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TMI Blog2024 (5) TMIX X X X Extracts X X X X X X X X Extracts X X X X ..... 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even if service tax was paid, it does not absolve the liability under the UPVAT Act, as Value Added Tax and Service Tax were separate and distinct taxation regimes before the introduction of the Goods and Services Tax Act, 2017. Further, the term 'sale' as defined under Section 2 (ac) of the UPVAT Act includes a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. d. In support of his contentions, he relies upon the judgment of the Supreme Court in case of Vikas Sales Corporation V. Commissioner of Commercial Tax reported in ( 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. e. Further reliance has been placed upon the judgment of Madras High Court in the case of S. P. S. Jayam and Co. v. Registrar, Tamil Nadu Taxation Special Tribunal reported in 2004 SCC OnLine Mad 1018 and the judgment of Bombay High Court in Commissioner of Sales Tax v. Duke Sons Pvt. Ltd. reported in ( 1999) 112 STC 370 . CONTENTIONS OF THE RESPONDENT 5. Mr. Shubham Agrawal, learned counsel appearing on behalf of the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to pay to the franchisor, directly or indirectly, a fee; and (iv) The franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person; 9. Reliance has been placed by the revisionist upon the judgement of the Bombay High Court in Commissioner of Sales Tax v. Duke Sons Pvt. Ltd. (supra) wherein the Bombay High Court held that for transfer of the right to use trademark, it is not necessary to hand over the trademark to the transferee or give control or possession of trademark to him. The Bombay High Court further stated that it can be done merely by authorizing the transferee to use the same in the manner required by the law as has been done in the present case. The right to use trademark can be transferred simultaneously to any number of persons. Relevant paragraph is extracted below: 7. Trade mark has been defined in Section 2(1)(v) of the Trade and Merchandise Marks Act, 1958 to mean a mark used in relation to goods for the purpose of indicating a connection in the course of trade between the goods and some person having the right, either as a proprietor or as registered user, to use the mark wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Coming to the facts of the present case, the petitioner/ assessee permitted M/s. Muthu Agencies to use their trademark in the course of trade at the rates specified therein for various items during a particular period. Of course, it retained the liberty to make use of the trademark in the event of the licensor starting to manufacture the products. Equally, it retained the liberty to grant licence to any other individual person or company to use the trademarks. Trademark is the property right and it exclusively belongs to the party who has registered it. Such a right is an intangible or incorporeal goods, which can be merchandised by the registered owners. As pointed out by the Supreme Court, the word goods is defined in very wide terms so as to bring in both tangible and intangible objects. General Clauses Act would explain movable property as property of every description except immovable property. Trademark right is intangible goods, which can be subject-matter of transfer. As already pointed out, M/s. Muthu Agencies was granted permission to use the trademark without any restriction whatsoever for a particular period. Consequently, it can only be taken as transfer of a right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nified tax framework. This means that earlier judgments, such as those in Duke Sons (supra) and S.P.S. Jayam (supra) must now be read in light of the new legislative context. As such, the precedential value of these decisions is diminished. 14. By Finance Act, 1994, the distinction between the transfer of right to use a trademark and its assignment was further nuanced. Licensing agreements, where the franchisee is granted limited rights to use a trademark or business concept, are clearly delineated from outright assignments or sales of trademarks. This distinction is crucial for tax purposes, as it determines the nature and extent of tax liability for the parties involved. 15. In light of the aforesaid, it is pertinent to look at judicial decisions on taxation of franchisees, or licensing agreements, which were rendered after the introduction of the Finance Act, 1994. 16. The Delhi High Court in the case of Mc Donalds India Pvt. Ltd. V. Commissioner of Trade Tax reported in 2017 (5) GSTL 120 espoused that commercial transactions primarily revolve around tangible items, with trademarks serving as valuable assets that contribute to the overall value and demand of the products or serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icensee's product. In usual cases of licensing, the trade mark owner may not wish to use mark its products or services in an area or region ; it instead would license the mark, to be used by the licensee's products, subject to limitations. The licensee has no right to initiate legal proceedings, in the event of infringement, (i.e., statutory right given to an owner or someone having proprietary rights over the mark, to seek injunction and damages). This is clear from section 28 of the Trade marks Act : 28. Rights conferred by registration. (1) Subject to the other provisions of this Act, the registration of a trade mark shall, if valid, give to the registered proprietor of the trade mark the exclusive right to the use of the trade mark in relation to the goods or service in respect of which the trade mark is registered and to obtain relief in respect of infringement of the trade mark in the manner provided by this Act. (2) The exclusive right to the use of a trade mark given under sub-section (1) shall be subject to any conditions and limitations to which the registration is subject. The property in the mark always vests with the owner. Furthermore, importantly the use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name is solely vested in appellant and the petitioners and has not been transferred; as is clearly manifested in the various clauses of the franchise agreements. The appellant and the petitioners grant a non-exclusive licence to the franchisees, which can be revoked upon non-compliance of the terms and conditions as stipulated in their franchise arrangement. Clearly, this does not amount to a transfer of the right to use goods. 17. Reference at this juncture can also be made to the judgment of the Hon ble Supreme Court in BSNL (supra) wherein the Hon ble Supreme Court laid down the test for a transaction to be constituted as the one for the transfer of right to use the goods: 97. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right to use the goods consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; (d) for the period during which the transferee has such leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch may include products manufactured or sourced by Malabar Gold. Therefore, the same will definitely satisfy the meaning of franchise as contained in section 65(47) of the Finance Act, 1994. The learned Special Government Pleader for Taxes referred to the agreement herein and said that no service is referred to in the clauses therein. We do not agree, in the light of clauses 3, 4 and 5 of the model agreement as already noticed. Since what is termed as taxable service is any service to be provided to a franchisee by a franchisor in relation to a franchise, the terms of the agreement will have to be understood in that context. 63. In the light of the principles stated in para 98 of the judgment in Bharat Sanchar Nigam Ltd.s case [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273(SC); (2006) 6 RC 276; (2006) 3 SCC 1, the provisions of the agreement, especially clauses (3) and (5) will show that the franchisor retains the right, effective control and possession and it is not a case of transfer of possession to the exclusion of the transferor. We notice that under clause(12) the franchisee has no right to sub-let or sub-lease or in any way sell, transfer, discharge or dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of possession to the franchisee. The Division Bench of Kerala High Court disagreed with the earlier view that the transaction constituted a deemed sale and held that the franchise agreement did not attract provisions of the Kerala Value Added Tax Act, as it involved non-exclusive rights and control retained by the franchiser. 20. Franchise agreements typically grant non-exclusive rights to use trademarks and business systems. Such agreements do not constitute a transfer of the right to use goods in a manner that excludes others, which is a critical criterion for considering a transaction as a deemed sale. The nonexclusive nature of these rights ensures that the franchisor retains control and can license the same rights to multiple franchisees, reinforcing the licensing framework rather than a full transfer. 21. When trademarks are licensed, the licensee s use of the mark is considered the owner s use, maintaining the continuity of the trademarks reputation and legal protections. This distinction between ownership and licensed use is crucial for determining the scope of rights and the corresponding tax liabilities. For instance, in typical licensing arrangements, the licensee doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritics, scrutinize each scene, seeking to unravel the true nature of franchise agreements. Yet, amidst the confusion, one question looms large: can franchise agreements be taxed as sales of goods? 24. Franchise agreements have become a ubiquitous feature of modern commerce, facilitating the expansion of businesses across diverse industries and geographies. However, the tax treatment of franchise agreements poses intricate challenges, with implications for both franchisors and franchisees. Transfer of the right to use a trademark does not necessitate the physical handover or control of the trademark. Instead, it can be affected by authorizing the transferee to use the trademark in accordance with the law. This underscores the intangible nature of trademark rights and their transferability without the need for physical possession. Franchise agreements primarily grant a representational right rather than an exclusive right to sell or manufacture goods, thereby categorizing such transactions as services rather than sales of goods. Franchise agreements are fundamentally licensing agreements rather than sales of goods. Licensing involves granting permission to use intellectual property r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. 27. In light of the above, I am of the view that 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. 28. The Supreme Court in the case of Godfrey Phillips India Limited v. State of Uttar Pradesh reported in (2005) 2 SCC 515 held that the Constitution of India does not permit overlapping of taxes. Once an activity is taxable as a service, it cannot be taxed as sale/deemed sale of goods. Relevant paragraphs of the are extracted below: 44. The Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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