TaxTMI 
TaxTMI 
2013 (7) TMI 101
X X X X Extracts X X X X
X X X X Extracts X X X X
....') registered under the Companies Act, 1956. The Commercial Tax Officer, Circle III, Kozhikode and the State of Kerala represented by the Secretary to Government, Department of Commercial Taxes, Trivandrum are the contesting respondents. 2. The Company is engaged in marketing, trading, export and import of jewellery, gold ornaments, diamond ornaments, platinum ornaments, watches, etc. under the name of 'Malabar Gold'. It is a registered dealer in the Office of Commercial Tax Officer, Circle III, Kozhikode bearing RC No.32110830404 and 32110830404C under the Kerala Value Added Tax Act, 2003 (for short 'the KVAT Act') and Central Sales Tax Act, 1956 respectively. It is having Service Tax registration No.AADCM9043RST001 dated 28.3.2006 issued under Section 69 of the Finance Act, 1994 under the category of 'Franchise Services'. 3. The whole background of the case and the circumstances under which the Company approached this Court by filing writ petitions, are narrated hereinbelow: The Commercial Tax Officer, Circle III, Kozhikode, by separate notices, proposed to assess the Company on the ground of alleged non payment of tax under the KVAT Act on the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come up in appeals and the Commissioner of Central Excise and Customs has come up in five appeals. 6. We heard learned counsel for the appellant Company, Shri Joseph Prabakar, Shri Thomas Mathew Nellimoottil, learned Senior Standing Counsel appearing for the Commissioner of Central Excise and Customs and Shri George Mecheril, learned Special Government Pleader for Taxes appearing for the State of Kerala and Commercial Tax Officer. 7. At the outset, learned counsel appearing for the Company submitted that the entire legal issues are covered in favour of the Company in the light of the binding decision of the Apex Court in BSNL's case {2006 (3) SCC 1) which interpreted Article 366 (29A((d) and List II Entry 54. It is submitted that the nature of the transaction is a franchise agreement and the Company has different franchisees who have executed similar agreements. The terms of the said agreement will show that the franchisees can store and sell products and the show room should have the name board "Malabar Gold" as per the design approved by the Company. The royalty fee being paid by the franchisees is a percentage of the annual net profit of the franchisees. It is submitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the Constitution, the legislation, viz. Finance Act, 1994 will prevail. 9. With regard to the Entry Serial No.68 of the Third Schedule to the KVAT Act, 2003, it is submitted that Trade Mark is not an item specifically included among the 'intangible goods' mentioned therein and the same is confined to copy right, patent and REP licence. The attempt by the Revenue is to rope in Trade Mark under Item (4) "others", which cannot be justified. 10. Learned counsel for the appellant Company further submitted that the decision of the Division Bench of this Court in Mechanical Assembly Systems (India) Pvt. Ltd. (2006 (144) STC 546) is distinguishable on its facts. What was involved therein is a transfer on a permanent basis of a know how. It is also pointed out that the said decision was rendered at the time when the Kerala General Sales Tax Act was in force and this Court held therein that the transfer of technical know how through technical personnel would satisfy the definition of sale. Learned counsel further submitted that the subsequent decisions of this Court reported in Jojo Frozen Foods (P) Ltd. v. State of Kerala {(2009) 24 VST 327) and Kareem Foods Pvt. Ltd. v. Sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elied upon in the subsequent decision of the Apex Court in Imagic Creative Pvt. Ltd.'s case (supra). Learned counsel also relied upon the decision of a Division Bench of the Bombay High Court in Commissioner of Sales Tax, Maharashtra State, Bombay v. Rolta Computer & Industries Private Ltd. {(2009) 25 VST 322} wherein also the dictum laid down in BSNL's case (supra) was followed. It is submitted that the learned Single Judge even though has sought to distinguish BSNL's case on the difference in the set of facts, the legal principles laid down by the Apex Court will govern this case also. It is also submitted that the Apex Court, in the judgment in BSNL's case (supra) has approved the earlier decision in State of A.P. v. Rashtriya Ispat Nigam Ltd. {(2002) 3 SCC 314}. In the said decision, in a similar matter wherein only the right to use a machine was given, the Apex Court adopted the principle regarding retention of effective control of the machinery by the transferor even though the machinery was used by a contractor. It was found that the respondent Company and the contractor were not free to make use of the machinery for the works other than the project work of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er the two enactments for the same transaction. Herein, the transaction is only one and the liability is only to pay service tax. Learned Standing Counsel also submitted, by referring to the various clauses in the franchise agreement, that herein there is no delivery, transfer of possession or exclusive right being given to the transferee for any purpose and the right given as evident from the various clauses in the agreement will loom large while considering the legal issue. Learned Standing Counsel further submitted that the impugned judgment cannot be supported. It is further submitted that the service tax alone is applicable herein and the State cannot overlook the provisions of the Finance Act, 1994 which will override the provisions of the KVAT Act. 12. Learned Special Government Pleader for Taxes, while supporting the judgment of the learned Single Judge, raised a preliminary objection that the Writ Appeals filed by the Commissioner of Central Excise and Customs are not maintainable, as they are not aggrieved parties. It is submitted that no directions have been issued against the said appellant. Learned Special Government Pleader further submitted that the judgments of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us Trade Mark herein will also come within the same. By referring to the judgment of the Apex Court in M. Karunanidhi v. Union of India (AIR 1979 SC 898) wherein the various tests for determining repugnancy have been laid down by a Constitution Bench, it is submitted that there is no repugnancy here. It is submitted that it may also be a case where both Service Tax Act and VAT Act will apply. He further submitted that clause 18 of the franchise agreement will show that the franchisee is not an agent and is treated as principal itself. It is therefore submitted that the plea that the franchisee is not having any control, cannot be supported. 17. Learned counsel for the appellant reiterated the contentions in the reply to the arguments of the learned Special Government Pleader and submitted that the State cannot take the stand that the principles in BSNL's case (supra) have no application herein and the State has also not explained how the present proposal is legally sustainable in the light of the said principles. 18. Before going into the contentious issues, we will refer to the relevant provisions. Sections 65(47) and 65(48) of the Finance Act gives the definitions of &#....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration shall be deemed to be a sale." We will also refer to Section 6 which provides for levy of tax on sale or purchase of goods and Sub-section 1(c) is important which reads as follows: "6. Levy of tax on sale or purchase of goods.-- (1) Every dealer whose total turnover for a year is not less than ten lakhs rupees and every importer or casual trader or agent of a non-resident dealer, or dealer in jewellery of gold, silver and platinum group metals or silver articles or contractor or any State Government, Central Government or Government of any Union Territory or any department thereof or any local authority or any autonomous body whatever be his total turnover for the year, shall be liable to pay tax on his sales or purchases of goods as provided in this Act. The liability to pay tax shall be on the taxable turnover.-- (a) and (b)xxxxxxxxxxxx (c) In the case of transfer of the right to use any goods for any purpose whether or not for a specified period, at the rate of four per cent a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under-mentioned activities at the showroom authorised by MALABAR GOLD. i. Retailing of gold ornaments ii. Retailing of diamond and other precious stone ornaments. iii. Retailing of premium watches. iv. Retailing of platinum and other premium fashion accessories. v. Any other items introduced by MALABAR GOLD in future. TERMS AND CONDITIONS After mutual discussions and negotiations MALABAR GOLD has agreed to grant permission subject to the following terms and conditions which are to be strictly complied by the FRANCHISEE. 1 omitted. 2. PRODUCTS The FRANCHISEE agrees not to stock, exhibit or sell any products in the authorised showroom during the period of this agreement, except the products authorized by MALABAR GOLD, which may include products manufactured or sourced by MALABAR GOLD. 3. TRADE NAME Means the trade name of MALABAR GOLD and/or its associates and shall include any....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e franchisee agrees to take prior written approval of MALABAR GOLD and/or its business associates in respect of usage of above mentioned material. D. The FRANCHISEE specifically undertakes that it shall have no right, title, lien, license etc on the business material content and material thereof and the permission to deal and/or resell the Business material content and material thereof granted to it through MALABAR GOLD shall terminate on the expiry or termination of this agreement which ever is earlier. E. The FRANCHISEE shall not do anything which will cause injury to the trade name of reputation or MALABAR GOLD and that the FRANCHISEE agrees to indemnify and keep MALABAR GOLD indemnified against all claims whatsoever and from all liabilities, damages or injury of any description which may occur or affect MALABAR GOLD for any failure by the FRANCHISEE to perform its obligations under this agreement or from any act or omission whatsoever on the part of the FRANCHISEE or its servants or agents. 4. SUPPORT FROM MALABAR GOLD MALABAR GOLD at its sole discretion will provide ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by MALABAR GOLD at the authorised showroom located at the following address. M/s. MALABAR COCHIN ARCADE PVT. LTD., 40/515-A, Opp. Grand Hotel, M.G. Road, Ernakulam District, Pin-682 101, Kerala State and/or other centres that may be opened in future by the FRANCHISEE, with the prior written approval of MALABAR GOLD. 5.3. NAME BOARD AND DISPLAY - The showroom shall have a name board "MALABAR GOLD. Conspicuously displayed as per the design approved by MALABAR GOLD. MALABAR GOLD will specify the approved design from time to time by specific circulars. The FRANCHISEE will not use any other logo or name including the name under which the franchise is taken without the written approval of MALABAR GOLD. The FRANCHISEE agrees to display and maintain MALABAR GOLD'S trade marks, trade names, service marks, logos and advertising and promotional materials including posters at such premises, in the manner authorised by MALABAR GOLD from time to time. The FRANCHISEE agrees to maintain and display signs of MALABAR GOLD only. The colour, colour scheme, size, design and location of such signs shall be, from time to time, be specified by MALABAR GOLD. The FRANCHISEE shall not pla....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enses phone/fax bills etc. promptly and all other incidental and related costs for the carrying on of the business. 5.9 LOCAL PROMOTION ADVERTISING & PUBLICITY - The FRANCHISEE agrees to spend on local promotion, advertising and publicity in connection with the showroom. MALABAR GOLD shall have the right to prescribe the manner and frequency of the advertising and promotional methods, which the FRANCHISEE will be obliged to carry out at its own cost. 5.10. SHARED PROMOTION, ADVERTISING & PUBLICITY - The FRANCHISEE agrees to share the proportionate amount spent on inter-national/national/regional/state/territory promotion, advertising and publicity for the brand name "MALABAR GOLD". MALABAR GOLD will decide the proportionate share to be borne by each FRANCHISEE. 5.11. RECORDS-The FRANCHISEE agrees to maintain such records as may be required by MALABAR GOLD to understand product preference, product movement, customer trends, financial position, stock position etc. and send regular reports as specified by MALABAR GOLD relating to those items from time to time. 5.12. PERSONNEL/EMPLOYMENT OF STAFF - i. The F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R GOLD nor shall any of them be entitled to any benefits, perquisites and amenities available with MALABAR GOLD. It is hereby further clarified that MALABAR GOLD will not be concerned or be made a party to any dispute between the FRANCHISEE and its employees. vii. The FRANCHISEE shall be entirely responsible and shall comply with all applicable statutes like PF, ESI, Minimum Wages Act, Payments of Wages Act etc. in terms of coverage, returns, record maintenance and like in relation to the employee of the FRANCHISEE. The FRANCHISEE shall also make payment of all benefits as admissible under different enactments to its employee(s), including weekly rest days, leave, National Holidays, Overtime if any, Bonus/Gratuity, if applicable, from time to time. MALABAR GOLD will not be liable for any non-compliance on part of FRANCHISEE and only the FRANCHISEE shall be held responsible for all legal consequences. viii. The FRANCHISEE shall maintain all requisite records, registers, accounts books, etc. which are obligatory under any law as applicable to the services being provided under this agreement and shall provide any information as may be required under any....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mployee of MALABAR GOLD. The FRANCHISEE shall have no right or power to, and shall not bind or obligate MALABAR GOLD in any way, manner or thing whatsoever, nor represent that he has any right to do so. iii. In all public records and in its relationship with other persons, on its letter heads and business forms, the FRANCHISEE shall indicate its independent ownership of the said business and that the FRANCHISEE is the person authorised by MALABAR GOLD to conduct the business in respect of the Businesses as is the subject matter of this AGREEMENT. Clauses 19 to 21 omitted 22. ROYALTY For being allowed to operate the "MALABAR GOLD" franchise, the FRANCHISEE will pay MALABAR GOLD a royalty of 10% of the Net Profit before computing depreciation and income tax. The royalty amount is calculated for every calender month and shall be remitted by the 15th of the succeeding month by means of a Demand Draft payable to MALABAR GOLD at Calicut. At the end of every financial year the actual annual profit of the FRANCHISEE will be calculated and settled. Clauses 23 & 24 omitted. 25. CANCELLATION/TERMIN....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mination of this Agreement, the Franchisee will be bound by the following - 1. The Franchisee will make all payments due to MALABAR GOLD. 2. The Franchisee will stop usage of and return Display Board, Publicity Material, Hoardings, Sign Boards and all such materials which indicate the Franchisee's association with the Franchiser or Franchiser's Trade Marks. 3. The FRANCHISEE under takes to return forthwith all literature, promotional materials, sign boards, visual support items, logos, stamps and seals of MALABAR GOLD. It is agreed that the FRANCHISEE shall forfeit all rights and privileges conferred upon the FRANCHISEE by this agreement, and the FRANCHISEE shall not be entitled to use the trade name or materials of MALABAR GOLD. 4. The Franchisee will not take undue advantage of being an Ex-Franchisee by making representations, express or implied. 5. The Franchisee will not complete in the same Product Category / Trade for a minimum period of 2 years from termination of this Agreement in the name / or for the benefit of himself / immediate family members." As already noticed, se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld definitely indicate that there is a transfer of technology for the manufacture of CCC deputing personnel for consideration, i.e. through human media. Transfer of technology in any manner either through floppy disc, CD or through deputing personnel, etc. would constitute sale within the meaning of Section 2(xxi) of the Kerala General Sales Tax Act." The interpretation of the term "goods" by the Apex Court in Tata Consultancy Services' case (supra) and the meaning of the term "goods" under Article 366(12) of the Constitution of India have been relied on and the meaning of the term "goods" in Article 366(12) of the Constitution was held as very wide and include all types of immovable properties whether those properties are tangible or intangible. 21. We find from the said judgment that the question considered therein was with regard to the transfer of know-how by deputing personnel and whether the same will attract the payment of tax under the KGST Act. It is true that the amount received was termed as royalty, but it was a case of outright transfer of the know-how itself and it was not a case of transfer of the use of know-how as pointed out by the learned counsel for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... cannot be accepted. In India the test, to determine whether a property is "goods", for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. Admittedly in the case of software, both canned and uncanned, all of these are possible." Therefore, the relevant test is whether the item concerned is capable of abstraction, consumption, use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. The specific item considered in the said case was software, both canned and uncanned and it was held that all the tests are possible in relation to the said item of goods. 26. Learned Special Government Pleader for Taxes relied upon paragraphs 25 to 27 of the above judgment which dealt with the definition of the term 'goods' under Article 366(12) of the Constitution of India. It was relied upon to show that both properties whether tangible or intangible, are also covered under the item of 'goods'. The principles enunciated under para 19 of the jud....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that even after introducing separate categories of deemed sales in the said Article, the meaning of the word "goods" was not altered. For easy reference, we extract the said paragraph hereunder: "43. Gannon Dunkerley (State of Madras v. Gannon Dunkerlay & Co. Ltd. - AIR 1958 SC 560) survived the 46th Constitutional Amendment in two respects. First with regard to the definition of 'sale' for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Art. 366(29A) operate. By introducing separate categories of 'deemed sales', the meaning of the word 'goods' was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment does not give a licence, for example, to assume that a transaction is a sale and then to look around for what could be the goods. The word "goods" has not been altered by the 46th Amendment. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tored and possessed. If a software whether customized or non-customised satisfies these attributes, the same would be goods". 57. This in our opinion, is the correct approach to the question as to what are "goods" for the purposes of sales tax. We respectfully adopt the same." 31. In para 73 their Lordships held that the dictum laid down in 20th Century Finance Corpn. Ltd. v. State of Maharashtra {(2000) 6 SCC 12} cannot be cited as an authority for the proposition that delivery of possession of the goods is not a necessary concomitant for completing a transaction of sale for the purposes of Article 366(29A)(d) of the Constitution. In paragraphs 74 and 75 the question whether actual delivery of goods is necessary for effecting the transfer of right to use the "goods" was considered. The said paragraphs are extracted hereinbelow: "74. In determining the situs of the transfer of the right to use the goods, the Court did not say that delivery of the goods was inessential for the purposes of completing the transfer of the right to use. The emphasized portions in the quoted passage evidences that the goods must be available when the transfer of the rig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e contractor was that of the respondent-Company; the contractor was not free to make use of the machinery for the works other than the project work of the respondent or.. . . . . (para 4 page 315) 77. But in Agrawal Brothers v. State of Haryana and Anr.(1999) 9 SCC 182, when the assessee had hired shuttering in favour of contractors to use it in the course of construction of buildings it was found that possession of the shuttering materials was transferred by the assessee to the customers for their use and, therefore, there was a deemed sale within the meaning of sub- clause (d) of Clause (29-A) of Article 366. What is noteworthy is that in both the cases there were goods in existence which were delivered to the contractors for their use. In one case there was no intention to transfer the right to use while in the other there was. 78. But if there are no deliverable goods in existence as in this case, there is no transfer of user at all. Providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was held that it will not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service. 35. In the concurring judgment, the relevant principles were laid down in paragraphs 96 and 97. The said paragraphs are extracted below: "96. The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses. 97. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes: a. There must be goods available for delivery; b. There must be a consensus ad idem as to the identity of the goods; c. The transferee should have a legal right to use the goods - consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee; d. For the period during which the transferee has such legal right, it has to be the exclusio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticle therein, have been emphasised by the Apex Court in the said decision. Learned counsel for the appellant is right in submitting that the said principles will have application to understand the scope and ambit of the term "right to use". 39. BSNL's case {(2006) 3 SCC 1}was again considered by the Apex Court in Imagic Creative Pvt. Ltd.'s case (2008 (9) STR 337). Their Lordships, in the said judgment, considered a case of composite contract and held that demand to pay sales tax for the value of the entire contract irrespective of element of service provided, is not correct. Therein, Article 366(29A) of the Constitution, Section 12 of the Karnataka Sales Tax Act, 1957 and Section 66 of the Finance Act, 1994 came up for consideration. In para 19, the findings contained in paragraphs 44 and 45 and 50 of BSNL's case {(2006) 3 SCC 1} have been extracted and in para 26 their Lordships considered the true effect of the legal fiction created under Article 366 (29A) and held as follows: "26.We have noticed hereinbefore that a legal fiction is created by reason of the said provision. Such a legal fiction, as is well known, should be applied only to the exten....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t even though the actual delivery of the goods is not necessary for effecting transfer of right to use the goods but the goods must be available at the time of transfer, must be deliverable and delivered at some stage." It was further held that the goods, i.e. computers and terminals were always in possession of the respondents and they were never delivered or handed over to the ONGC. It is also observed that "merely because a person agrees to provide service to a particular customer during a particular period of time of day to the exclusion of all other customers for the purpose of convenience, it does not mean that goods have been actually delivered to that particular customer to the exclusion of not only other customers but also to the exclusion of owner himself. Nature of the contract and the transaction between the respondents and the ONGC was nothing more than service contract whereby certain services were provided by the respondents to the ONGC" It was finally held that "sales tax cannot be levied on the said transaction." The view taken in the above judgment clearly supports the argument of the learned counsel for the appellant herein. 41. We will also refer to the ju....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany can use the trade mark on their own and can enter into franchise agreement with other parties. The effective control is with the appellant Company during the term of the agreement. We find force in the said submission and the dictum laid down by the Apex Court in BSNL's case (supra) will support the plea of the appellant Company. 43. Even though learned Special Government Pleader for Taxes vehemently submitted that the agreement herein does not contain any service element, we cannot agree. Clause 4 of the agreement is under the heading "Support from Malabar Gold". They are providing various services as mentioned therein including feasibility studies for the showroom, project plan for setting up the showroom, selection of site, design of interiors, etc. etc. Clause 5 also is important in understanding the said aspect. In the light of the above discussion, we are unable to hold that the provisions of the KVAT Act as referred to by the learned Special Government Pleader for Taxes, will apply herein, as the transaction herein will not come within the term 'deemed sale' in the light of the non fulfilment of certain conditions provided in BSNL's case (supra). 4....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5) will show that the franchisor retains the right, effective control and possession and it is not a case of transfer of possession to the exclusion of the transferor. We notice that under clause (12) the franchisee has no right to sub-let or sub-lease or in any way sell, transfer, discharge or distribute or delegate or assign the rights under the agreement in favour of any third party, which is also significant. On termination of the agreement also, going by clause 25.3, the franchisee shall forfeit all rights and privileges conferred on them by the agreement and the franchisee will not be entitled to use the trade name or materials of "Malabar Gold". Merely because, going by clause 18, the franchisee is not an agent, it will not get any other exclusive right. 46. Since this Court in the two judgments relied upon by the learned Special Government Pleader, viz. Jojo Frozen Foods (P) Ltd.'s case {(2009) 24 VST 327} and Kreem Foods (Pvt.) Ltd.'s case {(2009) 24 VST 333} had no occasion to consider Entry 97 and the provisions under Section 65(105)(zze) of the Finance Act and the definition of franchise and franchisor under Sections 65(47) (48) of the Finance Act, and those ....