TaxTMI 
TaxTMI 
2017 (5) TMI 999
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....ee Mukherjee, Advocate, for Respondent No.1. Sh. Amit Bansal, Sr. Standing Counsel, for Respondent No.2. Petitioner Through: Sh. Gagan Kumar, Advocate. Respondents Through: Sh. Harpreet Singh, Sr. Standing Counsel. Sh. Vikram Jetly, CGSC, for UOI. MR. S. RAVINDRA BHAT 1. The appeal (STA 27/2013) and writ petitions, (W.P.(C)3404/2015, W.P.(C)3408/2013, W.P.(C) 4453/2013 and W.P.(C)10726/2006) all are concerned with the same question of law. Resultantly, they were heard alongwith STA 26/2013.The question of law in STA 26/2013, which is the lead case in this batch, is as follows: "Whether the Tribunal was right in holding that consideration received under the franchise agreement was for transfer of right to use the goods, i.e., the trade mark, under the Delhi Sales Tax on Right to Use Goods Act, 2002 and under the Delhi Value Added Tax Act, 2004?" 2. The appellant is a wholly owned subsidiary of McDonald's Corporation, Delaware (a term hereinafter referred to as "McDonald's" or "the Appellant" in respect of the two appeals, i.e. STA 26-27/2013). It entered into joint venture agreements, with Connaught Plaza Restaurants Private Limited, Hardcastle Restauran....
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....me. The Value Added Tax Officer, Special Zone ('Assessing Authority I'), vide an order, dated 16.01.2007, treated the "McDonald's system" as goods and invoked a demand of Rs. 13,44,684/-. Aggrieved, McDonald's appealed to the Joint Commissioner, Trade and Taxes. The Joint Commissioner, by an order dated 01.07.2008 held that the transactions entered into by McDonald's involved the transfer of the right to use "McDonald's system", which constitutes goods in terms of Article 366(29A) of the Constitution and Section (1)(n) of the DSTRTUG Act, thereby upholding the order of the Assessing Authority. 5. Being aggrieved with the above order, McDonald's appealed to the Appellate Tribunal on 01.09.2008.The Tribunal, however, dismissed the appeal, and upheld the orders of the Joint Commissioner- V and Special Commissioner- III. Thus, aggrieved with the impugned order, McDonald's appeals to this court. 6. Similarly, the petitioner Sagar Ratna Restaurants Private Ltd (the first Petitioner in W.P(C) 4453/2013 and W.P.(C) 3404/2015, hereafter "Sagar Ratna") is aggrieved by the order dated 09.02.2015 passed by the VATO, Delhi, holding that, inter alia, the fee received by it-as franchisor,....
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....ayable under the franchise agreements signed, is liable to sales tax or VAT under the Delhi Value Added Tax Act, 2004 and under the DSTRTUG Act, 2002. Prior orders McDonald's 9. In the case of McDonald's, the assessment order for AY 2004-05 dated 16.01.2007, held that the charge of royalty or franchise relates to the transfer of the right to use of a patent or trade mark, and that McDonald's is liable for registration under Section 4 of the DSTRTUG Act, 2002, at the rate of 4% read with the provisions of the Delhi Sales Tax Act, 1975. The Assessing Officer (AO) adjudged the Appellant to fulfill the conditions assigned to a "dealer" under the DSTRTUG Act, 2002. Further citing the case of Vikas Sales Corporation v. CCT (1996) 102 STC 106 SC, the Supreme Court had ruled that trade marks are goods, and that for transferring the right to use, a trade mark, being intangible goods it is not necessary to hand over the trade mark to the transferee or give control or possession to him, but that transfer is achieved or complete by merely authorizing the transferee to use the trade mark in the manner required by law; the AO held that the charging of royalty relates to the transfer ....
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....se of trade mark and the service portion, if any, is incidental to the transfer of trade mark. The AO framed the assessment demand at Rs. 13,44,684/-. The Joint Commissioner, i.e the appellate authority, rejected McDonald's plea after undertaking an analysis of the provisions of the DSTRTUG Act, 2002, and the relevant clauses of the Master License Agreement. He concluded that the "McDonald's system" comprised incorporeal intellectual property. The appellate authority referred to the Supreme Court judgments of M/s. Vikas Sales Corporation (supra) and M/s Sunrise Associates v. Govt. of NCT of Delhi AIR 2006 SC 1908, to highlight how the franchise agreement has all the attributes of a license and, therefore, transactions covered by the said agreement are taxable under Section 3 of the DSTRTUG Act and, that the nature of the "McDonald's system" (as examined in the light of Section 2(1)(f) of the DSTRTUG Act) falls under the definition of "goods". 11. As such, in concurrence with the AO's assessment and reasoning, the Joint Commissioner upheld the AO's assessment order and directed the Appellant to deposit 50% of the amount in dispute as condition precedent for entertaining the appeal ....
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....on that arose from the franchise agreements, and that the service tax that was already being paid by the Petitioners, and further, that the non- exclusive transfer of the right to use goods (according to the provisions of the franchise agreements) was not tantamount to a transfer that is leviable under the DSTRTUG Act, 2002. Arguments advanced 14. At the outset, learned senior counsel for McDonald's submits that the assessing authorities and the Tribunal misconstrued the terms of the franchise agreement. The franchise agreement only confers the right to use the McDonald's systems in a restaurant, and royalty is paid as a percentage of gross sales. The exclusive purpose for which the McDonald's system can be utilized is highlighted in the clause 11 (d) of the franchise agreement that reads as follows: "Franchise and Joint Venture Partner shall acquire no right to use, or to license the use of, any name, mark or other intellectual property right granted or to be granted herein, except in connection with the operation of the Restaurant." Similarly, the franchisee agreements signed between the Petitioners and their respective franchisee parties do not give the exclusive right to ....
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.... transferee; d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor -this is the necessary concomitant of the plain language of the statute - viz. a "transfer of the right to use" and not merely a licence to use the goods; e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others." Thus, it was contended how the franchise agreement only permits the use of "McDonald's system" but there is no transfer of any right to use the trade mark. 17. Likewise, learned counsel highlighted the decision of Malabar Gold Private Ltd. v. CTO (2013) 63 VST 496 wherein the Kerala High Court in consideration of nature of the franchise, as well as the scope of the expression "transfer of right to use goods" and the scope of Article 366(29A), Entry 54 of List II, concluded that the tests laid down in BSNL (supra) were squarely applicable, and that there were no goods which were deliverable at any stage and there was no transfer of right to use any trade mark. It was thus, contended that the levy of sales tax/VAT was without jurisdicti....
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....ect of the franchise agreement between McDonald's and its franchisee(s) is to operate a comprehensive restaurant system (consisting of manuals, instructions etc., to run McDonald's' restaurants) at the location(s) specified in the agreement. The agreement is not even remotely connected with sale or "deemed sale" of goods and the ownership in the McDonald's trade mark, logo, service marks, and brand name is solely vested in McDonald's Corporation, U.S and is never transferred. This is clearly manifested in the various clauses of the franchise agreement. 20. It was argued that levy of VAT in the present case is impermissible. The counsel for appellants relied on the judgment reported as Godfrey Phillips Ltd. v. Union of India (2005) 2 SCC 515 to argue that the Constitution does not permit overlapping of taxes as held. Once an activity is taxable as a service, it cannot be taxed as sale/deemed sale of goods. As there is no "transfer of right to use of goods", or indeed any transfer at all, Article 366(29A) is not applicable. There is no "deemed sale" and no levy under the Delhi VAT is permissible. Counsel also relied on Imagic Creative (P) Ltd. v. Commissioner of Commercial Tax....
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.... multiple users. There is no such exception carved out in law, especially when the subject is a bundle of rights. 24. Learned counsel points out that in Subway Systems (supra) the Bombay High Court had not completely agreed with the assessee, but in one of the cases, held in favour of the revenue. The following passage of the judgment was cited: "We do not think that in BSNL the Supreme Court intended to prescribe a test of global or universal application without regard to individual circumstances. The judgment of the Supreme Court (in paragraph 90) notes the factual aspects. There, the entire infrastructure, instruments, appliances and exchange remained in the physical control and possession of the petitioner at all times and there was neither any physical transfer of such goods nor any transfer of the right to use such equipment or apparatuses. One of the issues that arose for consideration was whether there was any transfer of the right to use goods by providing access or a telephone connection by the telephone service provider to a subscriber. This BSNL test, was, therefore, set out in these circumstances. The Court had no occasion to consider its applicability to intangible ....
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....ire turnover. The observations of the tribunal in this regard, which were commended for consideration and endorsement of this court, are as follows: "the service that the appellant is providing to the franchisee is with a view to get the gross sales of the franchisee augmented so that it may get more royalty which means that the provision of sales under the MLA is designed in a manner to ensure continual enhancement of sales of the franchisee meaning thereby that provisions incorporated in the MLA are just for the purpose of the gross sales enhanced. In our considered view provision of service under the MLA is incidental to the main activity of transfer of the right to use the trade mark "McDonald"." 28. Learned counsel relied on Section 2(1)(v) of the Trade and Merchandise Marks Act, to say that the purpose of a trade mark is its use in relation to goods for the purpose of indicating a connection in the course of trade between the goods and some person having the right, either as a proprietor or as registered user, to use the mark whether with or without any indication of the identity of that person. It was submitted, in this context that the term "sale" is widely phrased, in r....
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....ods" in Section 2(1)(m)(ii) of the DVAT Act was relied by counsel for the revenue, who said that it included "property in goods (whether as goods or in some other form)" as the incident of taxation, was relied upon together with the expression "sale" in Section 2 (zc) of the said Act, which inter alia, expansively states that the term (i.e. "sale") includes "(vi) 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;" As there is elasticity to the form (i.e tangibility) of the subject matter (property) as well as to the term ("whether or not for a specified period") the grant of a right to use the mark, as part of an arrangement, cannot but be a transfer of the right to use it. In this regard, particular emphasis was placed on the franchise agreement in respect of Bikanerwala, which stated in one of the recital that the franchisee could, at the "FRANCHISER's sole and absolute discretion utilize its trade marks, Trade name / artistic works (hereinafter collectively referred to as "Rights")". It was argued that such recitals and conditions clearly established that the purpose of the ar....
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....at is intended to be transferred in the franchise and trade mark licensing agreements. 34. From a plain reading of the MLA, in (in the McDonald's cases) it is apparent that the arrangement is a composite contract wherein, the trade mark and other services like knowhow, recipe, training, trade secrets, policies, etc. are provided to the franchisee. The object of the franchise agreement between McDonald's and its franchisee(s) is to operate a comprehensive restaurant system (consisting of manuals, instructions etc., to run McDonald's' restaurants) at the locations specified in the agreement, albeit, without an exclusive transfer of right to use the same. Similarly, the agreements signed by the Petitioners (Sagar Ratna, Bikanerwala in whose cases the arrangement is a franchise contract) give the respective franchisees limited rights to operate services within the agreement, and are nonexclusive in nature; the franchisors remaining entitled to transfer rights to any third party to use their trade mark. In the case of GSK, the foreign, trade mark owner permitted use of the trade mark, subject to strict conditions with respect to the production and sale of the articles in question. 35.....
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....his court held that composite contracts cannot be split up by taking from it the value of the goods for the purposes of taxing the same under DVAT Act. The relevant part of the judgement reads as follows: "1. The conclusion, therefore, which emerges with respect to the facts of the present case on applying the ratio of the BSNL's case is that, since the contract in question is a composite contract of sale of goods and services, clearly, it is not permissible for the State Legislature by applying DVAT Act to tax composite contracts comprising of both goods and services. Not only the contracts cannot be artificially split up so as to enable the sale element to be taxed, further, the States cannot treat the contract as only a contract of sale of goods and tax the whole value of the transaction as a sale of goods. Since the parties have not intended the contract to be mutilated/severable inasmuch as no different values are specified in the subject contract towards goods value separately and the value of services separately, it is not permissible by the DVAT Act to impose sales tax on the whole transaction value because that would amount to the State to entrench upon the Union List and....
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....at what was intended to be transferred was not the trade mark, but an entire gamut of services, which includes, inter alia, a guide that educates the franchisees on various aspects of business and conduct to market the business. To segregate the terms of the agreement to levy VAT on only specific aspects of it would be inexact. Moreover, the Appellant and the Petitioners are already paying service tax levied on the franchise agreements, and there can be no overlapping of taxes. The subject matters in List I and List II of the Seventh Schedule to the Constitution are distinct and once a particular service is subject to service tax, it cannot be treated as a sale of goods and subject to VAT. Thus, the definition of "intellectual property" and levy of sales tax on transfer of right to use trade marks, patents and copyrights etc. will not apply in the case of a franchise agreement. This was highlighted in paragraphs 88 and 89 of BSNL (supra). 38. Now, hypothetically, even if we are to agree that the McDonald's system as well as trade marks of the Petitioners would fall within the definition of "goods", for it to be taxable within the DVAT and DSTRTUG Act, a transfer of the right....
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.... state and shall inform the Franchiser of any such laws and the alterations made for the compliance thereto. 3.7 MAXIMUM PRICES The Franchisee undertakes not to charge customers prices in excess of the prices specified by the Franchiser in writing from time to time ************* ************ ************ 3.18 ASSIGNMENT It is agreed that this agreement is non- assignable, transferable and no right direct or indirect in favour of any other party can be created without written consent of the Franchiser. The Franchiser shall have absolute discretion either to accept with such terms and conditions as may be deemed fit, or refuse the same. The Franchisee undertakes not to assign, charge or otherwise deal with the right granted to the Franchisee under this agreement and arrangement in any way without the prior written consent of the Franchiser. The restriction herein above will be applicable for takeover of company/firm of the franchisee, amalgamation and merger or any other process of law by which status of ownership or constitution of the Franchisee organization will amount to change. 3.18.2 The Franchisee shall not be entitled to grant any sub-franchise or enter into any a....
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....l not use the trademark SAGAR RATNA or any other deceptively similar trademark at any time thereafter in respect of any restaurant or allied business including food items." 40. Likewise, in Bikanerwala's case, the franchise agreement relied on, states, inter alia that: "9. Protection of Rights of FRANCHISER: ... (b) The FRANCHISEE acknowledges and agrees that all rights in and to the trade names/artistic works "BIKANO" & "BIKANERVALA" including all of the goodwill of the business associated therewith, are and shall hereafter continue to be the exclusive property of the FRANCHISER, and that for all use of the said trade names/artistic works by the FRANCHISER, the FRANCHISEE, acknowledges and agrees that it does not have and shall not hereafter claim acquire or assert any ownership. (c) The FRANCHISEE shall execute, acknowledge and deliver all documents and do all things which may be requested by the FRANCHISER to assist the FRANCHISER to establish, maintain and safeguard all rights or ownership in and to the said trade names/artistic works, both during the term of this Agreement and after the expiration or termination thereof. (d) The FRANCHISEE shall not, either during ....
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.... Marks upon or in relation only to the Contract Products manufactured and packed in strict accordance with the Quality standards, specifications (including standards and specifications as to quality control, method of processing, packaging) and directions of LICENSOR. The Trade Marks shall not be used upon or in relation to any goods other than the Contract Products. 3 LICENSEE shall not use and/or authorise the use of the Trade Marks or any of them in close proximity or in conjunction with any other trade mark or trade name, whether owned by LICENSEE or any other third party. The manner in which the Trade Marks or any of them may be used upon or in relation to the Contract Products and on labels, packaging, printed or other material or wheresoever, shall be approved in writing by LICENSOR. 4 LICENSEE shall, when using and/or authorising the use of the Trade Marks upon or in relation to the Contract Products, indicate clearly that LICENSOR is the owner of the Trade Marks and that the Trade Marks are being used are being used only by way of permitted use. 5(a) LICENSEE shall, at all time, during the continuance of this Agreement, permit or cause to permit the authorised repres....
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....ubject." The property in the mark always vests with the owner. Furthermore, importantly the use of the mark by the licensee inures to the owner, as the latter's continuous use, in terms of Section 48 of the Trade marks Act, which is as follows: "48. Registered users.- (1) Subject to the provisions of section 49, a person other than the registered proprietor of a trade mark may be registered as a registered user thereof in respect of any or all of the goods or services in respect of which the trade mark is registered. (2) The permitted use of trade mark shall be deemed to be used by the proprietor thereof, and shall be deemed not to be used by a person other than the proprietor, for the purpose of section 47 or for any other purpose for which such use in material under this Act or any other law." Therefore, when a trade vendor, distributor, establishment or anyone else permitted to sell articles or offer services the trade marks (or brand) which belongs to another, it is incorrect to state that the brand or mark, associated with the product, constitutes the sale rather than from sale of the underlying goods or services that are the subject of the trade mark (dishes in a re....
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....agraphs 26 and 27 of the judgment read: "26. Next question that arises for consideration is, where is the taxable event on the transfer of the right to use any goods. Article 366(29A)(d)empowers the State legislature to enact law imposing sales tax on the transfer of the right to use goods. The various sub-clauses of Clause(29A) of Article 366 permit the imposition of tax thus: Sub-clause (a)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....
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....ade in Malabar Gold Private Ltd. v CTO (2013) 63 VST 496, where a Division Bench of the Kerala High Court considered the nature of the franchise agreement as well as the scope of the expression "transfer of right to use the goods...". The High Court concluded that the tests laid down in the BSNL (supra) case were squarely applicable, that there were no goods which were deliverable at any stage and there was no transfer of right to use any trade mark. 46. For a transfer of the right to use goods to be effective, such transfer of right should be one that the transferee can exercise in exclusion of others; which is not the case in the present appeals and petitions, as the franchise agreement only grants a non-exclusive right, retaining the franchisor's right to transfer the composite bunch of services to other parties, apart from it retaining ownership to the same. The ownership in the trade mark, logo, service marks, and brand name is solely vested in Appellant and the Petitioners and has not been transferred; as is clearly manifested in the various clauses of the franchise agreements. The Appellant and the Petitioners grant a non-exclusive license to the franchisees, which can be r....