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2016 (8) TMI 717 - HC - VAT and Sales TaxLevy of service tax or sales tax - legislative competence - Subway franchise - scope of franchise agreement - Article 366 (29A) read with Item 54 of List II of constitutions of India - Held 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 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. We do not mean to suggest that every franchise agreement will necessarily fall outside the purview of the amended MVAT Act. There is conceivably a class of franchise agreements that would have all the incidents of a ‘sale’ or a ‘deemed sale’ (i.e., a transfer of the right to use). - the Subway franchise does not meet these tests. - There is no such exclusivity. The introduction of the word ‘franchise’ in the amended MVAT by notification will have to be read to mean those franchises that can reasonably and plausibly be construed to have the effect of a sale; it cannot be widened to include agreements styled as ‘franchise’ agreements simply because of the nomenclature. Indeed, it seems to us clear that if we accept that a franchise agreement is, by definition, one that requires territorial exclusivity, then the Subway agreements are not franchise agreements at all, but purely licensing agreements. Subway’s franchise agreement grants to the franchisee nothing more than mere permissive use of defined intangible rights. It is therefore a service, and is not amenable to VAT. We also hasten to clarify 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. Provisions of the MVAT Act are not applicable in respect of the franchisee given by the 1st Petitioner or in respect of the franchise fee or royalty received by it from the franchisees.
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