AI Drafter 
TaxTMI 
TaxTMI 
2014 (1) TMI 1837
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....) deleted the levy of tax, penalty and interest 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 ap....
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.... and the annual report/financials has held that.-- (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 conclusio....
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....SC 2372 : (1993)5 SCC 545 is relied upon in this regard. (iii) The appellant 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 ....
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....107 (Ker.) (DB) (d) Malabar Gold Private Limited, Calicut v Commercial Tax Officer, Kozhikode and Others 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....
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....R 2001 Kar. 2157 (DB): (2001)121 STC 277 (Kar.) (DB) (b) Hon'ble Bombay High Court decision in Commissioner of Sales Tax v Duke and Sons Private Limited (1999) 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 c....
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....only. 10. Per contra, the learned State Representative has reiterated the grounds of cross appeal and has submitted that the brand/franchise fee received as economic surplus is nothing but sale consideration received for the transfer of right 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 ....
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.... and phrases shall, unless the context requires otherwise, have the following meanings: 1.1 "Agreement" means this Agreement and any amendments, modifications, supplements, restatements, or notations thereto or thereof, as applicable. 1.2 "UBL" United Breweries Limited, with 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, select....
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.... the personal, non-assignable, non-transferable and non-exclusive right during the term: 2.2.1 to use the know-how for manufacture of UB Beer in the Territory under the supervision and control of UBL; 2.2.2 to label, market, sell, distribute and package UB Beer in the Territory and for no other purpose upon the condition that 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 dur....
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....te action accordingly. 4. Confidentiality.-- 4.1 BDL shall procure that its directors, officers employees and professional adviser's shall.-- 4.1.1 keep secret and confidential all information concerning the Technical know-how received from UBL ("the Confidential Information"), whether such information is oral or recorded in a more permanent 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 s....
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.... steps to comply with UBL's instructions to being the UB Beer upto the required standard. 5.6 BDL shall always stock UB Beer under adequate conditions and shall implement such stock rotation and control procedures as to prevent deterioration of the quality of UB Beer and to ensure stock rotation on first-in-first-out (FIFO) basis. 5.7 If at any time UBL finds it necessary to 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....
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....mic Surplus towards Marketing (the said fee for all sale of draught beer into the market will be Re. 1/- per Keg) to UBL on or before 7th of every succeeding month in cash out of the said Current Account. BDL undertakes to pass the necessary Board resolutions and keep the Bank informed of the Authorised Signatories or any change in the names of the Authorised Signatories. UBL shall provide BDL the names of the 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 agreeme....
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....ompany or group with special interest in the brewing industry in the Territory or elsewhere. (ii) By notice: (a) If BDL neglects its obligations in packaging, and selling the UB Beer in such a way that this negligence will damage the name and reputation of UBL. However, BDL may cure any such default not later than thirty (30) days after the notification of such default by UBL; (b) If BDL for any reason produces UB Beer of quality 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 ind....
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...., BDI, shall, upon the request of UBL, do all things and execute all documents necessary to cancel the entries, if any, to record BDL as a Registered User of the Trademarks in the Territory. 9.4.5 Upon or following the expiry or termination BDL shall complete the manufacturing operations or processes in respect of UB Beer which are in the process of manufacture. 10. Licence of Trade Marks.-- 10.1 UBL has permitted BDL to use the 'Trademarks to label and package UB Beer for 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 cau....
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....ll have the right, upon five (5) days' written notice, to enter BDL's premises or other location where records are maintained to inspect, audit, and make copies of any books of account, documents, records, papers and files of BDL relating to production and sales of UB Beer and BDL shall make any such material available for inspection. 14.3 Within ninety (90) days after the end of each year during the term of this Agreement and any extensions or renewals hereof, BDL shall furnish UBL with a statement 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....
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....xclusion of the appellant which means the brand names are given only for limited purpose and limited use. The CBUs are permitted to use or affixing the brand names on only for limited purpose and limited use. The CBUs are permitted to use or affixing the brand names on only those beer bottles which contained the beer manufactured by the CBUs as per the technical know-how formula and expertise provided by the appellant. Even the manufacturing process is being supervised and under the control of the appellant. The CBUs are barred 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 in....
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....e decision rendered by our Hon'ble High Court in Indus Towers Limited's case has discussed the nature and meaning of licence in paragraphs 67, 68 and 69. The relevant paragraph 69 reads as under.-- An exclusive licence is a leave to a thing and a contract not to give leave to anybody else to do the same thing. It confers no interest, or property in the thing but only makes an action lawful, which, without it would have been unlawful. A licence is a permission to do something that would otherwise be unlawful. 15. The franchise fee received by the appellant is 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 nat....
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.... the CBUs have to affix the labels of the brand names of the appellant since the entire product brewed has to be marketed on behalf of the appellant only. Thus, the use of the brand name is not independent of the main contract and there is no exclusive transfer of right to use such brand name to any of the CBUs. At all times, the ownership of the brand name always wrests with the appellant only. In addition to this as discussed in detail under Point No. 1 and after the analysis of the contract as a whole, the brand franchise fee and technical fee are not liable to tax under the 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 licensee....