2014 (1) TMI 1837 - AT - VAT and Sales Tax

Tax Tribunal Rules in Favor of Appellant on Brand Fees Taxability

United Breweries Limited Versus State of Karnataka

United Breweries Limited Versus State of Karnataka - 2014 (78)KarLJ 168 Issues Involved:1. Taxability of brand franchise and technical fees received from Contract Bottling Units (CBUs).2. Taxability of royalty received from licensees for the use of the 'Kingfisher' brand name for packaged drinking water.3. Validity of the First Appellate Authority's (FAA) decision on the above matters.4. Cross appeals by the State requesting restoration of the original assessment orders.Detailed Analysis:Issue 1: Taxability of Brand Franchise and Technical Fees from CBUsThe appellant, a company incorporated under the Companies Act, 1956, did not conduct any business within Karnataka during the financial years 2003-2004 and 2004-2005. The Assessing Authority (AA) assessed the appellant as an unregistered dealer and levied tax on brand franchise and technical fees received from CBUs under Section 5C of the Karnataka Sales Tax Act, 1957. The FAA partially allowed the appeal, ruling that these fees did not constitute a transfer of the right to use the brand name/trade mark and thus were not taxable.The Tribunal analyzed the agreements between the appellant and CBUs, concluding that the brand name or trade mark was not transferred exclusively to the CBUs. The agreements granted a non-assignable, non-transferable, and non-exclusive right to use the brand name under the appellant's supervision. The Tribunal referenced the Bharat Sanchar Nigam Limited case, emphasizing that for a transaction to constitute a transfer of the right to use goods, the transferee must have an exclusive legal right to use the goods. Since the CBUs did not have exclusive rights, the brand franchise and technical fees were not taxable.Issue 2: Taxability of Royalty from Licensees for Packaged Drinking WaterThe AA levied tax on royalty received from licensees for using the 'Kingfisher' brand name for packaged drinking water, treating it as a transfer of intellectual property. The FAA upheld this decision. However, the Tribunal found that the agreements with licensees did not grant exclusive rights to use the brand name. The Tribunal applied the principles from the Bharat Sanchar Nigam Limited case, determining that the royalty payments did not constitute a transfer of the right to use the brand name.Issue 3: Validity of the FAA's DecisionThe Tribunal upheld the FAA's decision that brand franchise and technical fees from CBUs were not taxable. It found that the FAA correctly interpreted the agreements and the relevant legal principles. The Tribunal also set aside the FAA's decision to uphold the tax on royalty payments, ruling that these payments did not involve a transfer of the right to use the brand name.Issue 4: Cross Appeals by the StateThe State's cross appeals requested the restoration of the original assessment orders, arguing that both the brand franchise fees and royalties constituted taxable transfers of the right to use the brand name. The Tribunal dismissed these appeals, finding that the State failed to establish that the FAA's decision was incorrect. The Tribunal concluded that the agreements did not involve exclusive transfers of the right to use the brand name, and thus the fees and royalties were not taxable.Final Order:1. Both the appeals by the appellant are allowed.2. The cross appeals by the State are dismissed, and the original assessment orders are not restored.3. The impugned appellate orders of the FAA are set aside, including the levy of penalty and interest.4. The original judgment is to be kept in STA No. 2456 of 2012, with copies in STA No. 2457 of 2012 and Cross Appeal Nos. 1142 and 1143 of 2013.5. The Registrar of the Tribunal is directed to comply with Regulation 53(b) of Chapter IX of Karnataka Appellate Tribunal Regulations, 1979 by communicating this order to the relevant parties.6. The office is directed to send back the lower authorities' records immediately.