2013 (12) TMI 743 - HC - VAT and Sales Tax

Franchise Agreement: Taxable as Sale of Intangible Goods under TNGST Act

M/s. Vitan Departmental Stores & Industries Limited Versus The State of Tamil Nadu, Rep. by the Joint Commissioner (CT)

M/s. Vitan Departmental Stores & Industries Limited Versus The State of Tamil Nadu, Rep. by the Joint Commissioner (CT) - TMI, [2014] 68 VST 70 (Mad) Issues Involved:1. Whether the franchise agreement constitutes a sale of goods or a provision of services.2. Whether the franchise fee is subject to sales tax under the Tamil Nadu General Sales Tax Act, 1959.3. Whether the franchise agreement involves a transfer of intangible property rights.Issue-wise Detailed Analysis:1. Nature of Franchise Agreement: Sale of Goods or Services:The petitioner argued that the franchise agreement is purely a service transaction and does not involve the sale of goods. The agreement was for the operation of a supermarket under the name 'VITAN A/C Supermarket,' with the franchisee paying fees for the use of the VITAN system and trademarks. The petitioner contended that the fee received is for services rendered and not for the sale of any tangible or intangible goods.2. Applicability of Sales Tax on Franchise Fee:The Assessing Authority, First Appellate Authority, and Tribunal concluded that the franchise fee is taxable under the TNGST Act. They held that the franchise agreement involved the transfer of trade name and goodwill, which are considered intangible goods. The Tribunal referenced the case of S.P.S. Jayam and Co. v. Registrar Tamil Nadu Taxation Special Tribunal, where it was established that trademarks are intangible goods and their transfer is subject to sales tax. The Tribunal dismissed the appeal, affirming that the franchise fee is taxable at 4%.3. Transfer of Intangible Property Rights:The petitioner argued that the franchise agreement did not involve the transfer of any property rights, but merely allowed the franchisee to use the VITAN system and trademarks. They cited the Supreme Court's decision in Sunrise Associates v. Government of NCT of Delhi, which distinguished between actionable claims and goods. However, the court found that the agreement did transfer intangible property rights, such as the right to use trademarks and goodwill, which are considered goods under the TNGST Act. The court held that the transfer of these rights constituted a sale of intangible goods, making the franchise fee subject to sales tax.Conclusion:The court concluded that the franchise agreement involved the transfer of the right to use intangible property, such as trademarks and goodwill, which are considered goods under the TNGST Act. Consequently, the franchise fee is subject to sales tax. The court dismissed the petitioner's appeals, affirming the Tribunal's decision that the franchise fee is taxable at 4%. The court emphasized that the petitioner had transferred exclusive rights to the franchisee, satisfying the criteria for a transfer of intangible goods and making the transaction taxable under the TNGST Act.