2004 (4) TMI 539 - HC - VAT and Sales Tax

Trademark Use Considered Taxable Sale of Incorporeal Goods; Writ Petition Dismissed Under Tamil Nadu Sales Tax Act.

The court affirmed the Tamil Nadu Taxation Special Tribunal's decision, supporting the Joint Commissioner-III's determination that the transaction ... Transfer of the right to use goods as a deemed sale - incorporeal/intangible goods (trademark) included within 'goods' - royalty receipts versus sale consideration - retention of proprietary rights by licensor not negating transferTransfer of the right to use goods as a deemed sale - incorporeal/intangible goods (trademark) included within 'goods' - royalty receipts versus sale consideration - Whether the amount received by the assessee for permitting use of its trademark was taxable as sale consideration by virtue of transfer of the right to use an incorporeal good, or whether it was only royalty exempt from turnover. - HELD THAT: - The Court examined the licence agreement clauses which granted the licensee permission to affix and use the trademarks in the course of trade at specified royalty rates, subject to no effective restriction on the licensee's use during the agreement period, and with the licensor retaining the liberty to use the mark and to grant further licences. The Court applied the settled principle that the definition of 'goods' in the sales tax enactment is wide enough to include intangible or incorporeal rights such as trademarks and that a transfer of the right to use such incorporeal goods for consideration is a 'deemed' sale. The Court distinguished cases concerning tangible goods in effective control of the transferor (such as machinery) on their facts and followed authorities holding that the right to use a trademark can be transferred without physical handing over; accordingly the arrangement was a transfer of the right to use the trademark and not merely a receipt of royalty exempt from turnover. Retention by the licensor of concurrent rights to use the mark or to sub-licence others did not alter the character of the transaction as a transfer of the right to use the trademark for consideration. [Paras 8, 9]The receipts from permitting use of the trademark were held to be consideration for transfer of the right to use an incorporeal good and therefore taxable as sale; the Tribunal's order confirming assessment was upheld.Final Conclusion: Writ petition dismissed; the receipts characterised by agreement as payment for permission to use the trademark constitute taxable consideration as transfer of the right to use incorporeal goods and the Tribunal's confirmation of assessment is maintained. Issues Involved:1. Whether the transaction amounts to a sale or a mere right to enjoy the trademark.2. Taxability of the consideration received for the transfer of the right to use the trademark.3. Interpretation of 'goods' and 'movable property' under the Tamil Nadu General Sales Tax Act.Summary:Issue 1: Whether the transaction amounts to a sale or a mere right to enjoy the trademark.The petitioner/assessee allowed M/s. Muthu Agencies to use their trademark and received Rs. 7,26,835 as royalty. The assessing authority revised the assessment, treating the amount as taxable, considering it a transfer of the right to use the trademark. The Appellate Assistant Commissioner initially accepted the assessee's claim that it was only royalty, but the Joint Commissioner, in suo motu revision, held that the transfer of trademark right is a sale of incorporeal goods for consideration and thus taxable. The Tamil Nadu Taxation Special Tribunal upheld this view.Issue 2: Taxability of the consideration received for the transfer of the right to use the trademark.The court examined various rulings, including:- Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer: The Andhra Pradesh High Court ruled that the transaction did not involve the transfer of the right to use machinery, as the machinery was under the effective control of the assessee.- Vikas Sales Corporation v. Commissioner of Commercial Taxes: The Supreme Court held that the transfer of an import license constitutes a sale of goods, including incorporeal rights like trademarks.- Commissioner of Sales Tax v. Duke & Sons Pvt. Ltd.: The Bombay High Court ruled that the transfer of the right to use a trademark does not require handing over control or possession of the trademark.- Aggarwal Brothers v. State of Haryana: The Supreme Court held that the transfer of the right to use goods for consideration is a deemed sale.- 20th Century Finance Corpn. Ltd. v. State of Maharashtra: The Supreme Court ruled that the taxable event is the transfer of the right to use the goods, regardless of delivery.- State of Uttar Pradesh v. Union of India: The Supreme Court held that the supply of telephonic connection satisfies the requirements of a 'transfer of the right to use the goods.'Issue 3: Interpretation of 'goods' and 'movable property' under the Tamil Nadu General Sales Tax Act.Section 2(j) of the Tamil Nadu General Sales Tax Act defines 'goods' to include all kinds of movable property, including intangible objects like trademarks. The court noted that the trademark is an intangible property right that can be merchandised by the registered owners. The court concluded that the transaction in question involved the transfer of the right to use the trademark, making it taxable.Conclusion:The court held that the order of the Tamil Nadu Taxation Special Tribunal, confirming the order of the Joint Commissioner-III (SMR), Chepauk, was in order. The writ petition was dismissed, and the connected W.P. M.Ps. were closed.