TaxTMI 
TaxTMI 
2016 (8) TMI 717
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....nbsp; Facts in the Monsanto Petition 14 IV. Submissions & Findings in Monsanto 20 V. Facts in the Subway Petition 50 VI. Submissions & Findings in SubwaY 53 VII. Conclusion 65 I. INTRODUCTION 1. These two Writ Petitions came to be tagged together presumably because they both raise issues of whether, in respect of the transactions that arise in each, the Petitioners are liable to a levy of service tax or sales tax. As it turns out, the facts are materially distinct; and as the following judgment shows, the two cases seem to us to be mirror images of each other: if one fails, on a parity of reasoning, the other must succeed. 2. We have heard Mr. Venkatraman for the Petitioners, Mr. Sonpal for Respondents Nos. 2 and 4, and....
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....the technology; the container, receptacle or form in which it is transmitted is entirely irrelevant. What the third party pays for is the technology, not the container; and since this has none of the qualities that define a sale or a deemed sale (viz., a transfer of the right to use), it must be held to be a service. Central to this argument is the aspect of non- exclusivity: Monsanto India passes no 'property' or 'estate' in the technology itself to the third party developer. It merely licenses it. Monsanto India may issue innumerable such technology licenses to various third party developers. Those developers in turn cannot further sub-license the technology. They can only use it to produce a hybrid, sowable seed. Therefore, the third party developers obtain only a right to use the technology; and there is no transfer of that right. The argument against this seems to us to be straightforward: that the only way for Monsanto India to effect this so-called technology transfer is by selling to the developer a seed duly imbued or impregnated with the protective technology. In other words, it is simply not possible for Monsanto India to divorce the container from the technology; withou....
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....cution of a works contract; (c) a tax on the delivery of goods on hire- purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;" 6. The incidence of tax in sub-clause (a) is on the transfer of property in goods; in sub-clause (b), too, it is on the transfer of property in goods, but in the context of a works co....
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....overnment in the Official Gazette. 4% 1-4-2005 to 31-2-2010 39 Goods of intangible or incorporeal nature as may be notified from time to time by the State Government in the OfficialGazette. 5% 1-4-2010 to date 8. The relevant provisions of the Finance Act, 1994 are set out below. 65. Definitions.- In this Chapter, unless the context otherwise requires, "(55a) "intellectual property right" means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright;" "(55b) "intellectual property service" means, - (a) transferring, temporarily; or (b) permitting the use or enjoyment of any intellectual property right;" "(105) "taxable service" means any service provided or to be provided,- (zzr) to any person, by the holder of intellectual property right, in relation to intellectual property service;" 66E. Declared Services:- The following shall constitute declared services, namely:- (c) temporary transfer or permitting the use or enjoyment of any intellectual property right; (Emphasis added throughout) ....
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....mpanies on a non-exclusive and non- transferable basis to use, test, produce and sell genetically modified hybrid cotton planting seeds. In return for this technology, Monsanto India receives trait fees based on the number of packets of seeds sold by the sub-licensees. These sub-licensing agreements, with almost 40 seed companies, are the transactions in question. Respondent Nos.1 and 2 in the Monsanto Writ Petition are the Union of India and the State of Maharashtra respectively. Respondent No.3 is the Principal Commissioner of Service Tax. Respondent No. 4 is the Commissioner of Sales Tax. 12. The Monsanto Petition, filed under Article 226 of the Constitution of India, brings a challenge to Entry 39 of Schedule C to the Maharashtra Value Added Tax Act, 2002 ("the MVAT Act"); the definitions under Sections 65(105)(zzr), 65(55a) and 65(55b) of the Finance Act, 1994; and sub-clause (c) of Section 66E of the Finance Act, 1994. The challenge is on two grounds. First, that these are ultra vires Articles 14, 19(1)(g) and 265 of the Constitution of India. Second, that the exercise of power of the Respondent No.1 under Entry 54 in List II of the Constitution is ultra vires; it encroach....
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....Institutional Biosafety Committee of the Department of Biotechnology, Ministry of Science and Technology, Ministry of Environment, Genetic Engineering Advisory Committee (GEAC) and others responsible. These approvals need certificates of validation and test reports, which are provided by Monsanto India. Once such approval is obtained from the GEAC, each sub-licensee can produce BT cotton hybrid seeds. These BT cotton hybrid seeds are then sold to farmers. 15. At present, the technologies licensed are Bollgard I ("BG I") and Bollgard II ("BG II"). The agreement provides for a few restrictions on the seed companies: the technology is non- transferable, non-exclusive, and cannot be assigned except in the manner provided in the agreement. The seed companies cannot grant further sub-licenses, and the sub-licensee is not permitted to reverse engineer, modify or use the BT gene without the prior consent of Monsanto India. Under the agreement, Monsanto India has also to provide training to produce hybrids at various stages, apart from assisting the seed companies in obtaining the required approvals and conducting zygosity tests. This training includes classroom training and sharing of p....
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.... listed with the Principal Commissioner of Service Tax. Monsanto Petition, Exhibit "C", pp. 42-43. Monsanto India's agreement also came within the ambit of the definition of 'service', provided in the Finance Act, and was liable be taxed in the category of "Intellectual Property Services". Several show cause notices were issued by the Service Tax Commissioner demanding service tax under the category of "Franchisee Service" for the trait fees received for BG I. One of these is annexed. Monsanto Petition, Exhibit "N", pp. 131-142. Monsanto India was initially engaged in licensing the BG I technology, but this did not come under the ambit of "Intellectual Property Services" because it was not patented. Monsanto India, in 2007, started to license the technology in BG II, which, being patented, required it to remit service tax. Monsanto India has been paying service tax since 2007. 19. Monsanto India submits that while under Section 66E of the Finance Act, a temporary transfer or permissive use or enjoyment of any intellectual property is considered to be a declared service, liable to service charge, the issuance of the Trade Circular also brought its sub-licensing agreement under th....
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....on transfer of property in goods; Sub-clause (b) on transfer of property in goods; Sub-clause (c) on delivery of goods; Sub-clause (d) on transfer of the right to use goods; Sub-clause (e) on supply of goods; and Sub- clause (f) on supply of services. The words "and such transfer, delivery or supply..." In the latter portion of Clause (29A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various sub-clauses. Thus, the transfer of goods will be a deemed sale in the cases of sub-clauses (a) and (b), the delivery of goods will be a deemed sale in case of Sub- clause (c), the supply of goods and services respectively will be deemed sales in the cases of sub-clauses (e) and (f) and the transfer of the right to use any goods will be a deemed sale in the case of Sub-clause (d). Clause (29A) cannot, in our view, be read as implying that the tax under Sub-clause (d) is to be imposed not on the transfer of the right to use goods but on the delivery of the goods for use. Nor, in our view, can a transfer of the right to use goods in Sub- clause (d) of Clause (29A) be equated with the third sort of bailment referred to in "Bailment" by Palmer, 1979 editi....
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....uble aspect. It is the acquisition of a right by the transferee, and loss of it by the transferor. The vestitive fact, if considered with reference to the transferee is a derivative title, while from the point of view of the transferor it is an alienative fact. 24. Corpus Juris Secundum defines 'transfer' as follows: Volume 87, p. 892. "The common use of the word 'transfer' is to denote the passing of title in property, or an interest therein, from one person to another, and in this sense the term means that the owner of property delivers it to another person with the intent of passing the right which he had it to the later." 25. In Rashtriya Ispat Nigam Limited v Commercial Tax Officer, (1990) 77 STC 182. the High Court of Andhra Pradesh, relying on Salmond and Corpus Juris Secundum, explained the expression 'transfer', in the context of the transfer of the right to use in paragraph 9 of its judgment in these words: "the essence of transfer is passage of control over the economic benefits of property which results in terminating rights and other relations in one entity and creating them in another." 26. Mr. Venkatraman further states that the question of whether or ....
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....in the context of the transfer of the right to use goods, as seen above, has been laid down in the context of tangible goods, it applies equally to intangible goods as well. The reason, he says, is that the expression 'goods' includes both tangibles and intangibles. The Constitution of India, under Article 366(12), defines 'goods' to include all materials, commodities and articles. We have no difficulty in accepting this proposition. The Supreme Court, in a number of judgments, has held that the expression 'goods' includes both tangibles and intangibles. The Constitution Bench in Tata Consultancy Services v State of Andhra Pradesh (2005) 1 SCC 30. held that as long as intangible goods remained in an intangible form, they could be treated differently. However, once such intangibles are captured in some media, which is a tangible form, the intangibles, too, become goods. Similarly, in Sunrise Associates v Government of NCT of Delhi (2006) 5 SCC 603. and Yasha Overseas v Commisioner of Sales Tax (2008) 8 SCC 681. the Supreme Court held that a right, tangible or intangible, that is capable of being bought and sold independently for consideration becomes goods. 29. Therefore, Mr. Ven....
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....zation to use is sufficient for the transaction to qualify as a transfer. In fact, even without effective control, permissive use and license would fall within the meaning of transfer of right to use. However in 2000, the Supreme Court held in 20th Century Finance Corporation that mere use would not constitute a deemed sale, and that transfer is the sine qua non of any sale. Even Salmond on Jurisprudence and Corpus Juris Secundum say that transfer is an acquisition of right on the part of the transferee and loss of that right by the transferor. The decisions of the Supreme Court in Aggarwal Brothers and in Rashtriya Ispat Nigam Limited also hold that effective control is a sine qua non for transfer of right to use. Mr. Venkatraman therefore submits that the finding in Duke & Sons that there is no need for effective control and that mere permission or license would be sufficient to constitute a deemed sale cannot be good law. This is especially so in light of the decision in BSNL, where the Supreme Court laid down a two-pronged test, viz., i) temporary exclusion of transferor and ii) loss of effective control, for a transaction to qualify as a transfer of the right to use maki....
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....uary 2009. as separate proceedings in that regard were pending. These were cases where the issue of sale versus service had been raised, but on which the Tata Sons court expressed no opinion. Lastly, Mr. Venkatraman says that the Court placed reliance on three decisions of the Kerala High Court in Kreem Foods Private Limited v State of Kerala, (2009) 24 VST 333. Jojo Frozen Foods Private Limited v State of Kerala(2009) 24 VST 327. and Mechanical Assembly Systems (India) Private Limited v State of Kerala, (2006) 144 STC 536., all of which had concurred with the view taken in Duke and Sons. These three decisions had subsequently been distinguished by the Kerala High Court itself in Malabar Gold Private Limited v CTO. (2013) 32 STR 3. This was not pointed out to the Court. 33. Mr. Venkatraman submits that the decision of the Andhra Pradesh High Court in Nutrine Confectionary Co Pvt Ltd v State of Andhra Pradesh (2011) 40 VST 327 (AP)., does not correctly interpret the test laid down in BSNL. In Nutrine, the Court held that in BSNL, the goods in question were mobile telephone connections, which are anyway invariably limited to the licensee. This cannot be said to be true of a trade ....
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....ive control over the goods, i.e., the intangible technology, remains with Monsanto India. Therefore, this is a case of mere permissive use. Had the right to use the technology been granted exclusively to the sub-licensee, then, he says, it would have been a case of transfer of the right to use. 36. He explains this using the following illustrations: (a) A is the owner of an intangible right. A transfers this right to use the intangibles to B temporarily, to A's exclusion. This case, he says, would fall under Article 366(29A)(d) as the transfer is of a right to use goods, since the BSNL twin tests of exclusion of the right and incapability of further transfer are both satisfied. (b) In the second scenario, A grants the right to use the intangibles to B in Maharashtra, to C in Karnataka and to D in Tamil Nadu. This agreement, he says, would reflect two aspects. First, the transfer is exclusive to the respective parties in their jurisdictions. It also excludes the transferor from using the intangible right in any of these States, thus rendering temporarily numb the transferor's right to use. In this case, too, he says, the BSNL twin tests would apply. The question that arises....
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....have the most serious reservations about the universal applicability of his propositions, which seem to us to be overbroad and to cast the net too widely. The first question is whether there is a 'transfer' within the meaning of Article 366(29A)(d). We believe there is. It is true that the essence of a 'transfer' is the divesting of a right or goods from transferor and the investing of the same in the transferee, and this is what Salmond on Jurisprudence and Corpus Juris Secundum both say. In our opinion, the seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in these fifty seeds and these are fully vested in the sub-licensee. Mr. Venkatraman is not correct when he says that the effective control of the 'goods' is with Monsanto India. In RINL, the Supreme Court concluded that the contractor (transferee) did not have effective control over the machinery, despite the fact that he was using it, since he could not make such use of it as he liked. He could not use the machinery for any project other than that of the transferor's, nor could he move it out during the period of the project. We do not see how w....
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....its applicability to intangible property like intellectual property. This is how BSNL has been interpreted by us in Tata Sons. We think that this interpretation is correct. In any case, it binds us. The Kerala High Court in Malabar Gold, in paragraph 35, took a contrary view. It took the BSNL twin test to be applicable as a general proposition, i.e., one that admits of no variance. As discussed above, we do not think this can ever be the a correct reading of BSNL. 39. Similarly, we do not think the test of 'effective control' in the sense laid down in RINL was intended to be one that demanded satisfaction in every case. The goods in RINL were machinery. It is in that context that the Supreme Court, upholding the decision of the Andhra Pradesh High Court, held that for a transaction to qualify as a transfer of the right to use goods, 'effective control' must be transferred to the transferee. This Court, in Duke and Sons, held that this test would not be applicable in the case of trade marks. It was held that for the transfer of a trade mark it was not necessary to 'hand over' the trade mark to the transferee or give control or possession of trade mark such transferee. We think th....
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....he sub-licensee is with the sub- licensee. Monsanto India has nothing whatsoever to do with this portion of the technology. The only restriction appears to be on the sale of the GMO cotton planting seeds. The sub-licensee is given a two-year window to sell or otherwise dispose of any remaining GMO planting seeds. After this period, Monsanto India has the option of requiring the sub-licensee to sell these planting seeds to Monsanto India itself or to dispose them for non-planting purposes. This clause makes it evident that the ownership of even the planting seeds is with the sub-licensee. Clause 2.5(d) then provides that Monsanto India can further sublicense the Bollgard Technology to a maximum of three other companies in the same territory as that the of the original sub-licensee. For additional transfers, Monsanto India would have to first consult the sub-licensee. Mr. Sonpal rightly states that this suggests that a transfer of the right has, in fact, taken place; and, even on Mr. Venkatraman's own illustrations, this case would not fall within the third illustration, but within the second and perhaps even the first. The degree of territorial exclusion is surely irrelevant; the qu....
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....it would amount to a breach of contract provided in the CD package, just as it would under Monsanto India's sub-licensing agreement. However, this does not do anything to disqualify the transaction itself from being a sale. These are all sales. 42. In our opinion, the most fundamental aspect of permissive use of goods is that at the end of the period for which the use is granted, the goods must be returned to the transferor. Let us consider this in the context of a car hire service, a book library service, Amazon Kindle Unlimited and ITunes Radio. When a car is taken on hire, a fee is paid and the car can be used for a certain period of time. During this time, the person renting the car can only use it. He cannot part with it and certainly cannot destroy it. Once the period of hire comes to an end, the car must be returned to the transferor. Therefore, the effective control over the car remains with the transferor. Likewise, in the case of a book library, the books must be returned to the library. With the Kindle Unlimited, one must pay a subscription fee to gain access to an unlimited number of books in the proprietory AZW format. When the subscription expires, all the books ar....
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....sh High Court in G.S. Lamba & Sons v State of Andhra Pradesh (2011) 43 VST 323. is, however, well-founded. The facts of that case are that one G manufactured ready mix concrete to its customers' specifications. Dealers entered into contracts with G to provide a transportation service for ready-made concrete by hiring transit mixers. G was given access to a dedicated fleet of such mixers, coloured and sized to its specifications, and could decide the delivery schedule of these mixers. The Additional Commissioner levied sales tax. The dealers contended that this was a contract of transportation service. A Division Bench set out the essential requirements of transfer of right to use, taking into account all the previous decisions in the field. It held that the essentials are: (i) not a transfer of property in goods, but the right to use property in goods; (ii) Article 366(29A)(d) read with the latter part of the clause (29A) would show that the tax is not on the delivery of goods used, but on the transfer of the right to use goods regardless of when or whether the goods are delivered for use, subject to the condition that the goods should be in use forever; (iii) in a transac....
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....ass of acquisitions that a man can own or in which he can have an interest. The rights that transfer of property cover are the right of acquisition, possession, use, enjoyment and disposition. 47. We pause here momentarily to consider the nature of these intangible goods. We believe this is necessary, because this is perhaps a case where the law is yet evolving to keep abreast of technology. If what Mr. Venkatraman suggests is correct, then every sale of software as we currently know it is never a sale but only a service. In his formulation, the 'medium' (CD, pen drive, etc) is irrelevant. Surely this cannot be correct. Software may be downloaded too, without any 'physical medium' intervening - the medium is as intangible as the goods. It is impossible, we think, and does not stand to reason to suggest that unless, say, Microsoft or Adobe wholly cede all control over their software products there is no sale, and when they allow a user to download and use their software they are only providing a service. Indeed, this is demonstrably incorrect. Microsoft and Adobe both have alternative distributions models. One may 'purchase' a license to Microsoft Office or Adobe Photoshop. This ....
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....rpetuity or whether the licensor has the right to terminate and repossess and deny further access to that intangible. In a software sale, there is no question of termination or repossession. It is for the licensee to use forever. This is clearly a sale or a deemed sale and it is in respect of not the medium or the intellectual property (the marks, copyright, patents, etc), but is the transfer of the right to use that software subject to those marks, patents, copyright, etc. Monsanto India's case is no different. Its sub-licensee do not acquire any proprietory intellectual property rights over the Bollard Technology; Monsanto India's and its parents' patents, copyright, marks and other intellectual property rights are preserved intact, unaffected by the sub-licensing. But the identified technology, the one infused in the fifty seeds given to the sub-licensee, is for the sub-licensee to use as he wishes. Viewed from this perspective, Mr. Venkatraman's clients' underlying fears are, we believe, unfounded. 48. Mr. Venkatraman, in the alternative and without prejudice, argues that the seeds themselves are exempt from being taxed under Entry 41 of Schedule A of the MVAT Act, 200....
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....he right to use (deemed sale) and that it does not fall under the exemption for seeds in the MVAT Act, then the levy and collection of Service Tax by the Union of India would be without the authority of law since VAT can only be levied and collected by the States. As argued earlier, the same transaction cannot be taxed as both a sale and a service. Monsanto India has already paid service tax for the entire period at a rate significantly higher than what is provided under the MVAT Act and therefore he says that it is not liable to pay further tax. For the period between May 2007 and February 2009, it has paid service tax at a rate of 12.36%, for March 2009 to March 2012 at a rate of 10.3%, for April 2012 to May 2015 at 12.36%, and for the period beginning June 2015 at a rate of 14%. Under Entry 39 of Schedule C of the MVAT Act, the applicable rate of sales tax is only 5% since April 2010, prior to which it was 4%. He therefore seeks a Writ of Mandamus directing Union of India to transfer the amount paid as service tax from the Consolidated Fund of India to the Consolidated Fund of State of Maharashtra. He argues that such a transfer would not amount to unjust enrichment. We decline ....
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....chisee fee which is paid when the agreement is signed; and the second is a royalty fee paid weekly by the franchisee on the basis of its weekly turnover. A sample franchise agreement is annexed. Subway Petition, Exhibit "A", pp. 30-49. Under these agreements, the franchisees have no more than a right to display Subway's intellectual property in the form of marks and logos, and a mere right to use such confidential information as Subway discloses and as prescribed by the franchise agreement. 56. Since September 2003, Subway has been paying service tax to the Union of India on the consideration received by it from the franchisees. In November 2014, Respondent No. 4 sought information from Subway under the MVAT Act, which Subway provided. Respondent No. 4 took the view that this consideration should be subject to VAT; on 21st November 2014, Respondent No. 4 issued a notice to this effect. Subway Petition, Exhibit "D", pp. 59-70. Subway received several notices asking it to show cause why the consideration it received should not be assessed to sales tax, and why no penalty should be imposed on the whole time director and the executive of the agency that maintained Subway's books of ....
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....greement on account of the prohibition in Clause 9(a) of the agreement. Third, there is no territorial restriction or competition restriction of any kind placed on Subway. It is entitled to enter into as many or as few franchisee agreements as it wants, even simultaneously, and it can on its own directly compete with its franchisees too. 59. Mr. Shroff submits that in light of the decisions of the Supreme Court on various composite contracts, Article 366(29A) was amended in 1983 to introduce a legal fiction by which six instances of transactions, enlisted as the clauses of the Article, were to be considered as deemed sales. The Amendment allows certain specific composite contracts to be divisible; those in which the sale component could be isolated and separately taxed - for instance works contracts, Article 366(29A) (b). hire-purchase contracts Article 366(29A) (c). and catering contracts. Article 366(29A)(d). Works contracts and catering contracts can be split under sub- clauses (b) and (f) of clause (29A) of Article 366. Besides these, no other composite contracts can be split under Article 366(29A) itself. The State would not have any power to separate the agreement to sell ....
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.... Delhi. Therefore, even if the transaction were considered to be a sale, the State of Mahrashtra would have no right to impose a levy of sales tax. It would be the authorities in Delhi who would be entitled to levy sales tax. 62. For the most part, Mr. Sonpal adopts his arguments in Monsanto for this Writ as well. But, he argues, there is a vital difference between the two. He urges that "franchises" and "trade marks", are expressly covered under the MVAT Act since 2005. The Government of Maharashtra, under the powers conferred by Entry 39 of Schedule C of the MVAT Act, issued a Notification (No. VAT- 1505/CR-114/Taxation-1), dated 1st June 2005, in which trade marks and franchises were included as "goods" for the purpose of Entry 39. In light of this express provision of law, Mr. Sonpal submits that Subway's franchise agreements are liable to be assessed to VAT. The Notification reads: Serial No. (1) Name of the goods of intangible or incorporeal nature (2) 1 Patents 2 Trade marks 3 Import licenses including exim scrips, special import licenses and duty free advance licenses. 4 Export Permit or license or quota 5 Software packages 6 Cre....
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..... This he is unable to do. 67. We cannot accept Mr. Sonpal's argument that the eligibility of VAT is to be determined by the State, and therefore it could levy a sales tax on a transaction which already attracts service tax. The decisions in BSNL, Imagic Creative, and Associated Lease Finance are exactly on this; service and sales tax are mutually exclusive of each other. 68. We have the greatest difficulty in accepting Mr. Sonpal's argument that Article 366(29A) allows a split of even a single composite agreement, where this is not the intention of the parties to the agreement. In our opinion, Mr. Shroff's reliance on the cases of Asian Oilfield and BSNL in support of his argument that Subway's transaction cannot be split into two distinct or severable components is correct. The State cannot tax the entire transaction as a sale either. This is well-settled law, and if a State was to be permitted to tax the whole transaction, it would amount to nothing less than entrenching upon the powers exclusively available to the Centre under the Union List. As has been repeatedly held by this Court, this just cannot be done. 69. We believe that Mr. Shroff is correct when he says that....
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....r franchisees in the very area in which these franchisees operate. Subway Petition, Clause 11(l) of the Agreement, p. 46. The franchisee cannot unilaterally sub-franchise; Subway Petition, Clause 9 of the Agreement, p. 42. if it could do without Subway's prior permission or leave, then the consideration might be wholly different and it may then be possible to say that there is a transfer of the right to use. We find that the right of transferrability is extremely restricted and is impossible without Subway control throughout. Similarly, if there is no requirement of having to cease display and use, Subway Petition, Clause 8(e) of the Agreement, p. 41. or return the intangible property at the end of the franchise agreement's term, Subway Petition, Clauses 8(e) and (j) of the Agreement, p. 41. then the transaction might arguably be a sale. Exercises in co-branding or sub-branding, where one party franchises its mark on a territorially-restricted basis and allows the franchisee to combine it with its own or other marks may also well have an element of sale. Similarly, where a dealership for, say, automobiles, has a territorial exclusivity, then it may amount to a franchise. The Subway....
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.... that requires territorial exclusivity, then the Subway agreements are not franchise agreements at all, but purely licensing agreements. 74. In our opinion, the mere inclusion of 'franchises' under the MVAT Act would not automatically make all franchise agreements liable to sales tax. What must be looked at is the real nature of the transaction and the actual intention of the parties. The agreement must be considered holistically, and effect must be given to the contracting parties' intentions. The label or description of the document is irrelevant. An agreement styled as a franchise might, on a proper examination, turn out to be nothing more than a mere license (as in Subway's case). On the other hand, an agreement that calls itself a license might actually be a franchise. If, in a given case, a franchise agreement is effectively nothing more than a mere permissive use, it cannot be made liable to VAT. It would be a service, and hence liable to service tax. When interpreting a taxing statute, or for that matter any statute, full effect must be given to the words used by the Legislature. This, however, does not mean that this principle must be stretched to a point which leads to....