2015 (11) TMI 754 - HC - VAT and Sales Tax

Court rules brand franchise fees for beer not taxable, but 'Kingfisher' royalty for water is.

The court ruled that the 'brand franchise fees' paid by Contract Bottling Units (CBUs) to the assessee for beer manufacturing did not constitute a ... Transfer of right to use goods - taxability of royalty and brand franchise fee - intellectual property service versus sale of goods - effective control test for transfer of right - prohibition on double taxation between sales tax and service taxTransfer of right to use goods - brand franchise fee - intellectual property service versus sale of goods - effective control test for transfer of right - Levy of Sales Tax on amounts received as 'brand franchise fees' from Contract Bottling Units (CBUs) for manufacture of beer. - HELD THAT: - The court examined whether the CBUs were granted a transferable right to use or exploit the assessee's brand name so as to attract tax as transfer of right to use goods. The agreements placed manufacture, specifications, pricing, marketing and sale under the control and supervision of the assessee; CBUs produced beer on behalf of the assessee, sold only to customers directed by the assessee at prices fixed by the assessee, and retained no independent right to exploit the trade mark. On these findings of fact the relationship was that of a captive manufacturer and not a transfer of the right to use the brand for independent commercial exploitation. The court applied the principle that tax under the sales-tax provision attaches only when there is a transfer of the right to use goods and noted that the amounts characterised as 'brand franchise fees' were already covered as an intellectual property service under the Finance Act and subject to Service Tax. In view of the absence of transfer of effective control or an exclusive, transferable right to exploit the brand by the CBUs, levy of Sales Tax, penalty and interest on the brand franchise fees for the years in question cannot be sustained. [Paras 16, 17, 18, 20, 21]No Sales Tax is leviable on amounts received as 'brand franchise fees' from CBUs for manufacture of beer for assessment years 2003-04 and 2004-05.Transfer of right to use goods - taxability of royalty - effective control test for transfer of right - Levy of Sales Tax on royalty received from licensee dealers for manufacture and sale of 'Kingfisher' packaged drinking water where right to use the trade mark was transferred. - HELD THAT: - The court found that the agreements with licensee dealers for packaged drinking water transferred the trade mark with a right to use and commercially exploit the 'Kingfisher' brand in return for royalty. Unlike the CBUs, the licensees obtained effective control to use and exploit the trade mark for their commercial sales. Such transfer of the right to use the trade mark amounts to transfer of intangible goods within the meaning of the sales-tax provision and is therefore taxable under the KST Act. The Tribunal's contrary conclusion on this point was set aside and the First Appellate Authority's finding that the royalty is chargeable to Sales Tax was confirmed. [Paras 22]Sales Tax is leviable on royalty received from licensee dealers who were transferred the right to use the 'Kingfisher' trade mark for packaged drinking water.Assessment and quantification remand - Remittance to the Assessing Officer for computation/assessment of tax and penalty in light of the court's findings. - HELD THAT: - Having determined the legal character of the respective receipts, the court directed that the matter be remitted to the Assessing Officer to assess tax and penalty, if any, consistent with the conclusions reached: no tax on brand franchise fees from CBUs and tax on royalty from licensees for packaged water. The remand is for assessment and imposition, if applicable, in accordance with the observations and directions in the order. [Paras 23]Matter remitted to the Assessing Officer to assess tax and penalty, if any, in accordance with the court's directions.Final Conclusion: Revision petitions partly allowed: Sales Tax, penalty and interest on 'brand franchise fees' from CBUs in respect of beer for assessment years 2003-04 and 2004-05 are set aside; levy on royalty from licensee dealers for 'Kingfisher' packaged drinking water is upheld and the matter is remitted to the Assessing Officer for assessment/quantification in light of these findings. Issues Involved:1. Taxability of 'brand franchise fees' received by the assessee from Contract Bottling Units (CBUs) for manufacturing beer.2. Taxability of royalty received by the assessee from licensee dealers for using the brand name/trade mark 'Kingfisher' for packaged drinking water.Detailed Analysis of the Judgment:1. Taxability of 'brand franchise fees' for Beer Manufacturing:The core issue is whether the 'brand franchise fees' paid by CBUs to the assessee for using its brand names in beer manufacturing constitutes a transfer of the right to use goods, thereby attracting sales tax under the Karnataka Sales Tax Act (KST Act).The court examined the agreements between the assessee and CBUs, noting that the manufacturing of beer was done as per the assessee's specifications, and the CBUs did not have any independent right to sell the beer. The CBUs were essentially captive manufacturers for the assessee, producing beer solely for the assessee's customers at prices set by the assessee. The 'brand franchise fees' of Rs. 10 per case paid by CBUs to the assessee was for the use of the brand name, but the CBUs did not acquire any right to exploit the brand name independently.The court referred to the Supreme Court's rulings in similar cases, emphasizing that for a transaction to be considered a transfer of the right to use goods, there must be a complete transfer of such rights without any restrictions. In this case, the CBUs did not get effective control over the brand name for full commercial exploitation. Therefore, the 'brand franchise fees' did not constitute a sale of intangible goods and was not subject to sales tax under the KST Act. Additionally, the assessee was already paying service tax on these fees under the Finance Act, 1994, which precludes double taxation.The Tribunal's finding that the 'brand franchise fees' were not transactions in the nature of transfer of the right to use the brand name/trade mark was upheld, and the levy of tax, penalty, and interest on these fees was deemed unjustified.2. Taxability of Royalty for Packaged Drinking Water:The second issue concerned the royalty received by the assessee from licensee dealers for using the 'Kingfisher' brand name for packaged drinking water. Unlike the beer manufacturing agreements, the agreements for packaged drinking water allowed the licensee dealers to use and exploit the brand name independently for commercial purposes, paying royalty to the assessee.The court held that this arrangement constituted a transfer of the right to use intangible goods (the brand name), making it subject to sales tax under the KST Act. The effective control over the brand name was transferred to the licensees, allowing them to use it for commercial purposes, which meets the criteria for a taxable transfer of the right to use goods.The Tribunal's decision to exempt this royalty from tax was overturned, and the First Appellate Authority's finding that the royalty was taxable was confirmed.Conclusion:The revision petitions were partly allowed. The court directed that no sales tax would be levied on the 'brand franchise fees' received by the assessee from CBUs for beer manufacturing for the assessment years 2003-04 and 2004-05. However, the assessee was liable to pay tax on the royalty received from licensee dealers for the 'Kingfisher' packaged drinking water. The matter was remitted to the Assessing Officer to reassess the tax and penalty in light of the court's observations and directions. No order as to costs was made.