2010 (8) TMI 876 - HC - VAT and Sales Tax

Sale of intellectual property not subject to sales tax under Karnataka Sales Tax Act

Kwality Biscuits (P.) Ltd. Versus State of Karnataka

Kwality Biscuits (P.) Ltd. Versus State of Karnataka - [2012] 53 VST 66 (Kar) Issues Involved:1. Whether the sale of intellectual property owned by the assessee attracts payment of sales tax under the Karnataka Sales Tax Act.2. Applicability of the Karnataka Sales Tax Act to the sale of intellectual property that took place in Calcutta.3. Whether intellectual property as intangible property qualifies as 'goods' under the Act.Issue-wise Detailed Analysis:1. Whether the sale of intellectual property owned by the assessee attracts payment of sales tax under the Karnataka Sales Tax Act:The court examined Section 5 of the Karnataka Sales Tax Act, which mandates every dealer to pay tax on their taxable turnover. The definition of a 'dealer' under Section 2(1)(k) includes any person engaged in the business of buying, selling, supplying, or distributing goods. The court further clarified the definitions of 'business,' 'goods,' 'sale,' 'taxable turnover,' 'total turnover,' and 'turnover' as provided under the Act.The court referenced several judgments, including the Supreme Court's decisions in *State of Gujarat v. Raipur Manufacturing Co. Ltd.* and *District Controller of Stores, Northern Railway, Jodhpur v. Assistant Commercial Taxation Officer*, to elucidate the meaning of 'business' and 'dealer.' These judgments emphasized that a person must carry on the business of selling a commodity for its turnover to be taxable and that the activity must be regular, continuous, and profit-oriented.The court concluded that the assessee was not engaged in the business of buying, selling, or distributing intellectual property. The intellectual property rights were used by the assessee to sell their goods and were not traded in the course of their business. Therefore, the sale of intellectual property was not incidental or ancillary to the assessee's main business of manufacturing and selling biscuits, confectionery, wheat products, jams, jellies, and creams. Consequently, the sale of intellectual property did not attract tax liability under the Act. The orders passed by the authorities imposing the liability were set aside.2. Applicability of the Karnataka Sales Tax Act to the sale of intellectual property that took place in Calcutta:Given the court's decision on the first issue, it declined to address the second issue as it became academic. The court noted that since the sale of intellectual property did not attract tax under the Act, the question of the sale's location was irrelevant in this case.3. Whether intellectual property as intangible property qualifies as 'goods' under the Act:Similar to the second issue, the court did not address this issue in detail. The court's decision on the first issue rendered this question academic. The court emphasized that the primary reason for setting aside the tax liability was that the sale of intellectual property was not part of the assessee's business activities as defined under the Act.Conclusion:(i) The revision was allowed.(ii) The impugned orders were set aside.(iii) It was held that the assessee is not liable to pay sales tax under the Act on the sale of intellectual property.(iv) No costs were awarded.