Non-exclusive franchise and trademark licence was held outside deemed sale taxation, and composite service contracts could not be split for VAT.

Royalty and franchise fees under a non-exclusive franchise and trade mark licence were held not to constitute consideration for transfer of the right to use goods, because the agreements granted only permissive use of a composite business system while ownership, control and the right to exclude others remained with the proprietor. Applying Article 366(29A)(d) and section 48 of the Trade Marks Act, the Court treated mere licence or permitted use as insufficient for deemed sale taxation, so VAT was not attracted. The Court also held that a composite franchise arrangement already taxed as a service could not be artificially severed and recharacterised as a deemed sale under VAT, making the assessments and notices unsustainable.

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Issues: (i) Whether royalty and franchise fee received under the franchise and trade mark licensing arrangements amounted to consideration for transfer of the right to use goods, so as to attract tax under the Delhi Sales Tax on Right to Use Goods Act, 2002 and the Delhi Value Added Tax Act, 2004; (ii) Whether the composite franchise arrangements, already subjected to service tax, could be split and taxed as a deemed sale of goods under the VAT regime.

Issue (i): Whether royalty and franchise fee received under the franchise and trade mark licensing arrangements amounted to consideration for transfer of the right to use goods, so as to attract tax under the Delhi Sales Tax on Right to Use Goods Act, 2002 and the Delhi Value Added Tax Act, 2004.

Analysis: The agreements were examined as whole instruments and were found to grant only a limited, non-exclusive permission to use a composite business system, along with knowhow, manuals, recipes, trade secrets, standards and related support. The essential ownership in the trade marks and other intellectual property always remained with the franchisor or licensor. Applying the requirement under Article 366(29A)(d) of the Constitution of India that there must be a transfer of the right to use goods, the Court held that mere permissive use or a licence, without exclusivity or transfer of control and without the right to exclude others, does not satisfy the statutory test. Section 48 of the Trade Marks Act, 1999 reinforced that permitted use by the franchisee or licensee inures to the benefit of the proprietor.

Conclusion: The franchise and trade mark licensing arrangements did not amount to a transfer of the right to use goods, and VAT was not attracted.

Issue (ii): Whether the composite franchise arrangements, already subjected to service tax, could be split and taxed as a deemed sale of goods under the VAT regime.

Analysis: The Court held that the arrangements were composite contracts dominated by the supply of franchise services, and that the service element could not be artificially severed to treat the entire consideration, or a part of it, as consideration for a deemed sale of goods. The definition of franchise under Section 65(47) of the Finance Act, 1994 was relevant in showing that the arrangement conferred only a representational right. Since the same transaction had already been treated as taxable service, an overlapping levy under VAT was impermissible. The Court applied the principle that taxing entries must be construed with exclusivity and that the dominant nature of the transaction could not be ignored.

Conclusion: The composite franchise transactions could not be split up for VAT purposes, and the impugned assessments and notices were unsustainable.

Final Conclusion: The impugned orders were quashed and the appeals and writ petitions were allowed, because the agreements disclosed only permissive, non-exclusive franchise use and not a taxable transfer of the right to use goods.

Ratio Decidendi: A non-exclusive franchise or trade mark licence that merely permits use of a composite business system, while ownership and the right to exclude others remain with the proprietor, is not a transfer of the right to use goods for the purpose of deemed sale taxation.

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