2024 (5) TMI 1268 - HC - VAT and Sales Tax

Levy of VAT - franchise of a trademark - transfer of the right to use goods or not - deemed sale or not - HELD THAT - The Kerala High Court in the case of MALABAR GOLD PRIVATE LIMITED VERSUS COMMERCIAL TAX OFFICER, KOZHIKODE OTHS 2013 (7) TMI 101 - KERALA HIGH COURT wherein the trade mark of the petitioner was transferred to the franchisees for their use and the consideration received was the royalty paid to the petitioner, held that, such a transaction cannot be treated as a deemed sale . The taxation of franchise agreements and sales of goods represents a complex and multifaceted issue that defies easy categorization. While both involve commercial transactions, they embody distinct economic realities and legal considerations that necessitate differential tax treatment. By recognizing the unique characteristics of franchise agreements, including the prevalence of intangible assets and the importance of intellectual property, tax authorities can develop nuanced tax policies that promote fairness, efficiency, and compliance. Ultimately, a balanced approach that takes into account the economic substance of franchise transactions and the need to prevent tax arbitrage and avoidance will ensure the integrity and effectiveness of the tax system. The franchise agreement in present case grants a non-exclusive license rather than a transfer of the right to use goods. As such, the transaction does not attract Value Added Tax under the UPVAT Act. It is clear from the factual matrix of the instant case that the respondent herein had received royalty amount from various dealers under the franchise agreement and service tax has been duly paid by it on the same. If these payments have been subjected to service tax, they cannot be recharacterized as the sale of goods to levy VAT or sales tax. The prevention of double taxation is a fundamental principle of tax law. Double taxation occurs when the same income or transaction is taxed more than once by different tax authorities or under different tax regimes. An activity once taxed as a service cannot be taxed again as a sale of goods. There are no reason to interfere with the view taken by the Commercial Tax Tribunal - the revision application is dismissed.

Summary

Issues Involved:
1. Whether the franchise of a trademark constitutes a transfer of the right to use goods, thereby making it subject to VAT.

Summary:

Issue 1: Whether the franchise of a trademark constitutes a transfer of the right to use goods, thereby making it subject to VAT.

The pivotal issue revolves around whether the franchise of a trademark constitutes a transfer of the right to use goods, thereby making it subject to VAT. The first appellate authority concluded that the dealer/respondent had sold his brand name/title under the franchise agreement, and Value Added Tax (VAT) had to be levied on it. The Commercial Tax Tribunal, relying on the judgment of Delhi High Court in M/s Mc Donalds India Pvt. Ltd. V. Commissioner of Trade Taxes New Delhi (2017 (5) GSTL 120), held that since the franchise of the trademark can be transferred to several persons simultaneously, it is merely a license to use the goods and not a transfer of the exclusive right to use the goods, and therefore, no VAT can be levied on the same.

Contentions of the Revisionist:
1. The revisionist argued that once the copyright has been transferred and royalty amount received, it becomes taxable u/s 58 of the UPVAT Act because entry at Serial No. 3 in Part A of Schedule-II of the Act makes clear that "All intangible goods like copyright, patent, rep. license etc.; transfer of right to use of goods" are taxable.
2. It was submitted that franchise or trademark falls within the meaning of transfer of right to use the goods, hence VAT is leviable on it.
3. The revisionist emphasized that even if service tax was paid, it does not absolve the liability under the UPVAT Act, as VAT and Service Tax were separate taxation regimes before the GST Act, 2017. The term 'sale' as defined u/s 2 (ac) of the UPVAT Act includes a transfer of the right to use any goods for any purpose.
4. Reliance was placed on the judgment of the Supreme Court in Vikas Sales Corporation V. Commissioner of Commercial Tax (1996) 4 SCC 433, wherein it was held that REP license/Exim scrips were goods on the sale of which sales tax can be levied.
5. Further reliance was placed on judgments of Madras High Court in S. P. S. Jayam and Co. v. Registrar, Tamil Nadu Taxation Special Tribunal (2004 SCC OnLine Mad 1018) and Bombay High Court in Commissioner of Sales Tax v. Duke & Sons Pvt. Ltd. (1999) 112 STC 370.

Contentions of the Respondent:
1. The respondent argued that the franchise agreement only granted a mere license for the use of his brand name, not an exclusive right to the licensees to sell/manufacture goods.
2. The permission granted was a non-exclusive right, thus the license does not constitute a 'transfer of right to use goods'.
3. Reliance was placed on the judgment of the Supreme Court in BSNL V. Union of India (2006 (3) SCC 1), which propounded a test for the constitution of a transaction as the transfer of right to use goods.
4. It was submitted that service tax at a rate of 15% had already been paid on the royalty received, indicating no intention to evade tax.
5. Service Tax and VAT are mutually exclusive levies, and a single consideration cannot be subjected to both levies, supported by the judgment of the Supreme Court in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes (2008) 2 SCC 614.

Analysis:
The analysis included a review of relevant legal provisions and judicial precedents. The Finance Act, 1994, Section 65(47) defines 'franchise' and delineates the boundaries of what constitutes a taxable service in franchising. The judgments in Duke & Sons and S.P.S. Jayam were re-evaluated in this context. The Delhi High Court in Mc Donalds India Pvt. Ltd. emphasized that franchise agreements grant non-exclusive rights, not constituting a transfer of the right to use goods. The Kerala High Court in Malabar Gold Private Limited v. Commercial Tax Officer (2013) 63 VST 497 also held that such transactions do not constitute a "deemed sale".

Conclusion:
The franchise agreement in the present case grants a non-exclusive license rather than a transfer of the right to use goods, thus, the transaction does not attract VAT under the UPVAT Act. The Supreme Court in Godfrey Phillips India Limited v. State of Uttar Pradesh (2005) 2 SCC 515 held that the Constitution does not permit overlapping of taxes. Once an activity is taxable as a service, it cannot be taxed as a sale/deemed sale of goods. The instant revision application is dismissed, and there shall be no order as to the costs.