TMI Blog2014 (1) TMI 1837X X X X Extracts X X X X X X X X Extracts X X X X ..... aneously 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 - the brand franchise and technical fees realised by the appellant from beer contract bottling units are not transactions in the nature of transfer of right to use brand name/trade mark and the same is purely a service simpliciter which falls outside the purview of Section 2(1)(t)(iv) of the KST Act, 1957 - answered in the affirmative. Whether, the State has established in the cross appeals that the impugned orders of the FAA is incorrect? - Held that: - the ownership of the brand name always wrests with the appellant only - 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 - the cross appeals of the State fails and liable to be dismissed - answered in the affirmative. Whether, the FAA is correct in deciding that the royalty realised by the appellant amounts to transfer of right to use the brand name "Kingfisher' to the licensees to manufacture and sale of packaged water with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 cross appeals as narrated above. 2. Brief facts of the case.-- (i) The appellant is a company incorporated under the Companies Act, 1956. The appellant has not carried on any business within the definition in Section 2(1)(f-2) of the Act during the years 2003-2004 and 2004-2005. As such, the appellant was not liable to obtain registration under the said Act or for furnishing compliances prescribed thereunder. (ii) This is evident from the fact that the AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed 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 rights sales and the determined taxable turnover, levy of tax, penalty and interest by the AA has been upheld. Thus, the appeal to that extent is partly dismissed. (vii) Being aggrieved by the common appellate order passed by the FAA insofar as it concerns dismissal of the appeal filed challenging the royalty payments determined to constitute outrights sales and being subjected to tax penalty and interest as done by the AA, the appellant has preferred these two appeals before this Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 brand name'. Therefore, the appellant submits that it was erroneous on the part of the lower authorities to hold that the royalty consideration received is for transfer of right to use the brand name Kingfisher as the transactions falling under Section 2(1)(t)(iv) of the Act. Besides, it is submitted that even in case of deemed sales, as mandated in Article 366(29-A)(d) of the Constitution of India, there must be transfer and delivery of goods. (v) The appellant submits that the royalty received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 for the manufacture of the beer by the CBUs. (iv) The agreement confirms that the appellant and CBUs are independent entities doing the business on their own rights as per law. (v) The consideration is always received in the form of 'Brand franchise fee and Technical fee', towards the transfer the right to use Brands/trademarks. (vi) The consideration received is Brand franchise fee and also technical fee and as economic surplus. (vii) The franchise cannot retransfer those rights and shall only use under the supervision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Kwality Biscuits (Private) Limited's case. Based on the above decisions, the appellant as respondent in cross appeal rebuts the arguments made by the appellant i.e., the State. The prayer is made to dismiss the cross appeals. 6. Heard the learned Counsel for the appellant in the appeal and also as respondent in the cross appeal. The learned State Representative has been heard with respect to the appeal as well as the cross appeal. 7. Perused the lower Court records. After careful examination of the records, the following points arise for our consideration.-- (1) Whether, the FAA is correct in de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 its Registered Office No. 16 of 1600, Ramamurthy Nagar, Nellore-524 003 (hereinafter called as BDL ) (which expression shall mean and include its successors in interest and assigns) of the OTHER FART. RECITALS: 1. UBL has for many years brewed premium beer at its breweries in India and in certain other countries around the World and has established a reputation and goodwill for its lager and strong beer under its trademarks. 2. UBL possesses special technical information and know-how relating to the brewing, selling, and manufacture of beer and is actively engaged in research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paque), 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. 1.8 Person includes bodies corporate, individuals, firms, partnerships and any other body of persons whether incorporated or unincorporated. 1.9 Specifications the specifications for the composition, process procedures, standards of quality, packaging, storing and presentation of UB beer as required under this Agreement. 1.10 Term shall mean the period contemplated in Clause 8. 1.11 Territory means the State of Tamil Nadu or other States as may be decided by UBL. 1.12 Nett Sales Revenue means the gross realisation less applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 throughout the duration of this Agreement in accordance with the arrangement agreed to between the parties hereto arrange for a member to its Technical Staff i.e., a Chief Brewer to be deputed to the Brewery, subject to the condition that UBL will inform BDL about the deputation of such member of its Technical Staff to Brewery after giving reasonable notice. Such member of the Technical Staff shall inspect the Brewery and all concerned laboratory departments and advise as to processing and quality control of UB Beer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Agreement. 5. Specifications.-- 5.1 BDL will brew, bottle, package and store UB Beer.-- 5.1.1 In exact conformity with the specifications which include all ingredients, raw materials, formulae, processes, methods and standards of quality laid down under the supervision of UBL. BDL shall brew UB Beer which will be a combination of 60% Strong Beer and 40% mild Beer. However, UB shall have liberty to change the said combination at any point of time at its sole discretion; 5.1.2 In full compliance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt 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 laws, directives, rules and regulations and legal requirements as laid down by the State Pollution Control Board. 5.11 BDL and UBL shall respectively comply with all laws and statutory rules and regulations relating to manufacture and sale of UB Beer. 6. Production of UB Beer.-- 6.1 UBL hereby undertakes to purchase by itself or though its nominee the entire quantity of UB Beer manufactured by BDL. 6.2 In manufacturing the Brewery Goods under the Trademarks belonging to BDL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 the event of a default by the other party in the performance of any of the terms and conditions of this Agreement except in the case of force majeure as defined in Clause 11 below provided, however, that either party retains the right to cure any such default to the satisfaction of the other party not later than thirty (30) days after the notification of such default; (b) In the event of the other party taking steps to enter into liquidation or its be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h: (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 BDL. 9.3 Hither party may terminate the agreement upon termination of the Registered User Agreement dated 3rd September, 2004. 9.3.1 Either party may terminate this Agreement by giving the other party six months notice in writing, without having to assign any reason for terminating the said Agreement. 9.4 Obligations and rights of parties upon termination or expiration: 9.4.1 in the event of expiration or termination of this Agreement, BDL shall forthwith discontinue the use of the Trademark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 can be resumed, and in every possible way safeguard the interests of UBL, and all payments and other amounts accruing to UBL and which cannot be remitted to UBL shall be deposited in a separate interest earing bank account in the name of UBL until normal conditions are restored and BDL shall use its best endeavours to negotiate satisfactory interest terms for such deposited money which interest shall accrue and belong to UBL. 12. No Assignment. --Except as otherwise provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table 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 on behalf of UBL. 16. Advertising and Promotion. --xxxxxxxx 17. Miscellaneous. --xxxxxxxx 18. Arbitration. --xxxxxxxxx 19. In the event of any disputes arising between the parties with regard to the terms of this Agreement, the same shall be subject to the jurisdiction of the Courts at Bangalore. 12. The agreement between M/s. Balaji Distilleries Limited (BDL) and the appellant-Company M/s. United Breweries Limited (UBL) consists of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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) There must be goods 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 therefor 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 transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 contract bottling units are not transactions in the nature of transfer of right to use brand name/trade mark and the same is purely a service simpliciter which falls outside the purview of Section 2(1)(t)(iv) of the KST Act, 1957. Hence in view of the above detailed discussion, first point is answered in the affirmative. 16. Point No. 2.--The case-laws relied in the cross appeals have no relevance for the resolution of these appeals for the reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond 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 far as the consideration received for providing of technical know-how. It is only on the amounts received for the use of licence, the tax has been levied considering the same as transfer of right to use the trademark Kingfisher. The conjoint reading of the agreements i.e., licence agreement as well as technical know-how agreements reveals the fact that the appellant-company has allowed the said trade mark only for limited purpose and it has no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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