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TMI Blog2016 (8) TMI 717X X X X Extracts X X X X X X X X Extracts X X X X ..... In Subway’s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement. We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use. We do not mean to suggest that every franchise agreement will necessarily fall outside the purview of the amended MVAT Act. There is conceivably a class of franchise agreements that would have all the incidents of a ‘sale’ or a ‘deemed sale’ (i.e., a transfer of the right to use). - the Subway franchise does not meet these tests. - There is no such exclusivity. The introduction of the word ‘franchise’ in the amended MVAT by notification will have to be read to mean those franchises that can reasonably and plausibly be construed to have the effect of a sale; it cannot be widened to include agreements styled as ‘franchise’ agreements simply because of the nomen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 2. We have heard Mr. Venkatraman for the Petitioners, Mr. Sonpal for Respondents Nos. 2 and 4, and Mr. Jetly for Respondent Nos. 1 and 3 in Writ Petition No. 9175 of 2015 ( the Monsanto Petition ). In Writ Petition No. 497 of 2015 ( the Subway Petition ), we have heard Mr. Shroff for the Petitioners, Mr. Jetly for Respondents Nos. 2 and 3 and Mr. Sonpal for Respondent Nos. 1 and 4. We have carefully considered the submissions of all the counsels and the material they have placed before us. Mr. Jetly has broadly adopted the arguments of Mr. Venkatraman and Mr. Shroff. 3. Mr. Venkatraman s submissions are intricately structured. We will turn to these presently. It seems to us necessary, however, to at least attempt to distill the essence of the arguments in his Petition and, therefore, in the companion Petition. In doing so, we leave aside for the present all questions of legislative competence. (a) If we may be permitted a small latitude, the kernel (or seed , as it were) of Mr. Venkatraman s case is this: Mahyco Monsanto Biotech (India) Pvt. Ltd. ( Monsanto India ) supplies to third parties a certain type of hybrid cotton seed. This seed is impregnated with a proprie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r words, it is simply not possible for Monsanto India to divorce the container from the technology; without the seed container, the technology is in itself useless. Once this is seen, it becomes apparent that all the qualities that Monsanto India describes as applicable to a sale apply exactly to the third party developers acquisition of that impregnated seed. That third party developer may further sell it as is or do what he wishes with it. There is clearly not only a transfer of a right to use (as there would be in a deemed sale), but there is in fact a direct sale of the impregnated seed; this is in no way a service. (b) The Subway Petition is, as we have said, an almost exact mirror image. Here, the transaction is a franchise agreement. Subway holds considerable intellectual property in the form of trade marks, copyright and so on. The franchisee in question is in Mumbai, though the agreement is stated to have been executed in Delhi. The situs argument is subsidiary. What Subway says is that the franchise agreement is purely a service. Its franchisee has a mere right to display Subway s marks. It cannot sub-license the intellectual property further downstream to sub-franc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of property in goods; in sub-clause (b), too, it is on the transfer of property in goods, but in the context of a works contract; in sub- clause (c), it is on the delivery of goods; in sub-clause (d), it is on the transfer of a right to use any goods; in sub-clause (e), it is on the supply of goods as part of a service; and in sub-clause (f ), it is on the supply of services. It is sub-clause (d) that falls for consideration in these Writ Petitions. 7. The relevant provisions of The Maharashtra Value Added Tax, 2002 read thus: 2. Definitions.- In this Act, unless the context otherwise requires,- (24) sale means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words sell , buy and purchase , with all their grammatical variations and cognate expressions, shall be construed accordingly; Explanation .- For the purposes of this clause,- (a) (b)(i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration; (ii) the transfer of prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans any service provided or to be provided,- (zzr) to any person, by the holder of intellectual property right, in relation to intellectual property service; 66E. Declared Services:- The following shall constitute declared services, namely:- (c) temporary transfer or permitting the use or enjoyment of any intellectual property right; (Emphasis added throughout) 9. Mr. Venkatraman relies on a number of judgments to elucidate the meaning and requirements of Article 366(29A)(d). These, he says, must always be present for a transaction to fall within the ambit of this Article. Mr. Shroff too has adopted his formulation of the law. Although these are considered in detail later in this judgment, a summary of these legal submissions on this aspect would be helpful. Briefly, Mr. Venkatraman s argument is that for a transaction to qualify as a transfer of the right to use goods - a deemed sale - the following requirements must be met : (a) there must be a transfer goods; (b) transfer requires divesting in one and vesting in another of the same rights or goods; (c) the effective control over the goods must pass to the transferee; (d) the origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definitions under Sections 65(105)(zzr), 65(55a) and 65(55b) of the Finance Act, 1994; and sub-clause (c) of Section 66E of the Finance Act, 1994. The challenge is on two grounds. First, that these are ultra vires Articles 14, 19(1)(g) and 265 of the Constitution of India. Second, that the exercise of power of the Respondent No.1 under Entry 54 in List II of the Constitution is ultra vires; it encroaches on the power vested exclusively in the Union under Entry 97 in List I. 13. The principal question of this dispute is whether these agreements whereby the Monsanto technology is granted by the Petitioner to the seed companies amounts to mere permissive use and, therefore, a service under Section 65(B)(44) of the Finance Act, 1994 ( Finance Act ) read with Entry 97 List I of the Constitution, or whether it is a deemed sale in the nature of transfer of right to use goods under clause (b)(iv) of the Explanation to Section 2(24) of the MVAT Act read with Article 366(29A)(d) and Entry 54 List II of the Constitution. 14. A brief background of the Monsanto technology and business structure is necessary. Bacillus Thuringlensis ( BT ) is a naturally occurring bacterium that prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses, and the sub-licensee is not permitted to reverse engineer, modify or use the BT gene without the prior consent of Monsanto India. Under the agreement, Monsanto India has also to provide training to produce hybrids at various stages, apart from assisting the seed companies in obtaining the required approvals and conducting zygosity tests. This training includes classroom training and sharing of protocols. Under the sub-licensing agreement, Monsanto India receives consideration from the seed companies in the form of a one-time fixed fee and a recurring variable based on the sale of the genetically modified seeds; in essence, a trait fee. 16. Prior to the introduction of the VAT system in Maharashtra, tax on transfer of right to use goods was governed by the Maharashtra Sales Tax on Transfer of Right to Use any Goods Act, 1985 ( Lease Tax Act ). Under this legislation, Monsanto India was not liable to pay any sales tax because the exhaustive entry concerning intangible goods did not cover technical know-how. Vide an application of Determination of Disputed Question ( DDQ ), Monsanto India applied to the Commissioner of Sales Tax to determine the applicability of the Lease Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patented, required it to remit service tax. Monsanto India has been paying service tax since 2007. 19. Monsanto India submits that while under Section 66E of the Finance Act, a temporary transfer or permissive use or enjoyment of any intellectual property is considered to be a declared service, liable to service charge, the issuance of the Trade Circular also brought its sub-licensing agreement under the ambit of VAT. Currently, therefore, it is subject to a double levy, as both a service and a sale. This is impermissible in law. IV. SUBMISSIONS FINDINGS IN MONSANTO 20. The crux of Mr. Venkatraman s case is that Monsanto India s agreements fall within the ambit of a permissive use rather than a transfer of a right to use. It is, therefore, a service and not a deemed sale within the meaning of Article 366(29A)(d) of the Constitution of India. The transaction, he says, is a single composite transaction and cannot be taxed as both a sale and a service. Sales tax and service tax are mutually exclusive and this, he says, is well-settled: BSNL, 2006 (2) STR 161 (SC). Imagic Creative Private Limited v CTO 2008 (9) STR 337. and Association of Leasing and Finance Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be a deemed sale in the case of Sub-clause (d). Clause (29A) cannot, in our view, be read as implying that the tax under Sub-clause (d) is to be imposed not on the transfer of the right to use goods but on the delivery of the goods for use. Nor, in our view, can a transfer of the right to use goods in Sub- clause (d) of Clause (29A) be equated with the third sort of bailment referred to in Bailment by Palmer, 1979 edition, page 88. The third sort referred to there is when goods are left with the bailee to be used by him for hire, which implies the transfer of the goods to the bailee. In the case of Sub-clause (d), the goods are not required to be left with the transferee. All that is required is that there is a transfer of the right to use the goods. In our view, therefore, on a plain construction of Sub-clause (d) of Clause (29A), the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are delivered for use. What is required is that the goods should be in existence so that they may be used. And further contract in respect thereof is also required to be executed. Given that, the locus of the deemed sale is the place where the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh, relying on Salmond and Corpus Juris Secundum, explained the expression transfer , in the context of the transfer of the right to use in paragraph 9 of its judgment in these words: the essence of transfer is passage of control over the economic benefits of property which results in terminating rights and other relations in one entity and creating them in another. 26. Mr. Venkatraman further states that the question of whether or not a particular transaction amounts to a transfer of the right to use goods depends on who, i.e., the transferor or transferee, has effective control over the goods. If the effective control over the goods is given to the transferee, then, he says, it would be a transfer of the right to use goods. If, on the other hand, the transferor retains effective control, then it would be a case of a mere permissive use or license to use. The term effective control is used in contrast to mere physical control. It is the power to exercise those rights that arise out of ownership, as opposed to, say, a bailment. For this, he relies on the judgments of the Supreme Court in Aggarwal Brothers v State of Haryana (1999) 9 SCC 182. and State of Andhra P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rently. However, once such intangibles are captured in some media, which is a tangible form, the intangibles, too, become goods. Similarly, in Sunrise Associates v Government of NCT of Delhi (2006) 5 SCC 603 . and Yasha Overseas v Commisioner of Sales Tax (2008) 8 SCC 681. the Supreme Court held that a right, tangible or intangible, that is capable of being bought and sold independently for consideration becomes goods. 29. Therefore, Mr. Venkatraman says, there is no distinction in law between tangible and intangible goods. Neither Article 366(12) nor 366(29A)(d) of the Constitution prescribe separate parameters for a transfer of tangible goods and a transfer of intangible goods. Neither expression, i.e. goods or transfer , has any artificial or deeming fictions for intangible goods. The expression transfer in Article 366(29A)(d), therefore, has the same meaning with respect to both tangible goods and intangibles. 30. For a transaction to qualify as a transfer of the right to use goods, in Mr. Venkatraman s formulation, the following tests must be met: (a) there must be a transfer goods; (b) such a transfer requires divesting in one and vesting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Venkatraman therefore submits that the finding in Duke Sons that there is no need for effective control and that mere permission or license would be sufficient to constitute a deemed sale cannot be good law. This is especially so in light of the decision in BSNL, where the Supreme Court laid down a two-pronged test, viz., i) temporary exclusion of transferor and ii) loss of effective control, for a transaction to qualify as a transfer of the right to use making it a deemed sale . Mr. Venkatraman submits that the holding in Duke Sons that the decision of the Andhra Pradesh High Court in Rashtriya Inspat Nigam Limited does not apply to trade marks is not the correct position in law today. This is so, he submits, because the Supreme Court has clarified time and again, right from 20th Century to BSNL, that there must be an vesting in the hands of the transferee and a concomittant divesting from the hands of the transferor. There is also nothing in the law, he submits, to distinguish between tangible and intangible goods. This, he says, also cannot be done in view of the judgment of the Constitutional Bench in Tata Consultancy Service, which held that goods include bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited v CTO. (2013) 32 STR 3. This was not pointed out to the Court. 33. Mr. Venkatraman submits that the decision of the Andhra Pradesh High Court in Nutrine Confectionary Co Pvt Ltd v State of Andhra Pradesh (2011) 40 VST 327 (AP)., does not correctly interpret the test laid down in BSNL. In Nutrine, the Court held that in BSNL, the goods in question were mobile telephone connections, which are anyway invariably limited to the licensee. This cannot be said to be true of a trade mark or logo. The fact that the appellant still continued to hold the mark NUTRINE for itself and transacted business in such name even after licensing it to others, the Court held, cannot be reason to exclude it from being a sale. This is because a trade mark is inherently capable of being assigned for either an exclusive use or a limited use to multiple licensees. Mr. Venkatraman urges that the decision in Nutrine did not apply the BSNL twin test that was expressly laid down by the Supreme Court. Without appreciating that Nutrine Confectionary Company was not divesting effective control or retaining exclusivity, the Bench held it to be a transfer of right to use. This is contrary, Mr. Venkatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the second scenario, A grants the right to use the intangibles to B in Maharashtra, to C in Karnataka and to D in Tamil Nadu. This agreement, he says, would reflect two aspects. First, the transfer is exclusive to the respective parties in their jurisdictions. It also excludes the transferor from using the intangible right in any of these States, thus rendering temporarily numb the transferor s right to use. In this case, too, he says, the BSNL twin tests would apply. The question that arises here is whether the second aspect of the BSNL twin test (incapacity of the transferor to make further transfers) is satisfied, given that A has transferred the right to three different individuals. Had the goods in question been tangibles, the test of incapacity to make further transfers would mean that once the goods are transferred to B, the first transferor, A could not then transfer these to C, D and so on. The reason this is not so is because of the nature of intangible rights. A tangible right is limited to the physical property involved, but this is not the case with intangible rights. One can wheel out as many transactions as possible and simultaneously too, in terms of place, person, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sub-licensee. Mr. Venkatraman is not correct when he says that the effective control of the goods is with Monsanto India. In RINL, the Supreme Court concluded that the contractor (transferee) did not have effective control over the machinery, despite the fact that he was using it, since he could not make such use of it as he liked. He could not use the machinery for any project other than that of the transferor s, nor could he move it out during the period of the project. We do not see how we can draw a parallel from that case to the one at hand. The effective control over the seeds, and, therefore that portion of the technology that is embedded in the seeds, is entirely with the sub-licensee. That sub- licensee is not bound to use the seeds (and the embedded technology) in accordance with Monsanto India s wishes. Monsanto India cannot further dictate to the sub-licensee what he or it may do with these technology-infused seeds. The sub-licensee can do as it wishes with them. It may not use them at all. It may even destroy the seeds. Once the transaction is complete, i.e., once possession of the technology-imbued seeds is effected, and those seeds are delivered, Monsanto India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, upholding the decision of the Andhra Pradesh High Court, held that for a transaction to qualify as a transfer of the right to use goods, effective control must be transferred to the transferee. This Court, in Duke and Sons, held that this test would not be applicable in the case of trade marks. It was held that for the transfer of a trade mark it was not necessary to hand over the trade mark to the transferee or give control or possession of trade mark such transferee. We think that this represents the correct position in law. Indeed, when it comes to trade and service marks, there are several intermediate positions that are possible: there may be a mere right to display the mark, for instance; or, there may be an assignment of the mark in its entirety; or there may be a limited or hybrid arrangement that lies in between. Many examples abound: large retail stores routinely carry goods of various brands, i.e., goods with marks that identify their source. A fabric or textile retailer, for instance, or one dealing in electronics, may have multiple brands on sale. This is not a case of a transfer; the right to the retailer is a mere right to display, and there is no transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f three other companies in the same territory as that the of the original sub-licensee. For additional transfers, Monsanto India would have to first consult the sub-licensee. Mr. Sonpal rightly states that this suggests that a transfer of the right has, in fact, taken place; and, even on Mr. Venkatraman s own illustrations, this case would not fall within the third illustration, but within the second and perhaps even the first. The degree of territorial exclusion is surely irrelevant; the question is whether or not there is any exclusivity. If it were mere permissive use, there would be no question of the Monsato India having to first consult the sub-licensee before effecting further transfers. Further, under clause 7.1 the sub-licensee can assign the agreement and its rights and obligations under it to its wholly-owned subsidiaries without Monsanto India s permission. Mr. Sonpal rightly says that this can never happen in a case of a permissive use. In law, a wholly-owned subsidiary is a distinct legal entity. In a case of service or permissive use, a person can never assign the goods or rights to a third person. 41. At this stage, we find that a parallel to practical, every-day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly use it. He cannot part with it and certainly cannot destroy it. Once the period of hire comes to an end, the car must be returned to the transferor. Therefore, the effective control over the car remains with the transferor. Likewise, in the case of a book library, the books must be returned to the library. With the Kindle Unlimited, one must pay a subscription fee to gain access to an unlimited number of books in the proprietory AZW format. When the subscription expires, all the books are repossessed. ITunes Radio too is a similar concept. A subscription fee is paid, which allows access to music. Once this expires, access to the music is denied. These, in our opinion, are cases of permissive use. The Monsanto India sub-licensing transaction could only be a service in one circumstance, i.e., if the seed companies gave Monsanto India a bag of seeds to mutate and improve with the Bollgard Technology which would, thereafter, be returned to the seed companies. That might perhaps be a service. 43. Mr. Sonpal relies on a great many authorities, not all of them apposite. In a case like this, we will not be detained by his submission that Monsanto India s petition is not maintainable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account all the previous decisions in the field. It held that the essentials are: (i) not a transfer of property in goods, but the right to use property in goods; (ii) Article 366(29A)(d) read with the latter part of the clause (29A) would show that the tax is not on the delivery of goods used, but on the transfer of the right to use goods regardless of when or whether the goods are delivered for use, subject to the condition that the goods should be in use forever; (iii) in a transaction for the transfer of right to use, the delivery of goods is not a condition precedent but one of the elements of the transaction; (iv) the effective or general control does not always mean physical control and even if the manner, method, modalities and the time of the use of goods is decided by the lessee or the customer, it would be under the effective or general control over the goods; (v) the approvals, concessions, licenses and permits in relation to the goods would also be available to the user of the goods even if such licenses or permits are in the name of the owner or transferor of the goods; and (vi) during the period of contract, exclusive right to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal medium intervening - the medium is as intangible as the goods. It is impossible, we think, and does not stand to reason to suggest that unless, say, Microsoft or Adobe wholly cede all control over their software products there is no sale, and when they allow a user to download and use their software they are only providing a service. Indeed, this is demonstrably incorrect. Microsoft and Adobe both have alternative distributions models. One may purchase a license to Microsoft Office or Adobe Photoshop. This may be a one-off, standalone product, delivered either by download or on physical media. That is for the user to keep and do with it what he wishes (except, of course, attempting to decompile it). He does not have to use it all; he can destroy the media and all personal copies of it. The same software is also available nowadays for a subscription - for an annual or monthly fee, the software can be downloaded and used; if the subscription ends, at the very least updates end and very possibly the software will not function optimally. The latter may be a service, very like car rental or book borrowing from a library. The former is clearly a sale. The difficulty with Mr. Venka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks and other intellectual property rights are preserved intact, unaffected by the sub-licensing. But the identified technology, the one infused in the fifty seeds given to the sub-licensee, is for the sub-licensee to use as he wishes. Viewed from this perspective, Mr. Venkatraman s clients underlying fears are, we believe, unfounded. 48. Mr. Venkatraman, in the alternative and without prejudice, argues that the seeds themselves are exempt from being taxed under Entry 41 of Schedule A of the MVAT Act, 2002, even if the transaction in question is held to be a sale. Entry 41 of Schedule A reads thus: SCHEDULE A LIST OF GOODS FOR WHICH THE RATE OF TAX IS NIL% 41. Seeds of all types excluding oil seeds and seeds to which any other entry of this Schedule or of Schedule C applies. The donor seeds are coker seeds in nature and therefore he argues that they do not fall under the category of oil seeds. To support this contention he relies on the definitions of oil seeds from several dictionaries. 49. Since the seeds in question are purely donor seeds, the question of the scope of the entry relating to seeds, Mr. Venkatraman submits, does not arise. Trade C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 at a rate of 10.3%, for April 2012 to May 2015 at 12.36%, and for the period beginning June 2015 at a rate of 14%. Under Entry 39 of Schedule C of the MVAT Act, the applicable rate of sales tax is only 5% since April 2010, prior to which it was 4%. He therefore seeks a Writ of Mandamus directing Union of India to transfer the amount paid as service tax from the Consolidated Fund of India to the Consolidated Fund of State of Maharashtra. He argues that such a transfer would not amount to unjust enrichment. We decline to enter into this debate. We leave it to Monsanto India to adopt suitable proceedings in this behalf, and leave their contentions open to the necessary extent. V. FACTS IN THE SUBWAY PETITION 54. In Writ Petition No. 497 of 2015, Subway is a private limited company of which Petitioner No. 2 is a full time director. Subway operates and franchises sandwich shops in India. It is part of an international chain. Petitioner No.3 is an executive of the outsourced agency that maintains Subway s account books. Respondent Nos. 1 and 2 are the State of Maharashtra and the Union of India respectively. Respondent No. 3 is the Commissioner of Service Tax, an officer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 4 sought information from Subway under the MVAT Act, which Subway provided. Respondent No. 4 took the view that this consideration should be subject to VAT; on 21st November 2014, Respondent No. 4 issued a notice to this effect. Subway Petition, Exhibit D , pp. 59 70. Subway received several notices asking it to show cause why the consideration it received should not be assessed to sales tax, and why no penalty should be imposed on the whole time director and the executive of the agency that maintained Subway s books of accounts. Subway Petition, Exhibit G , pp. 92 98; Exhibit H , p. 99. The cumulative penalty for the period between 2006 and 2009 amounted to approximately ₹ 5.3 crores. The interest under Section 30(1) of the MVAT Act for same period amounted to approximately ₹ 19 lakhs. There was much correspondence exchanged between Subway and Respondent No.4. Each side cited judgments. On 26th March 2015, Subway wrote to the 4th Respondent requesting it not assess tax till a decision was arrived at in the present writ proceedings, which it had by then already filed. Subway Petition, Exhibit I , pp. 100 102; Exhibit J , pp. 103 107. Respondent No. 4 did not acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows certain specific composite contracts to be divisible; those in which the sale component could be isolated and separately taxed - for instance works contracts, Article 366(29A) (b). hire-purchase contracts Article 366(29A) (c). and catering contracts. Article 366(29A)(d). Works contracts and catering contracts can be split under sub- clauses (b) and (f) of clause (29A) of Article 366. Besides these, no other composite contracts can be split under Article 366(29A) itself. The State would not have any power to separate the agreement to sell from the agreement to render service and therefore would not be permitted to impose a tax on the sale component. This, Mr. Shroff submits, is of course subject to the exception that the transaction does not represent two distinct contracts. He contends that Subway s agreement comes within the ambit of sub-clause (d) and therefore cannot be split in light of the Constitutional provisions. Here, the transaction does not involve two distinct agreements. There is no intention of separate agreements and the sale is not distinctly discernible. Mr. Shroff says that even if this were true of Subway s agreement, though it is not, the State would not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 1st June 2005, in which trade marks and franchises were included as goods for the purpose of Entry 39. In light of this express provision of law, Mr. Sonpal submits that Subway s franchise agreements are liable to be assessed to VAT. The Notification reads: Serial No. (1) Name of the goods of intangible or incorporeal nature (2) 1 Patents 2 Trade marks 3 Import licenses including exim scrips, special import licenses and duty free advance licenses. 4 Export Permit or license or quota 5 Software packages 6 Credit of Duty Entitlement Pass Book 7 Technical know-how 8 Goodwill 9 Copyright 10 Designs registered under the Designs Act, 1911. 11 SIM cards used in Mobile Phones. 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x on a transaction which already attracts service tax. The decisions in BSNL, Imagic Creative, and Associated Lease Finance are exactly on this; service and sales tax are mutually exclusive of each other. 68. We have the greatest difficulty in accepting Mr. Sonpal s argument that Article 366(29A) allows a split of even a single composite agreement, where this is not the intention of the parties to the agreement. In our opinion, Mr. Shroff s reliance on the cases of Asian Oilfield and BSNL in support of his argument that Subway s transaction cannot be split into two distinct or severable components is correct. The State cannot tax the entire transaction as a sale either. This is well-settled law, and if a State was to be permitted to tax the whole transaction, it would amount to nothing less than entrenching upon the powers exclusively available to the Centre under the Union List. As has been repeatedly held by this Court, this just cannot be done. 69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subject only to service tax. In our opinion, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way Petition, Clause 9 of the Agreement, p. 42. if it could do without Subway s prior permission or leave, then the consideration might be wholly different and it may then be possible to say that there is a transfer of the right to use. We find that the right of transferrability is extremely restricted and is impossible without Subway control throughout. Similarly, if there is no requirement of having to cease display and use, Subway Petition, Clause 8(e) of the Agreement, p. 41. or return the intangible property at the end of the franchise agreement s term, Subway Petition, Clauses 8(e) and (j) of the Agreement, p. 41. then the transaction might arguably be a sale. Exercises in co-branding or sub-branding, where one party franchises its mark on a territorially-restricted basis and allows the franchisee to combine it with its own or other marks may also well have an element of sale. Similarly, where a dealership for, say, automobiles, has a territorial exclusivity, then it may amount to a franchise. The Subway franchise model has none of these elements. The so-called system is controlled by Subway and it is exclusive to Subway. At the end of the franchise term, it cannot be used. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of franchises under the MVAT Act would not automatically make all franchise agreements liable to sales tax. What must be looked at is the real nature of the transaction and the actual intention of the parties. The agreement must be considered holistically, and effect must be given to the contracting parties intentions. The label or description of the document is irrelevant. An agreement styled as a franchise might, on a proper examination, turn out to be nothing more than a mere license (as in Subway s case). On the other hand, an agreement that calls itself a license might actually be a franchise. If, in a given case, a franchise agreement is effectively nothing more than a mere permissive use, it cannot be made liable to VAT. It would be a service, and hence liable to service tax. When interpreting a taxing statute, or for that matter any statute, full effect must be given to the words used by the Legislature. This, however, does not mean that this principle must be stretched to a point which leads to an absurd result, or one that was not contemplated by the Legislature. The Legislature is presumed to know the law and to have acted in accordance with it. We, therefore, do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be the closest approximation of the situs of his intangible asset. This is the principle widely used, unless there is a local legislation to the contrary; there is not. This is also the thrust of the Delhi High Court s decision in Cub Pty Limited v Union of India Others. Writ Petition(Civil) 6902 of 2008, judgment delivered on 25th July 2016. Therefore, the situs of Subway s agreement, as Mr. Shroff rightly says, would be Delhi. VII. CONCLUSION 76. For the reasons set out above, Rule is discharged in Writ Petition 9175 of 2015, but with no order as to costs. 77. In Writ Petition 497 of 2015, Rule is made absolute in terms of prayer clauses (b) and (c). These are as follows: (b) for a declaration that the provisions of the MVAT Act are not applicable in respect of the franchisee given by the 1st Petitioner or in respect of the franchise fee or royalty received by it from the franchisees. (c) for a writ of certiorari or a writ in the nature of certiorari or any other writ direction or order under Article 226 of the Constitution of India, calling pertaining to the show cause Notices dated 21 November, 2014 and 20 March 2015 (Exhibits D, G and H hereto) as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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