2012 (11) TMI 927 - HC - VAT and Sales Tax

Court upholds VAT on royalties for Trade Mark use, deems it a sale under KVAT Act

MALABAR GOLD PRIVATE LIMITED Versus COMMERCIAL TAX OFFICER CIRCLE III, KOZHIKODE & OTHERS

MALABAR GOLD PRIVATE LIMITED Versus COMMERCIAL TAX OFFICER CIRCLE III, KOZHIKODE & OTHERS - 2013 (29) S.T.R. 119 (Ker.) , [2013] 58 VST 191 (Ker) Issues Involved:1. Whether the transfer of the right to use the petitioner's Trade Mark constitutes a 'sale' as defined under the Kerala Value Added Tax Act.2. Whether an intangible asset like a Trade Mark qualifies as 'Goods' under the Kerala Value Added Tax Act.3. The applicability of VAT on royalty received, given the mutual exclusivity of VAT and Service Tax.Detailed Analysis:Issue 1: Transfer of Right to Use Trade Mark as 'Sale'The petitioner, a company engaged in trading and marketing of jewelry, challenged the levy of VAT on royalties received from franchisees for the use of its Trade Mark, arguing that it is already paying Service Tax on these royalties under the Finance Act, 1994. The court examined whether such a transfer constitutes a 'sale' under the Kerala Value Added Tax Act (KVAT Act). The court referred to the definition of 'sale' in Section 2(xliii) of the Act, which includes the transfer of the right to use any goods for any purpose for valuable consideration. The court concluded that the transfer of the Trade Mark to the franchisees for a royalty is a 'deemed sale' under the Act, as the petitioner admitted to receiving royalties for the use of its Trade Mark by franchisees.Issue 2: Trade Mark as 'Goods'The court next examined whether a Trade Mark qualifies as 'Goods' under Section 2(xx) of the KVAT Act, which defines 'goods' as all kinds of movable property, including intangible property. The court referred to the Supreme Court's judgment in Tata Consultancy Services v. State of A.P., which held that intangible property capable of abstraction, consumption, and use qualifies as 'goods'. The court also cited previous judgments where technical know-how and royalties from franchisees were considered 'goods' and subject to sales tax. Based on these precedents, the court held that a Trade Mark is 'goods' under the KVAT Act.Issue 3: Mutual Exclusivity of VAT and Service TaxThe petitioner argued that since it is paying Service Tax on the royalties received, it should not be liable to pay VAT on the same transaction, citing the Supreme Court judgment in Imagic Creative (P) Ltd. v. Commissioner of Commercial Taxes, which held that VAT and Service Tax are mutually exclusive. However, the court clarified that while it had determined the royalties are subject to VAT, it was not called upon to decide the legality of the Service Tax levy. The court suggested that if the petitioner believes the Service Tax levy is illegal, it should challenge it in appropriate proceedings.Conclusion:The court dismissed the writ petitions, upholding the VAT demand on the royalties received by the petitioner for the use of its Trade Mark by franchisees. The court ruled that the transfer of the right to use the Trade Mark constitutes a 'sale' under the KVAT Act and that the Trade Mark qualifies as 'goods'. The court did not address the legality of the Service Tax levy, leaving it open for the petitioner to challenge separately.