in the said transaction and it has to be reiterated that the fees are paid by the purchaser outside the State to the assessee within the State. Hence Exhibit P9 to the extent it assess the non-competition fee is set aside - penalty set aside. Penalty - Held that - Revision is allowed finding no cause for penalty and as a consequence the revision is rejected. Revision allowed.

Summary

Issues Involved:
1. Situs of Sale for Trade Mark or Patent
2. Taxability under the Kerala General Sales Tax Act (KGST Act) and Kerala Value Added Tax Act (KVAT Act)
3. Applicability of Central Sales Tax Act (CST Act)
4. Penalty Imposition and its Legitimacy

Detailed Analysis:

1. Situs of Sale for Trade Mark or Patent
The primary issue addressed is the determination of the situs of sale when dealing with the sale of intangible, incorporeal goods such as trademarks or patents. The court examined the situs of sale based on where the transfer of property in goods occurs. The decision in 20th Century Finance Corporation Ltd. v. State of Maharashtra was heavily relied upon, which stated that the situs of sale is where the transfer of property in goods from one person to another is occasioned. The court concluded that the situs of sale would be in the state where the contract for the transfer was executed, provided no statutory fiction is created otherwise.

2. Taxability under the Kerala General Sales Tax Act (KGST Act) and Kerala Value Added Tax Act (KVAT Act)
The court affirmed that the sale of trademarks and patents is susceptible to levy under the KGST Act and KVAT Act. The assessment of non-competition fees received by the petitioner-assessee based on an agreement with the purchaser of the trademark was considered as a local sale under the KGST Act. The court also discussed the intrinsic value of intangible goods and their capability of being taxed under general sales tax laws.

3. Applicability of Central Sales Tax Act (CST Act)
The court scrutinized the application of the CST Act, particularly Sections 3 and 4, which deal with inter-State sales. It was argued that the sale of intangible goods like trademarks or patents, when transferred from one state to another, constitutes an inter-State sale. The court concluded that the transfer of intangible, incorporeal rights from an entity in Kerala to another state occasions the movement of goods from Kerala, thus making it an inter-State sale taxable under the CST Act. The court also referenced the decision in CUB PTY Limited v. UOI, which supported the principle that the situs of an intangible asset is closest to the situs of the owner.

4. Penalty Imposition and its Legitimacy
The penalty imposed on the assessee for evasion of tax was a significant point of contention. The court noted that the misunderstanding of the decision in 20th Century Finance Corporation Ltd. by the assessee was bona fide, leading to the course of action taken. Consequently, the court found no cause for penalty, setting aside the orders imposing penalties. The court allowed the revisions related to the penalty, dismissing the State's challenge to the reduction of the penalty.

Conclusion:
The judgment concluded with the following orders:
- The situs of sale for intangible goods like trademarks and patents is where the contract for the transfer is executed unless a statutory fiction specifies otherwise.
- The sale of such intangible goods is taxable under the KGST Act and KVAT Act.
- The transfer of intangible rights from Kerala to another state constitutes an inter-State sale under the CST Act.
- The penalties imposed on the assessee for tax evasion were set aside due to the bona fide misunderstanding of relevant legal precedents.
- The assessment of non-competition fees was set aside, but the assessment under the CST Act for the transfer of trademarks or goodwill was upheld.

The court ordered the parties to bear their respective costs and allowed for statutory appeals to be filed within 30 days if any issues remain undecided.