Franchise royalty for trade mark use treated as service, not transfer of right to use goods under VAT law

Royalty paid under a franchise agreement for use of a trade mark was treated as consideration for a franchise service, not as taxable transfer of the right to use goods under the Kerala Value Added Tax Act, 2003. The agreement gave only a limited, controlled permission to use the trade mark, while the franchisor retained ownership, effective control, and the ability to grant similar permissions to others; the franchisee acquired no exclusive, permanent, or assignable right. Because the arrangement did not place deliverable goods in the franchisee's possession to the exclusion of the franchisor, and instead included support, standardisation, supervision, and promotional assistance, it fell outside the VAT net and within the concept of franchise service under the Finance Act, 1994.

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Issues: Whether royalty received under the franchise agreement for use of the trade mark was liable to tax under the Kerala Value Added Tax Act, 2003, or whether the transaction was taxable only as a franchise service under the Finance Act, 1994.

Analysis: The franchise agreement granted the franchisee only a limited permission to use the trade mark in a controlled manner. The franchisor retained ownership, effective control, and the right to grant similar permissions to others, and the franchisee could not sub-let, assign, or acquire any permanent or exclusive right. Applying the tests governing transfer of the right to use goods, the transaction did not involve deliverable goods being placed in the possession of the franchisee to the exclusion of the franchisor. The agreement also contained substantial service elements, including support, standardisation, supervision, and promotional assistance, bringing it within the statutory concept of franchise service. The earlier sales tax decisions were distinguished as they involved different facts and, in substance, outright transfer of know-how or pre-service-tax period transactions.

Conclusion: The royalty could not be brought to tax under the Kerala Value Added Tax Act, 2003, and the transaction was held to fall outside the VAT net.

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