2025 (11) TMI 1432 - HC - VAT / Sales Tax

Trademark Crocin assignment held export under Section 5(1) CST Act, outside local sales tax under Schedule C-I-26

M/s. Duphar Interfran Ltd. Versus The State of Maharashtra.

HC held that the Brand Acquisition Agreement for the trademark 'Crocin' constituted an agreement to sell an intangible asset whose situs follows the owner ... Brand Acquisition Agreement - agreement to sale or not - such sale is a sale within the State of Maharashtra liable to tax at 4% in terms of Schedule Entry C-I-26 appended to the Bombay Sales Tax Act, 1959 or otherwise - sale of the said trademark has taken place within the State of Maharashtra or is deemed to have taken place during export outside India, under the canopy of Section 5(1) of the Central Sales Tax Act, 1956 - HELD THAT:- In N.K. Jain vs. C.K. Shah [1991 (3) TMI 389 - SUPREME COURT], the Supreme Court has categorically observed that in gathering the meaning of a word used in the statute, the context in which that word has been used has significance and the legislative purpose must be noted by reading the statute as a whole and bearing in mind the context in which the word has been used in the statute. This Court has categorically held that in the determination of situs of an intangible asset, which does not have a physical form, one needs to follow the internationally accepted legal principle of “mobilia sequuntur personam”. Applying this principle and juxtaposing it to the given facts, it is undisputed that the situs of SKB, i.e. the assignee of the trademark, is in the UK. The Agreement in question was executed with the Assignee, i.e. SKB, which is based/situated in the UK. Applying the ratio in Mahyco Monsanto [2016 (8) TMI 717 - BOMBAY HIGH COURT], it would follow that the trademark, which is an intangible, by way of deeming fiction, on assignment, moved with the owner/assignee. Such movement of the trademark outside India to UK, following the situs of the owner would make it fall within the scope and ambit of ‘export’ as contemplated under Section 5 of the CST Act. The decision of a learned Single Judge of the Delhi High Court in Sun Pharmaceuticals Industries Ltd. Vs. Cipla Ltd. [2008 (10) TMI 726 - DELHI HIGH COURT] perused. The Court, dealing with an assignment under Section 2(b) of the Trade and Merchandise Marks Act, 1958, observed that an assignment in writing by the act of the parties concerned does not require registration. For the assignment to be complete, the registrar is not involved. In terms of Section 45(1) of the said Act, the Assignee acquires title to a registered trademark on assignment and not by registration. The Court pertinently observed that if the person in whom the title has been vested by assignment, is precluded from exercising rights merely because of non-registration of an otherwise registered trademark, that would create a havoc with assignability and trading in trademarks though being expressly permitted under the Act and confer a premium to third parties, which is not what the law prescribes and/or contemplates. These observations of the Delhi High Court in Sun Pharmaceuticals Industries Ltd. are apposite in the given factual complexion. The Brand Acquisition Agreement dated 18 January 1996 in respect of trademark-‘Crocin’ entered into between the parties is an Agreement to Sale and such sale is not a sale within the State of Maharashtra, but shall be deemed to have taken place in the course of export of the said trademark-‘Crocin’ outside India, as contemplated under Section 5(1) of the Central Sales Tax Act, 1956. The sales tax reference is disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the Brand Acquisition Agreement dated 18 January 1996 in respect of the trademark 'Crocin' constitutes an agreement to sale of 'goods'. 1.2 Whether the sale/assignment of the trademark 'Crocin' under the said Agreement is a sale within the State of Maharashtra liable to tax under the Bombay Sales Tax Act, 1959, or a sale in the course of export outside India under Section 5(1) of the Central Sales Tax Act, 1956 read with Article 286 of the Constitution. 1.3 For purposes of Section 5 of the Central Sales Tax Act, 1956, whether an intangible trademark constitutes 'goods' capable of being exported, and how the situs of such intangible property is to be determined (by registration or by location of owner). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of the Brand Acquisition Agreement: whether it is an agreement to sale of goods Legal framework (as discussed) 2.1 The Court proceeded on the basis of the Tribunal's finding and the Applicant's concession that the Brand Acquisition Agreement dated 18 January 1996 is an agreement to sale in respect of the trademark 'Crocin'. Interpretation and reasoning 2.2 The Court recorded that the first limb of the referred question - whether the Agreement is an agreement to sale - stood concluded in the affirmative by the Tribunal and was not disputed before the Court. 2.3 The Court treated the transaction as a sale of 'goods' consisting of an intangible/incorporeal property, namely the trademark 'Crocin', in line with the statutory scheme and the Tribunal's characterization. Conclusions 2.4 The Agreement dated 18 January 1996 is an agreement to sale, and the subject-matter (the trademark 'Crocin') is 'goods' for purposes of sales tax analysis. Issue 2 - Whether the sale is within Maharashtra or in the course of export outside India Legal framework (as discussed) 2.5 The Court analysed Sections 3, 4 and 5 of the Central Sales Tax Act, 1956 and Article 286 of the Constitution (post 6th Amendment): (a) Sections 3 and 4: define inter-State sales and sales outside a State. (b) Section 5(1): a sale is in the course of export only if it occasions export of the goods out of the territory of India or is effected by transfer of documents of title after the goods have crossed the customs frontiers. (c) Article 286: prohibits States from taxing sales taking place in the course of import/export; after the amendment, the expression 'goods' is not confined to tangibles and extends to intangibles. 2.6 The Court expressly held that Section 5 of the CST Act, read with the amended Article 286, applies equally to intangible goods, including trademarks. Interpretation and reasoning 2.7 The Court applied the settled principle that statutory words must be construed in their context and as part of the statute as a whole, relying on decisions such as Reserve Bank of India v. Peerless General Finance, N.K. Jain v. C.K. Shah, and a coordinate bench decision in Code Engineers Pvt. Ltd. v. Union of India to hold that 'goods' in Sections 3, 4 and 5 must bear a consistent, contextually informed meaning, covering intangibles. 2.8 On this basis, the Court accepted the submission that it would be impermissible to treat 'goods' in Section 4 (for outside-State sales) as including intangibles but confine 'goods' in Section 5 (for export) only to tangibles with physical movement; such a differential construction would be inconsistent with the common constitutional scheme under Article 286 and Article 269. (a) Determination of situs of intangible property 2.9 The central controversy was whether the situs of the trademark 'Crocin' was in India (as per registration) or followed the owner/assignee (as an intangible). 2.10 The Court relied on the coordinate bench decision in Mahyco Monsanto v. Union of India, which held that: (i) Intangible assets do not have physical form or location. (ii) In absence of a specific legislative deeming fiction as to situs of such intangibles, the internationally accepted principle 'mobilia sequuntur personam' applies - the situs of the intangible follows the situs of its owner. (iii) For intellectual property, Indian legislation has not provided any contrary rule; therefore, the situs is where the owner is situated. 2.11 The Court further relied on the Delhi High Court decision in CUB PTY Ltd. v. Union of India, as cited in Mahyco Monsanto, reiterating that where there is no specific statutory provision fixing situs of intangible intellectual property, 'mobilia sequuntur personam' governs and the situs is that of the owner. 2.12 Applying these principles, the Court held that the trademark 'Crocin', being an intangible, followed the situs of its owner/assignee, SKB, a company incorporated and situated in the UK. Upon assignment, the situs of the trademark shifted from India to the UK. (b) Role of registration versus ownership 2.13 The Revenue contended, and the Tribunal had earlier held, that the situs of a trademark is determined by its place of registration in India and that registration confers legal efficacy, thus fixing the situs in India. 2.14 The Court rejected this reasoning, distinguishing between registration and ownership of a trademark, and relying on: (i) Rustom and Hornsby v. Zamindara Engineering, and In re The Century Spinning and Manufacturing Co. Ltd., and Commissioner of Income Tax v. Finlay Mills Ltd., for the propositions that registration does not create the mark nor alter a pre-existing mark and that common law rights in unregistered marks exist (basis for passing off), while registration merely enables statutory infringement remedies. (ii) Parksons Cartamundi v. Suresh Kumar Jasraj Burad, for the proposition that assignment of trademarks is not dependent on subsequent registration; the assignee acquires title by virtue of assignment, and acquisition of title is not postponed to registration. (iii) Sun Pharmaceuticals Industries Ltd. v. Cipla Ltd., for the proposition that an assignment in writing under the Trade and Merchandise Marks Act, 1958 is complete without registration; the assignee acquires title on assignment, not by registration, and non-registration cannot preclude exercise of rights nor defeat assignability and trading in trademarks. 2.15 On this basis, the Court held that registration is not determinative of situs; situs must follow ownership, not the place of registration. Registration in India, therefore, could not be used to assert that the trademark remained situated in India after its assignment to a UK-based owner. (c) Application of 'mobilia sequuntur personam' and export under Section 5(1) 2.16 The Court endorsed the reasoning of the Kerala High Court in Lal Products v. Intelligence Officer, which applied 'mobilia sequuntur personam' to trademarks and held that: (i) A transfer/assignment of a trademark is a transfer of property in goods, not a mere transfer of right to use. (ii) Complete rights vest in the transferee, and the transferor retains no subsisting rights. 2.17 Applying this to the facts, the Court found: (a) The trademark 'Crocin' is intangible/incorporeal property. (b) Under the Brand Acquisition Agreement, there was a complete assignment to SKB, a UK-based entity; all prior rights of the assignor in India were extinguished. (c) By operation of 'mobilia sequuntur personam', the situs of the trademark moved with the assignee to the UK. 2.18 The Court held that this movement of the intangible property, by way of assignment to a non-resident owner located abroad, constituted movement of 'goods' out of India for the purposes of Section 5(1) of the CST Act, and must be treated as a sale in the course of export. 2.19 The Court rejected the Revenue's reliance on factors such as: (i) The Agreement being governed by Indian law; and (ii) Consideration being payable and received in India; holding that these do not alter the situs of the intangible asset for the purposes of Section 5(1). The decisive factor is the situs of the owner/assignee, not the place of registration, governing law, or currency of payment. 2.20 The Court also noted that if the Revenue's contention that the situs always remained in India due to registration were accepted, the expression 'sale in the course of export' in Section 5(1) (as applied to intangibles) would be rendered redundant and otiose, contrary to the constitutional and statutory scheme. Conclusions 2.21 The trademark 'Crocin' is 'goods' within the meaning of the CST Act, and Section 5(1) applies to intangibles as well as tangibles. 2.22 The Brand Acquisition Agreement effects a complete assignment of the trademark to SKB in the UK; by applying the principle 'mobilia sequuntur personam', the situs of the trademark moves to the UK with the assignee. 2.23 Such movement of the intangible asset out of India, upon assignment to a foreign owner, constitutes a sale in the course of export under Section 5(1) of the CST Act read with Article 286(1)(b) of the Constitution. 2.24 Consequently, the sale/assignment of the trademark 'Crocin' under the Agreement dated 18 January 1996 is not a sale within the State of Maharashtra and is not liable to tax at 4% under Schedule Entry C-I-26 of the Bombay Sales Tax Act, 1959. 2.25 The referred question is answered by holding that, while the Agreement is an agreement to sale, the sale is deemed to have taken place in the course of export of the trademark outside India and is not taxable as a local sale in Maharashtra.