TaxTMI 
TaxTMI 
TaxTMI 
2014 (1) TMI 1837
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....erest on the amounts received by the appellant as brand franchisee fee from the Beer contract Bottling Units (CBUs) and has (b) confirmed the levy of tax, penalty and interest on the amount received as royalty from the licensee who are engaged in the business of packaged drinking water as consideration received for transfer of right to use the brand name/trade mark of the appellant. Further directions are given to issue revised demand notice to the Deputy Commissioner of Commercial Taxes (Audit-61), VAT Division-6, Bangalore (hereinafter referred to as 'Assessing Authority' or for short as 'AA') who has originally passed the assessment orders for the impugned years 2003-2004 and 2004-2005 respectively which has been modified by the FAA as mentioned above. The State has preferred cross appeals against the impugned common appellate order and has requested to restore the original assessment orders for the years 2003-2004 and 2004-2005 dated 3rd March, 2011. Aggrieved by this impugned order of the FAA allowing the appeal in part, the appellant namely United Breweries Limited (for short 'UBL') has preferred the present appeals. In turn the State has preferred the....
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....nbsp;(a) Payments from CBUs with whom agreements were entered into for manufacture and sale beer towards brand franchise fee, to constitute deemed sales of transfer of right to use goods -- brand names, liable to tax under Section 5C of the Act. (b) Payments from licensees with whom agreements were entered for manufacture and sale of package drinking water, towards royalty as sales liable to tax under Section 5(1) of the Act. Thus, the AA after issuing proposition notice has passed the orders to the best of judgment under Section 12(3) of the Act and along with the same, the penalty and interest are also levied under Sections 12(4) and 12B(2) of the Act. (vi) The appellant contested the order of the AA before the FAA who has allowed the appeals in part and partly dismissed the appeals. The FAA by the impugned appellate order has decided that payments received from the CBUs towards brand franchise fee determined by the AA as deemed sales as invalid and has set aside the levy of tax, penalty and interest. Thus, the appeal to that extent is partly allowed. However, the FAA has come to the conclusion that the royalty payments received from the licensees constitute out r....
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....t submits that the mere licence to manufacture drinking water under the brand name owned by it does not amount to transfer of right to use the brand name. The agreements entered into by the appellant with the licensees are merely the technical know-how agreements and licence agreements and not the agreements for transfer of right to use the brand names. The lower authorities have erred in fact and law in having taken the contrary view and to have determined the royalty payments as turnover relating to sales, liable to tax. (iv) The appellant submits that technical know-how agreements are for rendering technical service which does not involve any transfer of tangible or intangible goods. Similarly, the licence agreements are not agreements for transfer of right to use the "licence to manufacture drinking water or transfer of right to use the brand name 'Kingfisher'. On the contrary, the agreements are purely for production and marketing of drinking water and the licensees are required to pay a fixed sum as royalty to the appellant. The agreements in any manner cannot be construed as resulting in the transactions in the nature of 'sale simpliciter or deemed sale of....
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....2013(76) Kar. L.J. 593 (HC) (DB) (e) Indus - Towers Limited, Bangalore v The Deputy Commissioner of Commercial Taxes, Enforcement I, South Zone, Bangalore and Others: 2012(73) Kar. L.J. 241 (HC) (DB): (2012)56 VST 359 (Kar.) (DB); (f) Kwality Biscuits (Private) Limited's case. 4. Grounds of cross appeal.-- (i) Per contra, the State in the cross appeal has submitted that brand franchise fee and royalty amount collected by the appellant amounts to transfer of right to use the brand name and trade mark for the manufacture and sale of beer and kingfisher mineral water. (ii) It has been submitted in the cross appeal that the AA is correct in treating such transactions as falling under Section 5C of the Act and under Entry 16 of Seventh Schedule of the Act. The AA has also levied additional tax and cess as per the provisions of the Act or the impugned year along with penalty and interest after due verification of the accounts of the appellant and based on financials. (iii) Dominant nature test is invoked to support the grounds put forth in the cross appeal. It is submitted that the agreement is for transfer of right to use brand name/trade mark f....
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....999) 112 STC 370 (Bom.) (DB) (c) Hon'ble Madras High Court decision in S P.S. Jayam and Company v Registrar, Tamil Nadu Taxation Special Tribunal and Others (2004)137 STC 117 (Mad.) (d) Vikas Sales Corporation and Another a Commissioner of Commercial Taxes and Another (1950-2004)3 SCST 3186 : AIR 1996 SC 2082 : (1996)4 SCC 433 : (1996) 102 STC 106 (SC); (c) Tata Consultancy Services v State of Andhra Pradesh 2004(57) Kar. L.J. 345 (SC): AIR 2005 SC 371 : (2005)1 SCC 308 : (2004)271 ITR 401 (SC) 2004 AIR 5 CW 6583 : (2004)137 STC 620 (SC). Based on the above grounds and decisions, the State has made prayer to restore the orders of the AA and to set aside the orders of the FAA so far as allowing the appeal in part deciding that brand/franchise fee received is not exigible to tax under Section 5C of the Act. 5. Per contra, the appellant as respondent in the cross appeal has relied on the following decisions.--- (a) Bharat Sanchar Nigam Limited's case; (b) Rashtriya Ispat Nigam Limited's case; (c) Alpha Clay's case; (d) Malabar Gold Private Limited's case; (e) Indus Towers Limited's case; (f) Kw....
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....ight to use the brand name/trade mark. 11. In order to resolve this issue, it is necessary to analyze the agreements between the appellant-company and the CBUs. In fact, the appellant-company has entered into such contract bottling agreements for the manufacture of branded beer on behalf of the appellant with various brewing units situated outside the State and through out the country. These agreements are available on the AA's records. All these agreements are of similar nature except for some variations but the substance of the agreements is common for all. One such agreement as a representation agreement for the purpose of these appeals is reproduced hereunder.-- BREWING AND DISTRIBUTION AGREEMENT This Agreement is made on this 3rd day of September, 2004 at Bangalore. BETWEEN: United Breweries Limited, a Company incorporated under the Companies Act, 1956 and having its Registered Office at "UB Anchorage", # 100/1, Richmond Road, Bangalore 560 025 (hereinafter called as "UBL") (which expression shall mean and include its successors in interest and assigns) of the ONE PART. AND Balaji Distilleries Limited, a Company incorporated under the Companies Act, 1956 and having ....
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....th its Registered Office at "UB Anchorage", # 100/1, Richmond Road, Bangalore 560 025, who are the owners o{ the know-how mentioned in Clause 1.7 and the Trade Marks mentioned in Clause 1.14 herein. 1.3 "BEL" Balaji Distilleries Limited, with its Registered Office at No. 16 of 1600, Ramamurthy Nagar, Nellore-524 003, Tamil Nadu. 1.4 "Brewery" the brewing plan of BDL being set up at Mount Thiruvallur High Road, Aronvyoyal Village, Chengai MGR District, Pin: 602 025, Tamil Nadu where UB beer shall be manufactured. 1.5 "Brewery Goods" ale, beer (clear and opaque), larger, stout, porter, malt, liquor, and all other alcoholic and non-alcoholic Brewery goods. 1.6 "Effective Date" 1st April, 2004 as more fully described in Clause 8. 1.7 "know-how" all relevant technical information, data and material not otherwise generally known relating to manufacture of UB beer and includes characteristics, selection, judgment of properties and data relating to materials for the manufacture of UB beer, processes, techniques and methods used or useful in the production of UB beer and equipment and data relating to the packaging of UB beer owned and developed by UBL and disclosed to BDL hereunder. ....
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.... UB Beer shall be produced according to the know-how and specifications prescribed by UBL under the supervision and control of UBL; and 2.2.3 provided however, if BDL shall be unable to meet the demand for UB Beer in the Territory as per the terms of this agreement, UBL shall have the right to source from third parties within or without the Territory and to sell UB Beer to meet such demand. 2.3 BDL shall not manufacture, sell or dispose of UB Beer, except as provided in this Agreement. 2.4 BDL shall not manufacture beer under the Trademarks belonging to any other person without the prior written approval of UBL, which approval will not be unreasonably withheld. 3. Technology and Technical Assistance.-- 3.1 UBL may on the terms of this Agreement make available to BDL the know-how and technology now in the possession of UBL or which shall during the tenure or this Agreement be developed or acquired by UBL for manufacture of UB Beer, provided that nothing herein contained shall require UBL to disclose to BDL any know-how or transfer any technology which is or shall come into UBL's possession subject to an obligation not to disclose the same to any third parties. 3.2 UBL will....
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....anent form; 4.1.2 use confidential information solely for the purposes of manufacture of UB Beer and not to obtain, any commercial advantage save in relation to the manufacture of UB Beer; 4.1.3 not make any written or oral disclosure concerning the participating of each party in the manufacture of UB Beer save with the prior written consent of UBL; 4.1.4 not disclose confidential information of its affiliates, directors, officers, employees or professional advisers except insofar as such disclosure is necessary for the purposes of the manufacture of UB Beer, and then only if such person to whom such information is disclosed agrees to he hound by the terms hereof as if he/she is a party hereto. 4.2 If so required by UBL in respect of any particular item of know-how and other secrets, BDL shall obtain a pledge of secrecy from any member of its staff to whom such disclosure is made. 4.3 All know-how acquired by BDL under the terms of this Agreement and any improvements in the specifications made by BDL relating to the production and packaging of UB Beer shall be and remain the sole property of UBL and shall be used by BDL only in accordance with the provisions of this Agre....
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.... introduce special ingredients or brewing compounds in connection with the manufacture of UB Beer, BDL shall be obliged to adhere to the advice of UBL. 5.8 For the purpose of upholding and protecting the good name and World-wide image of UBL it is agreed that BDL shall consult UBL as to the specifications of the packaging such as type of bottles, cans and others containers used by BDL for the sale of UB Beer including crown corks, layout and text of labels and materials, shape and text of exterior cartons and cases and shall adopt and comply with any requests made by UBL in such matter which shall not infringe any relevant laws of official regulations. 5.9 Whenever BDL is making use of the name or the Trademarks of UBL on labels, packaging, or the like, such names or Trademarks shall be used only in exact conformity with the specifications adopted by UBL for such names and Trademarks and particulars of which have been furnished to BDL. From the text of the labels on UB Beer it shall under all circumstances clearly appear that the contents have been produced by BDL under a Registered User Right from UBL. 5.10 BDL agrees that it will comply with all applicable environmental ....
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....he Signatories whom they want included to operate the said Account. BDL shall not under any circumstances alter or change such signatories without the written approval of UBL. 7.3 in the event of sale to UBL's indentors, the Economic Surplus payable to UBL shall be arrived at as follows: Selling Price (direct billing by BDL) : X Less: Variable Cost as incurred by BDL : Y Less: BDL Retention : Z(X-Y-Rs. 10) Economic Surplus as marketing Fee to UBL : Rs. 10.00 7.4 As and when UBL is capable of getting the price Advantage from TASMAC and whenever a new brand or pack size of an existing brand is introduced in the market, any excess realisation beyond the present realisation shall be shared between the parties on mutually agreed terms. 8. Term. --This agreement shall run concurrently with the said Project Agreement from the Effective Date and shall be liable for termination earlier on mutual agreement. 9. Termination.-- 9.1 Notwithstanding the provisions of Clause 8 and without prejudice to any rights of action or any claim of damages or right accrued at the date of termination, BDL and UBL may be giving written notice of six months terminate the Agreement.-- (a) In ....
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....ality which in the opinion of UBL is not satisfactory, and the quality of the UB Beer are not without delay satisfactorily improved to the satisfaction of UBL. 9.2.2 Without prejudice to any rights or any claim of damages or right accrued at the date of termination and notwithstanding the provision of Clause 8 and Clause 9, BDL shall have the right to terminate the Agreement by written notice in the event of any one or more of the following occurrences taking place: (i) Forthwith: (a) If UBL is prevented by any statute, judgment or decree by any Court from purchasing UB Beer from BDL or performing any other acts under this agreement; (b) If there is a change in the effective control whether directly or indirectly of the ownership of UBL; (c) If more than one half of the assets of UBL relating to the production of Brewery Goods are transferred to a person, company or organisation otherwise than as result of reconstruction or amalgamation. (ii) By notice: (a) If UBL default in the performance of its obligations under this agreement. However, UBL may cure any such default not later than thirty days after the notification of such default by BD....
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....r sale pursuant to the terms and conditions of the Registered User Agreement and upon the condition that UB Beer shall be produced according to the know-how and specifications prescribed by URL under this Agreement under the supervision of URL. 11. Force Majeure.-- 11.1 in the event that either party hereto shall be rendered wholly or partially unable to perform its obligations under this Agreement, by reason or causes beyond its control, including but not restricted to acts of God, fire, storm, floods, accident, war, riot, labour disputes, bundh, shortage of raw materials, or transportation failure, then the said performance of the obligations of such party, insofar as it is affected by such cause, shall be excused during the continuance of any inability so caused provided that the party affected advises the other party in writing of its inability within seven days after such cause comes into existence. 11.2 If due to war, warlike conditions, revolt, insurrections or any other force majeure condition, the parties are prevented from maintaining normal relations, BDL shall to the best of its ability continue its activities in conformity with this Agreement until normal relations ....
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.... of the gross sales or UB Beer for such year by such product categories as UBL may reasonably request. All such statements shall be prepared in accordance with generally accepted accounting principles consistently applied form applicable period to period. 15. Limitation of Liability.-- 15.1 UBL shall be responsible for the physical or financial injury, loss or damage of any kind arising out of consumption of UB Beer by any person which may be attributable to the manufacture of bulk beer upto the Bright Beer Tanks(BBT). 15.2 BDL shall be responsible for physical or financial injury, loss or damage of any kind arising out of consumption of UB Beer or otherwise which may be attributable to bottling and packaging operations of the UB Beer. 15.3 BDL is solely responsible for ensuring that UB Beer and their production, bottling, packaging, storage, conform to all applicable laws, bye-laws and regulations in the Territory, and will indemnify and keep indemnified UBL, immediately on demand against all claims, losses, costs and expenses made against or suffered by UBL arising out of, or in any way connected with, the bottling, packaging, storage, sale or other disposal of UB Beer by or ....
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.... from using the brand names owned and held by the appellant on products or beer manufactured by the CBUs on its own account or on products or beer manufactured by any other third party. The brand name affixed on each bottle of beer is by mode of affixing paper labels. The paper labels inter alia contained the words 'For United Breweries Limited, Bangalore'. The terms and conditions which are present in the recital clearly establish that the permission granted to the CBUs is not to the exclusion of the appellant, the owner and holder of the trade mark. Therefore as per the law laid down in the Bharat Sanchar Nigam Limited's case the transactions involving granting of permission to use brand name/trade marks by the appellant to the CBUs does not constitute as transactions of transfer of right to use brand names and trade marks. In this regard, it is necessary to quote the principles laid down in the Bharat Sanchar Nigam Limited's case and particularly paragraph 98 is of utmost importance wherein it has been ruled as under.-- 98. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes.-- (a)....
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.... nothing but the licence fee and does not involve any transfer of right to use the brand name or trade mark. In this context, in Indus Towers Limited's case, in paragraph No. 71, it has been ruled that it is well-settled that, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular words used in the agreement. The agreement has to be read as a whole to determine the nature of transfer. From the close reading of the all the clauses and sub-clauses of the agreement between the appellant and the CBUs confirms the fact that it is only the permission in the nature of licence to use the brand name or trade mark for which the franchise fee is received which is being reflected in the financials. Therefore, there cannot be any doubt to come to the conclusion that there is no transfer of right to use the brand name/trade mark of the appellant by the CBUs. The brand name of the appellant has been given simultaneously to other CBUs also which by itself proves that there is no transfer of right to use the brand name exclusively by any specific CBU. I fence, the brand franchise and technical fees realised by the appellant from beer cont....
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....he Act. Hence the levy of tax by the AA on franchise fee and technical fee has to be held as incorrect and this Bench comes to the conclusion that the FAA is correct in deciding the said issue while allowing the appeal in part. In view of the above detailed discussion under Point No. 1 which has a direct bearing on 'cross appeals' and based on the same reasoning, the cross appeals of the State fails and liable to be dismissed. Hence second point is answered in the affirmative. 18. Point No. 3. -- The appellant has contested the levy of tax on royalty charges received for having permitted the licensees to use the brand name Kingfisher for the manufacture of packaged drinking water. In fact in case of packaged drinking water there are two agreements with each of the licensees which are called as (1) technical know-how agreement and (2) licence agreement. These types of agreements are entered with various packaged drinking water manufacturers or producers. The only difference being that there are two separate agreements, one for providing technical know-how and the second one for the use of licence i.e., the brand name 'King fisher'. The AA has not levied any tax so f....