2013 (7) TMI 101 - HC - VAT and Sales Tax

Franchise agreement not subject to VAT under KVAT Act, ruled by appellate court.

MALABAR GOLD PRIVATE LIMITED Versus COMMERCIAL TAX OFFICER, KOZHIKODE & OTHS.

The appellate court reversed the Single Judge's decision, ruling that the franchise agreement does not fall under the KVAT Act. It held that the ... Levy of VAT on transfer of Trade Mark to the franchisees - scope of the term 'intangible goods' - deemed sale - royalty received from franchisees for use of Trade Mark - Entry Serial No.68 of the Third Schedule to the KVAT Act, 2003 - Held that:- even though both sides relied upon the provisions of Articles 246 and 254 of the Constitution of India, we need not enter into a finding on the said question, as we are of the view that the tests laid down in BSNL's case (2006 (3) TMI 1 - Supreme court) are squarely applicable here. Herein, it cannot be said that there are goods deliverable at any stage which is the test laid down by the Apex Court in paragraphs 78 and 79 of BSNL's case (2006 (3) TMI 1 - Supreme court) and for that reason also, there is no transfer of right to user at all. Coupled with the same, is the fact that during the period in question the franchisee is having the right, it is not to the exclusion of the franchisor and as it is seen that even during the period during which the transaction is going on, the franchisor can again transfer the right to others, the tests laid down in sub paragraphs (d) and (e) under para 97 of BSNL's case (2006 (3) TMI 1 - Supreme court) are not satisfied. We are unable to agree with the view taken by the learned Single Judge [2012 (11) TMI 927 - KERALA HIGH COURT]. The view taken in para 14 of the judgment is that the transaction in question is a deemed sale as defined under Section 2(x)(iii) of the KVAT Act. The above view was taken by concluding that the trade mark of the appellant is transferred to the franchisees for their use and the consideration received is the royalty paid to the appellant. In para 17, the principles stated in BSNL's case (2006 (3) TMI 1 - Supreme court) were distinguished on the facts of the said case and it was held that in the said case the Court was not dealing with a case involving transfer of intellectual property rights such as trade mark. It was held that there is total transfer of trade mark on payment of royalty which alone will attract the provisions of KVAT Act. With great respect, we are unable to agree with the same. Order of single judge reversed [2012 (11) TMI 927 - KERALA HIGH COURT] - Decided in favor of assessee. Issues Involved:1. Whether royalty received from franchisees for the use of the Trade Mark attracts VAT under the KVAT Act.2. Whether the transaction of franchise agreement constitutes a sale under the KVAT Act.3. Applicability of service tax and VAT on the same transaction.4. Interpretation of the term 'goods' and 'right to use' under Article 366(29A)(d) of the Constitution.5. Distinguishing previous judgments and their applicability to the current case.Issue-wise Detailed Analysis:1. Whether royalty received from franchisees for the use of the Trade Mark attracts VAT under the KVAT Act:The Commercial Tax Officer issued notices proposing to assess the Company for non-payment of tax under the KVAT Act on the royalty received from franchisees for the use of the Trade Mark for the assessment years 2006-2011. The Company contended that the transaction attracts service tax alone, which they have paid under the category of 'Franchise Services'. The learned Single Judge held that the royalty received is exigible to tax under Section 6(1)(c) of the KVAT Act. However, the appellate court found that the transaction does not constitute a sale under the KVAT Act, as the franchisees do not get an exclusive right to use the Trade Mark.2. Whether the transaction of franchise agreement constitutes a sale under the KVAT Act:The franchise agreement allowed franchisees to use the Trade Mark but did not transfer the Trade Mark exclusively. The agreement stipulated that the franchisees could not transfer the Trade Mark to a third party or use it to the exclusion of the appellant Company. The appellate court held that mere licensing to use the Trade Mark does not constitute a sale under the KVAT Act, as the franchisees do not get an absolute transfer of the Trade Mark.3. Applicability of service tax and VAT on the same transaction:The Company argued that the transaction is covered under service tax law, and thus, VAT cannot be imposed on the same transaction. The appellate court agreed, citing the principle that payment of service tax and VAT are mutually exclusive. The court relied on the judgment in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes, which held that once a transaction is covered under service tax, it cannot be charged for sales tax or VAT again.4. Interpretation of the term 'goods' and 'right to use' under Article 366(29A)(d) of the Constitution:The court analyzed the principles laid down in BSNL's case, which interpreted Article 366(29A)(d) regarding the transfer of the right to use goods. The court held that for a transaction to be considered a sale under this article, the goods must be deliverable and delivered at some stage. In this case, the Trade Mark was not deliverable, and the franchisees did not get an exclusive right to use it, failing the tests laid down in BSNL's case.5. Distinguishing previous judgments and their applicability to the current case:The court distinguished the present case from previous judgments like Mechanical Assembly Systems (India) Pvt. Ltd., Jojo Frozen Foods (P) Ltd., and Kreem Foods Private Ltd., which dealt with the transfer of know-how and royalty under the KGST Act. The court noted that those cases did not consider the provisions of the Finance Act, 1994, which introduced service tax on franchise services. The court also distinguished the judgment in Nutrine Confectionary Co. Pvt. Ltd. v. State of Andhra Pradesh, as the facts and the statutory provisions involved were different.Conclusion:The appellate court reversed the judgment of the learned Single Judge, holding that the franchise agreement does not attract the provisions of the KVAT Act. The court concluded that the transaction is covered under service tax law, and the royalty received by the Company from franchisees for the use of the Trade Mark is not subject to VAT under the KVAT Act.