2015 (11) TMI 754 - HC - VAT and Sales Tax

Levy of tax / VAT on franchisee fees/royalty paid - Levy of tax on manufacture of Beer and Packaged drinking water - whether there is complete transfer of right to use the said property (being brand name/trade name) in favour of the manufacturer (CBUs) or not - Held that - only when there is transfer of right to use the brand name/trade mark belonging to the assessee, without any restriction, then alone it could be a case of transfer of right to use the intangible goods, which would be the brand name/trade mark. However, if no such right to use is given to the manufacturer, it would not amount to transfer of right. - In the case of manufacture of beer, the amount paid towards brand franchise fees is to the assessee, and admittedly the assessee, has not transferred any right to the manufacturer of beer to exploit the brand name for its own use. 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. It is also noteworthy that, for the amount received by the assessee as brand franchise fees from the CBUs, admittedly, the assessee is paying Service Tax, as the same is covered as Intellectual Property Service under sub-Section 55(b) of Section 65 of the Finance Act, 1994. - levy of tax, penalty and interest, in the case of manufacture of beer, on the amount received by the assessee as brand franchise fees from CBUs for the assessment years in question, cannot be justified in law. Since it is not disputed that under the agreement, the trade mark- Kingfisher is transferred to the licensee dealers, with a right to use the trade mark and exploit the same for commercial use, which was on payment of royalty to the assessee, the same would amount to transfer of right to use the intangible goods, being the trade mark- Kingfisher , which would thus be subject to tax under KST Act. It is not disputed that in case of drinking water- Kingfisher , the effective control over the brand name is transferred to the licensees to use and exploit the brand name for commercial use, which would amount to transfer of right to use goods, liable to tax under the KST Act. As such, the finding recorded by the First Appellate Authority in this regard, is confirmed and the order of the Tribunal with regard to this issue, is set aside. - Decided partly in favour of Revenue.

Issues Involved:
1. Taxability of "brand franchise fees" received by the assessee from Contract Bottling Units (CBUs) for manufacturing beer.
2. Taxability of royalty received by the assessee from licensee dealers for using the brand name/trade mark 'Kingfisher' for packaged drinking water.

Detailed Analysis of the Judgment:

1. Taxability of "brand franchise fees" for Beer Manufacturing:

The core issue is whether the "brand franchise fees" paid by CBUs to the assessee for using its brand names in beer manufacturing constitutes a transfer of the right to use goods, thereby attracting sales tax under the Karnataka Sales Tax Act (KST Act).

The court examined the agreements between the assessee and CBUs, noting that the manufacturing of beer was done as per the assessee's specifications, and the CBUs did not have any independent right to sell the beer. The CBUs were essentially captive manufacturers for the assessee, producing beer solely for the assessee's customers at prices set by the assessee. The "brand franchise fees" of Rs. 10 per case paid by CBUs to the assessee was for the use of the brand name, but the CBUs did not acquire any right to exploit the brand name independently.

The court referred to the Supreme Court's rulings in similar cases, emphasizing that for a transaction to be considered a transfer of the right to use goods, there must be a complete transfer of such rights without any restrictions. In this case, the CBUs did not get effective control over the brand name for full commercial exploitation. Therefore, the "brand franchise fees" did not constitute a sale of intangible goods and was not subject to sales tax under the KST Act. Additionally, the assessee was already paying service tax on these fees under the Finance Act, 1994, which precludes double taxation.

The Tribunal's finding that the "brand franchise fees" were not transactions in the nature of transfer of the right to use the brand name/trade mark was upheld, and the levy of tax, penalty, and interest on these fees was deemed unjustified.

2. Taxability of Royalty for Packaged Drinking Water:

The second issue concerned the royalty received by the assessee from licensee dealers for using the 'Kingfisher' brand name for packaged drinking water. Unlike the beer manufacturing agreements, the agreements for packaged drinking water allowed the licensee dealers to use and exploit the brand name independently for commercial purposes, paying royalty to the assessee.

The court held that this arrangement constituted a transfer of the right to use intangible goods (the brand name), making it subject to sales tax under the KST Act. The effective control over the brand name was transferred to the licensees, allowing them to use it for commercial purposes, which meets the criteria for a taxable transfer of the right to use goods.

The Tribunal's decision to exempt this royalty from tax was overturned, and the First Appellate Authority's finding that the royalty was taxable was confirmed.

Conclusion:

The revision petitions were partly allowed. The court directed that no sales tax would be levied on the "brand franchise fees" received by the assessee from CBUs for beer manufacturing for the assessment years 2003-04 and 2004-05. However, the assessee was liable to pay tax on the royalty received from licensee dealers for the 'Kingfisher' packaged drinking water. The matter was remitted to the Assessing Officer to reassess the tax and penalty in light of the court's observations and directions. No order as to costs was made.

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