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2015 (11) TMI 754 - KARNATAKA HIGH COURT

2015 (11) TMI 754 - KARNATAKA HIGH COURT - TMI - Levy of tax / VAT on franchisee fees/royalty paid - Levy of tax on manufacture of Beer and Packaged drinking water - whether there is complete transfer of right to use the said property (being brand name/trade name) in favour of the manufacturer (CBUs) or not - Held that:- only when there is transfer of right to use the brand name/trade mark belonging to the assessee, without any restriction, then alone it could be a case of transfer of right to u .....

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xploitation. As such, it cannot be considered as 'sale' of intangible goods by the assessee, which would be subject to Sales Tax under the KST Act. It is also noteworthy that, for the amount received by the assessee as 'brand franchise fees' from the CBUs, admittedly, the assessee is paying Service Tax, as the same is covered as Intellectual Property Service under sub-Section 55(b) of Section 65 of the Finance Act, 1994. - levy of tax, penalty and interest, in the case of manufacture of beer, on .....

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which would thus be subject to tax under KST Act. It is not disputed that in case of drinking water-'Kingfisher', the effective control over the brand name is transferred to the licensees to use and exploit the brand name for commercial use, which would amount to transfer of right to use goods, liable to tax under the KST Act. As such, the finding recorded by the First Appellate Authority in this regard, is confirmed and the order of the Tribunal with regard to this issue, is set aside. - Decid .....

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respondent-assessee has been exempted from payment of tax for the assessment years 2003-04 and 2004-05. 2. Briefly the facts relevant for the purpose of this case are: The respondent-assessee, United Breweries Limited owns the following brand names related to beer (1) Kingfisher Premium Lager Beer; (2) Kingfisher Super Strong Premium Beer; and (3) Kalyani Black Label Premium Lager Beer. The respondent-assessee also owns the 'Kingfisher' brand of packaged drinking water. Admittedly, in t .....

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f the assessee and supplied only to the assessee or its indentors. No right was given to the CBUs to directly sell the beer to its own customers. In fact, the CBUs were captive manufacturers of beer for the assessee -United Breweries Limited. 4. Under the Brewing and Distribution Agreement entered into between the assessee and the CBUs, the brewing and bottling of the beer was to be done as per the specifications given by the assessee, and by using the trade marks, names and logos of the assesse .....

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agreement, it was specifically provided that the CBUs shall sell the entire beer manufactured in their jurisdiction to the assessee or its indentors. The agreement also provided that any liability attributable to the CBUs on bulk beer up to the Bright Beer tanks (BBT), was to be of the assessee. Thus, according to the agreement with regard to beer, the CBUs neither had any right over the product, nor did they have any right to sell or exploit the beer so produced, nor fix any price of the produ .....

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er, the manufacturers were to pay royalty to the assessee for use of brand name/trade name, and were then free to sell the manufactured packaged water to their own customers, and exploit the trade name/brand name, for which they were paying royalty to the respondent-assessee. 6. For the relevant assessment years, the Assessing Officer, though did not levy any tax on the transfer of technical know-how, for manufacture of beer, but subjected the assessee to tax for payment of ₹ 10/- per case .....

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xability on the payment of brand franchise fee/royalty in the case of manufacture of beer, as well as drinking water. 7. Being aggrieved by the order of the Assessing Officer, the respondent-assessee filed an appeal before the Joint Commissioner of Commercial Taxes (Appeals) (hereinafter referred to as the 'First Appellate Authority') By an order dated 20-10-2012, the First Appellate Authority allowed the appeal with regard to levy of tax, penalty and interest on the amounts received by .....

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ppellate Authority, the assessee filed an appeal before the Tribunal, challenging that part of the order by which tax, penalty and interest was held to be chargeable on the amount collected as royalty in the case of packaged water; and the Revenue filed an appeal challenging the other part of the order by which the assessee was exempted from payment of tax in the case of beer. The Tribunal, by its order dated 17-01-2014, allowed the appeal filed by the assessee and dismissed the appeal of the Re .....

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ounsel for the parties, these Revision Petitions have been heard and are being finally disposed of at the admission stage itself. 10. The submission of Sri.Shivayogiswamy, learned Additional Government Advocate appearing for the Revision Petitioner is that the Tribunal has wrongly held that no tax would be leviable on "brand franchise fees" which has been charged by the assessee from the Contract Bottling Units (CBUs) for manufacturing beer under the brand name/trade name of the assess .....

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ansfer of goods as defined under the Karnataka Sales Tax Act. 11. Per contra, Sri.N.Venkataramana, learned Senior Counsel appearing for the respondent-assessee submitted, that for getting the beer manufactured from the CBUs, the know-how and specifications are supplied by the assessee to the CBUs, according to which beer is manufactured on behalf of the assessee, for which, the cost of raw materials and the labour is paid in the account of the assessee. In turn, the CBUs sell the beer on behalf .....

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at the expense of, the assessee. It has also been submitted that for the 'brand franchise fees' received by the assessee from the CBUs, the assessee pays Service Tax, as the same is covered under the definition of 'Service' as provided under sub-Section 55(b) of Section 65 of the Finance Act, 1994. It is thus contended that since the payment received from CBUs as 'brand franchise fees' would not be termed as 'goods' within the meaning of transfer of right to use t .....

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papers, actionable claims, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including goods, as goods or in some other form involved in the execution of a works contract or those goods to be used in the fitting out, improvement or repair of movable property) and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale. Section 5-C of the KST Act: Levy of t .....

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n (3) of the said schedule. Provided that no tax shall be levied under this section if the goods in respect of which the right to use is transferred, have been subjected to tax under Section 5. Sub-Section (55b) of Section 65 of the Finance Act, 1994 : (55b) "Intellectual property service" means, - (a) transferring, temporarily; or (b) permitting the use or enjoyment of, any intellectual property right. …………………………&he .....

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p;…………………….. (zzzzj) to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances. Article 366 of the Constitution of India: Definitions:- In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assi .....

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ntract; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service .....

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doubt that sale of goods can be taxed under Constitution of India, which would include tax on transfer of right to use any goods for any purpose. The price of such sale is to be taxed. "Goods" is defined under the KST Act which may be tangible or intangible. In the present case, the transfer of right to use brand name/trade name would be intangible goods. 15. We shall first consider the case relating to the sale of beer. With regard to taxability on the payment of the 'brand franch .....

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de mark belonging to the assessee, as it is not free to sell the product in the market, to customers of its choice. It is also not disputed that the manufacturing is done as per the specifications given by the assessee. Thus, it can be concluded that the CBU is the captive manufacturer of the assessee, who has to produce the beer in terms of the specifications and other conditions as provided by the assessee. The CBUs cannot sell the beer to customers of its choice, but only to the intended cust .....

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ranchise fees' and other surplus profit of the assessee. Such 'brand franchise fee' in the present case is ₹ 10/- per case. It is this amount which the Revenue contends that it should be subjected to tax. 17. The Apex Court, in the case of State of Andhra Pradesh and another v. Rashtriya ISPAT Nigama Limited [2002] 126 STC 114, has held that in the case of tangible goods, even though delivery or possession of the machinery may have been given to the contractor, yet when the eff .....

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ight to use goods accrues only on account of transfer of right. In other words, right to use arises only on transfer of such right and unless there is transfer of right, the right to use does not arise." Therefore, only when there is transfer of right to use the brand name/trade mark belonging to the assessee, without any restriction, then alone it could be a case of transfer of right to use the intangible goods, which would be the brand name/trade mark. However, if no such right to use is .....

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sessee, which would be subject to Sales Tax under the KST Act. It is also noteworthy that, for the amount received by the assessee as 'brand franchise fees' from the CBUs, admittedly, the assessee is paying Service Tax, as the same is covered as Intellectual Property Service under sub-Section 55(b) of Section 65 of the Finance Act, 1994. 19. The law is well settled that double taxation on the same goods is not permissible. The Apex Court in the case of Bharath Sanchar Nigama Limited v. U .....

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e purview of Section 2(1)(t)(iv) of the KST Act". The Tribunal has, further, recorded a finding of fact that "CBUs have no independent voice or rights so far as the purchase of materials and sales of manufactured beer are concerned. All the brewing operations are to be carried out by the CBUs as per the directions and control of the appellant (assessee herein). In this process, the CBUs have to affix the labels of the brand names of the appellant since the entire product brewed has to .....

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s for the assessment years in question, cannot be justified in law. 22. Coming to the next issue of 'Kingfisher' packaged drinking water, the question is regarding the levy of tax on the amount collected by the assessee as royalty from the licensee dealers, engaged in the business of manufacturing packaged drinking water as consideration for transfer of right to use brand name/trade mark-'Kingfisher'. In our opinion, since it is not disputed that under the agreement, the trade ma .....

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