APPLICIBILITY OF VAT ON ROYALTY PAYMENT FOR USE OF BRAND

[BABULALA SHARMA]

Dear Sir,

We are a mid size biscuit manufacturing company. We have given our brand logo to another company for their use on the packets manufactured by them. In return, they pay us royalty as per agreement with them for our transferring rights to them to use our brand. our question is whether VAT is payable on the royalty that we receive from our brand user.

Looking forward to expert advice urgently.

Regards,

Babulal Sharmma

Bhagwati Foods Pvt. Ltd.

[Sanjeev Sachdeva]

Mr Sharma,

In the case of Malabar Gold Pvt Ltd in a judgment passed by the High Court at Kerela, it was held that VAT will be payable on such royalty as this is the payment made for "transfer of rights to use goods". Such royalty in law will be considered as sale of goods and therefore attracts VAT. The division bench of the Kerala High Court, in Malabar Gold Private Limited versus commercial tax officer, Commissioner of Central Excise and Customs and ors (2013-TIOL-512-HC-KERALA-ST) = 2013 (7) TMI 101 - KERALA HIGH COURT has overruled the judgement delivered by the single judge and held that the transaction of letting the franchise use the trademark owned by the franchiser without the right to transfer or sub-let the trademark to a third party cannot be considered as "transfer of right to use" therefore no VAT is payable in this case.

AI Summary

Transfer of rights to use: VAT may apply to brand royalty unless no right to sub-license is granted.
Applicability of VAT on brand-use royalty depends on whether the royalty is a transfer of rights to use constituting a sale of goods. While one High Court view treated such royalty as VATable sale, a division-bench in Kerala held that granting use of a trademark without any right to transfer or sub-license is not a transfer of the right to use and thus does not attract VAT under that characterisation.