2022 (9) TMI 436 - AT - Service Tax

Levy of service tax - right to use component of the Trademark License Agreement - grant of license under the Trademark License Agreement would amount to deemed sale under article 366 (29A) of the Constitution, or not - period of dispute in the present appeal is from 2008-009 to 2013-14 - HELD THAT - It can safely be said that under Sales Tax, there is transfer of possession and effective control in goods, while there is no such transfer of possession and effective control under Service Tax. A perusal of the terms of the Trademark License Agreement dated August 27, 2008 and the Retail License Agreement executed on October 01, 2007 would show that there is a noticeable difference between the two. In the case of the Retail License Agreement only a non-exclusive and non-transferrable license to use the trademark was granted by the respondent to Pantaloon. Pantaloon also agreed that the respondent would have the right to control the standard and quality of the products. There is also no restriction in granting the license to others during the license period. This agreement is clearly, therefore, outside the purview of article 366 (29A) (d) of the Constitution that defines tax on the sale or purchase of the goods. Service tax would, therefore, be chargeable. However, in the case of the Trademark License Agreement an exclusive license to use the trademark in any manner during the term of the agreement was granted. Such a license could not be granted to any other person during the period of the agreement. This would clearly fall within the meaning of the phrase transfer of right to use the goods and would be covered by article 366 (29A) (d) of the Constitution. Service Tax would, therefore, not be payable. The Principal Commissioner, therefore, committed no illegality in holding that service tax could not be levied on the right to use component of the Trademark License Agreement - Appeal dismissed.

Summary

Issues Involved:
1. Whether the "right to use" component of the Trademark License Agreement amounts to a deemed sale under Article 366(29A) of the Constitution, thereby attracting VAT and not service tax.
2. Whether the bifurcation of the gross value into royalty and right to use is arbitrary and intended to avoid paying higher service tax.
3. Whether the demand for the period April 2008 to September 2008 is beyond the limitation period and hence excludable.

Issue-wise Detailed Analysis:

1. Deemed Sale and VAT vs. Service Tax:
The Principal Commissioner dropped the show cause notice, stating that the grant of license under the Trademark License Agreement would amount to a deemed sale under Article 366(29A) of the Constitution and, therefore, could not be subjected to service tax. This conclusion was supported by the Supreme Court's judgment in Bharat Sanchar Nigam Ltd. vs Union of India [2006 (2) S.T.R. 161 (S.C.)]. The respondent argued that the transfer of the right to use the Trademark on an exclusive basis qualifies as a deemed sale, thus attracting VAT and excluding service tax. The relevant statutory provisions before and after 01.07.2012 were analyzed, including sections 65(55a), 65(55b), and 65(105)(zzr) of the Finance Act, and section 65B(44) and 66E of the Finance Act post-01.07.2012. The Principal Commissioner concluded that the Trademark License Agreement provided an exclusive license, barring the licensor from transferring the same right to another person during the agreement period, thus falling under Article 366(29A)(d) of the Constitution. Therefore, service tax was not applicable.

2. Bifurcation of Gross Value:
The Department argued that the respondent deliberately bifurcated the gross value into royalty and right to use to avoid paying higher service tax. The Principal Commissioner, however, observed that the issuance of two invoices (one for royalty with service tax and another for right to use with VAT) was proper and in accordance with the law. The Commissioner noted that the Trademark License Agreement granted an exclusive license, which constituted a transfer of the right to use goods, thus falling under the purview of deemed sale and attracting VAT. The bifurcation was found to be legitimate and not arbitrary.

3. Limitation Period:
The respondent contended that the demand for Rs. 10,01,258/- for the period April 2008 to September 2008 was beyond the limitation period of five years and hence excludable. The judgment did not specifically address this issue in detail, but the overall conclusion supported the respondent's stance on the applicability of VAT over service tax, implying that any demand beyond the limitation period would be invalid.

Conclusion:
The appeal filed by the Commissioner of Service Tax was dismissed. The Principal Commissioner's order, which held that service tax could not be levied on the "right to use" component of the Trademark License Agreement, was upheld. The bifurcation of the gross value into royalty and right to use was deemed appropriate and compliant with the law. The demand for the period beyond the limitation period was implicitly considered excludable. The judgment reinforced the distinction between deemed sale attracting VAT and services attracting service tax, based on the nature of the transaction and the exclusivity of the license granted.