Franchise royalty not VATable as sale where trademark use remained non-exclusive and control stayed with the franchisor.

Royalty under a franchise agreement for use of a trademark was treated as a non-exclusive licence, not a transfer of the right to use goods, because ownership and effective control of the mark remained with the franchisor. Applying the statutory definitions of franchise and sale, the Court held that the arrangement lacked the exclusive legal right necessary to amount to a deemed sale under the Uttar Pradesh Value Added Tax Act, 2008. It also applied the principle that consideration already subjected to service tax cannot be recharacterised as a sale for VAT. The royalty was therefore not liable to VAT.

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Issues: Whether royalty received under a franchise agreement for use of a trademark constituted a transfer of the right to use goods so as to attract VAT under the Uttar Pradesh Value Added Tax Act, 2008.

Analysis: The franchise arrangement was examined against the statutory definition of franchise under Section 65(47) of the Finance Act, 1994 and the definition of sale under Section 2(ac) of the Uttar Pradesh Value Added Tax Act, 2008. The arrangement granted only representational and non-exclusive use of the brand, while ownership and effective control of the trademark remained with the franchisor. Applying the test for transfer of the right to use goods, the arrangement lacked the element of exclusive legal right in favour of the franchisee. The Court also relied on the principle that an amount already subjected to service tax cannot be recharacterised as a sale of goods for VAT purposes.

Conclusion: The franchise agreement amounted to a non-exclusive licence and not a transfer of the right to use goods, so the royalty was not liable to VAT under the Uttar Pradesh Value Added Tax Act, 2008.

Ratio Decidendi: A non-exclusive franchise licence that leaves ownership and control of the trademark with the grantor does not satisfy the legal attributes of a transfer of the right to use goods and cannot be taxed again as a sale for VAT when it is already taxed as a service.

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