AI Drafter 
TaxTMI 
TaxTMI 
2018 (2) TMI 236
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....ing 0.01% of the value of the sale of the goods from M/s New Sahyadri Industries Ltd. He pointed out that Revenue has treated this amount as a consideration for the taxable service provided under Intellectual Property Service and demanded Service Tax on the same. Learned Counsel argued that they have paid VAT on this receipt treating brand name as goods. Learned Counsel further pointed out that under the VAT Laws, brand name is treated as goods and therefore, transfer of right to use of goods is taxable under VAT. He argued that since they have paid the VAT, there cannot be any leviability of Service Tax. 2.1 Learned Counsel relied on the decision of Hon'ble High Court of Mumbai in case of Tata Sons Ltd. & Another Vs. The State of Maharashtra & Another 2015-TIOL-345-HC-MUM-CT. He argued that in the said case in almost identical circumstances, it has been held that on the transactions of transfer of right to use trade mark or brand name, VAT is payable. Learned Counsel also relied on the decision of Hon'ble High Court of Mumbai in case of Mahyco Monsanto Biotech (India) Pvt. Ltd. Vs. Union of India - 2016 (44) STR 161 (Bom), wherein Hon'ble High Court has held as unde....
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....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 licences required therefore should be available to the 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." (Emphasis added)" 2.2 Learned Counsel also relied on the decision of Hon'ble High Court of Kerala in case of Malabar Gold Pvt. Ltd. - 2013-TIOL-512-HC-KERALA-ST, wherein Hon'ble High Court of Kerala differed with the decision of Hon'ble High Court of Bombay in case of Tata Sons (supra) and held that franchise agreement considered in that case will not attract the provisions of Kerala Value Added Tax (KVAT) ....
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....nted out that the impugned order does not give any reason for imposition of penalty and is silent and non-speaking in that aspect. 3. Learned AR relies on the impugned order. Learned AR pointed out that decision of Hon'ble High Court in the case of Tata Sons Ltd. (supra) pertains to the period 2001-02 and during the said period, there was no taxable service under the head of IPR and therefore, the provisions of Finance Act, 1994 were not before the Hon'ble High Court. Learned AR relied on the decision of Hon'ble High Court of Delhi in the case of Mc Donalds India Pvt. Ltd. - 2017 (5) GSTL 120 (Del). In the said case, relying on the decision of Hon'ble High Court of Kerala in the case of Malabar Gold Pvt. Ltd. (supra) held as follows: - "45. Likewise, the Supreme Court in State of Andhra Pradesh and Anr. v. Rashtriya Ispat Nigam Ltd. - [2002] 126 S.T.C 114 (S.C.) upheld the Andhra Pradesh High Court s decision that 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. A similar decision was made in Malabar Gold Private Ltd. v.....
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.... trademark licensee), are empowered to safeguard violation of the mark, through enforcement mechanisms, such as filing suits for injunction or damages. This underlines that the most important attribute of ownership or transfer (even in the most evanescent sense) is absent. Furthermore, by reason of Section 48 of the Trade Marks Act, the utilization of the mark by the franchisee/licensee would accrue to the trademark owner. Therefore, the reputation or brand building which accrues on account of increased volume of business because of the franchise/licensing arrangement, continues to be with the owner. No brand building or brand benefit accrues or arises to the franchisee/licensee. 48. From the above analysis, what irrefutably follows is that the franchise agreements in the three cases (and trade mark licensing agreement in GSK s petition) permit a limited right to use the composite system of the respective businesses of the appellant and the petitioners to the franchisors/licensee, and the dominant intention, as well as the specific provisions arising from the franchise agreements are not of a "transfer of the right to use goods." 3.1 Learned AR pointed out that even in ....
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.... to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark Subway and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sub-licensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement. We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use. 70. We do not mean to sug....
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....ify that we are not determining whether any particular kind of arrangement is or is not a franchise. Any examples, we have given are merely illustrative, and not binding or final findings." 4. We have gone through the rival submissions. We find that Hon'ble High Court of Mumbai in case of Mahyco Monsanto (supra) has clearly held as under: - 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 licence (as in Subway's case). On the other hand, an agreement that calls itself a licence 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....
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....n transfer the same rights to others." 4.1 Learned Counsel for the appellant have argued that in case of Tata Sons (Supra), Hon'ble High Court had not applied the test laid down by Hon'ble Apex Court by observing as follows: - "51. It is in relation to such a controversy that the observations, findings and conclusions must be confined. We do not see as to how they can be extended and in the facts and circumstances of the present case to the enactment that we are dealing with. Going by the plain and unambiguous language of the Act of 1985 we cannot read into it the element of exclusivity and a transfer contemplated therein to be unconditional. Therefore the tests in para (d) and (e) cannot be read in the Act of 1985." It is seen that in the said case, Hon'ble High Court order was concerned with leviability of Sales Tax under Maharashtra Sales Tax (on Transfer of Right to use any goods for any purpose) Act, 1985 With respect to the test prescribed, the Hon'ble Apex Court has observed as follows: - 38. We must note that Mr. Venkatraman s submission that the BSNL test must always be present in each and every case for a transaction to be considere....
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....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 Section 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 of List II of the Constitution is ultra vires; it encroaches on the power vested exclusively in the Union under Entry 97 of List I. 13. The principal question of this dispute is whether these agreements whereby the Monsanto technology is granted by the Petitioner to the seed companies ....
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....ponsible. 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-licences, 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 protocols. Under the sub-licensing agreement, Monsanto India receives consideration from the seed companies in the form of a one-time fixed fee and a recurring variable based on the sale....
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....se 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 question is whether or not there is any exclusivity. If it were mere permissive use, there would be no question of the Monsanto India having to first consult the sub-licensee before effecting further transfers. Further, under Clause 7.1 the sub-licensee can assign the agreement and its rights and obligations under it to its wholly-owned subsidiaries without Monsanto India s permission. Mr. Sonpal rightly says that this can never happen in a case of a permissive use. In law, a wholly-owned subsidiary is a distinct legal entity. In a case of service or permissive use, a person can never assign the goods or rights to a third person. 41. At this stage, we find that a parallel to practical, everyday examples would be useful. Take, for instance, the example of when one buys a book from Amazon for their Kindle device. In this case, Amazon can transfer the intellectual property of the book to multiple other users simultaneously, but each single transaction would still be a sale. This would also be true of the example of a ....
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....dle 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 are repossessed. ITunes Radio too is a similar concept. A subscription fee is paid, which allows access to music. Once this expires, access to the music is denied. These, in our opinion, are cases of permissive use. The Monsanto India sub-licensing transaction could only be a service in one circumstance, i.e., if the seed companies gave Monsanto India a bag of seeds to mutate and improve with the Bollgard Technology which would, thereafter, be returned to the seed companies. That might perhaps be a service." In this context, the Hon'ble High Court held that the transactions undertaken by Mahyco Monsanto were in the nature of sale. 4.4 In case of Subway, the facts before Hon'ble High Court were as follows: - "55. A brief description of Subway s business is this. Subway was granted a non-exclusive sub-license by Subway International B.V. ( SIBV ), a Dutch Limited Liability Corporation to establish, operate and franchise others to operate SUBWAY-branded restaurants in India. This non-exclusive l....
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....tion 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." After analyzing the aforesaid facts, Hon'ble High Court has observed as follows: - 69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark Subway and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sub-licensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway s case, there are set terms provided by the agreement which have to be followed. A breach o....
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.... over the franchisee s daily operations, without, at the same time, ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology. This is, therefore, diametrically opposed to the Monsanto model, for Monsanto India has no control whatever in what its licensee does with the BT-infused donor seeds; that licensee may choose not to use them at all. There is also no question of any return or cessation to Monsanto India. Thus, viewed from any perspective, and on the facts of the case, we are unable to hold that the Subway franchise agreements have any of the necessary elements of a sale or a deemed sale. 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 licence (a....
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..... These understandings are for a period ten years, which may be renewed for further period on such terms and conditions as mutually agreed by both of us. Anyone of us shall be entitled to terminate this understanding by giving the notice to other party for the period not less than three months. 6. The Company shall be entitled to use the said trademark for the purpose of lawful business and shall not use the trademark for any other purpose, than explicitly stated in this letter. 7. You shall not permit to any other party for use of trademark Swastik during the period of licensing arrangement with us without our prior consent in writing. In the token of your acceptance of conditions of this letter, please sign and return duplicate copy of this letter for our record." It is apparent from the agreement that, (i) No exclusive right to use the trade mark "Swastik" has been given to M/s New Sahyadri Industries Ltd. The appellants are free to give this trade mark to other even in the same territory. (ii) M/s New Sahyadri Industries Ltd. are not free to permit use of the trade mark to anybody else i.e. they cannot sub-license. (iii) If M/s New Sahyadri Industr....