Trade mark licensing can amount to deemed sale, with service tax payment not excluding VAT liability.
A transfer of the right to use a trade mark for royalty was treated as a deemed sale under the Kerala Value Added Tax Act because the franchise agreements granted commercial use of the mark for consideration. A trade mark was held to be goods for VAT purposes, as intangible property capable of transfer and exploitation falls within the statutory concept of goods. Payment of service tax on the royalty did not displace the independent VAT levy arising from the transfer of the right to use goods. The royalty received for franchise use of the trade mark was therefore liable to VAT, and the tax and penalty challenges failed.
Issues: (i) Whether the transfer of the right to use the trade mark to franchisees for royalty amounted to a deemed sale under the Kerala Value Added Tax Act. (ii) Whether a trade mark is goods within the meaning of the Kerala Value Added Tax Act. (iii) Whether payment of service tax on the royalty received excluded liability to VAT under the Kerala Value Added Tax Act.
Issue (i): Whether the transfer of the right to use the trade mark to franchisees for royalty amounted to a deemed sale under the Kerala Value Added Tax Act.
Analysis: Article 366(29A)(d) of the Constitution of India deems a transfer of the right to use goods for consideration to be a sale. Section 2(xliii) of the Kerala Value Added Tax Act, together with Explanation V, adopts the same principle. The franchise agreements authorised the franchisees to use the trade mark for agreed royalty, and the transfer was therefore for consideration and within the statutory concept of sale.
Conclusion: The transfer of the right to use the trade mark was a deemed sale under the Kerala Value Added Tax Act.
Issue (ii): Whether a trade mark is goods within the meaning of the Kerala Value Added Tax Act.
Analysis: Section 2(xx) of the Kerala Value Added Tax Act defines goods broadly to include movable property, and judicial authority treats intangible property capable of use, transfer and possession as goods for sales tax purposes. A trade mark, though incorporeal, is capable of transfer and commercial exploitation and falls within that concept.
Conclusion: A trade mark is goods for the purposes of the Kerala Value Added Tax Act.
Issue (iii): Whether payment of service tax on the royalty received excluded liability to VAT under the Kerala Value Added Tax Act.
Analysis: The levy under the Kerala Value Added Tax Act is attracted by the transfer of the right to use goods, while service tax under the Finance Act, 1994 operates in its own field. The fact that service tax was paid on the royalty did not negate the independent VAT liability arising under the sale-tax regime applicable to the transaction.
Conclusion: Payment of service tax did not exclude liability to VAT under the Kerala Value Added Tax Act.
Final Conclusion: Royalty received for permitting franchisees to use the trade mark was taxable under the Kerala Value Added Tax Act, and the writ petitions challenging the tax and penalty demands were liable to fail.
Ratio Decidendi: A transfer of the right to use a trade mark for consideration constitutes a deemed sale of goods under the Kerala Value Added Tax Act, and the concurrent payment of service tax does not by itself bar VAT liability on that transaction.
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