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2016 (8) TMI 717 - BOMBAY HIGH COURT

2016 (8) TMI 717 - BOMBAY HIGH COURT - 2016 (44) S.T.R. 161 (Bom.) - Levy 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 franchise .....

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troy 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 agreemen .....

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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 .....

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yalty received by it from the franchisees. - WRIT PETITION NO. 9175 OF 2015, WRIT PETITION NO. 497 OF 2015 - Dated:- 11-8-2016 - S.C. Dharmadhikari & G.S.Patel, JJ Mr. N. Venkatraman, Senior Counsel, with Mr. Arun Jain, Mr. Jas Sanghvi and Ms. Shilip Jain, i/b M/s. PDS Legal. Mr. V. A. Sonpal, Special Counsel. Mr. Pradeep S. Jetly, with Mr. Jitendra B. Mishra. Mr. D. B. Shroff, Senior Counsel, with Mr. Hormazd Daruwalla, i/b M/s. Khaitan & Co. Mr. V.A. Sonpal, Special Counsel, with Ms. A .....

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arise in each, the Petitioners are liable to a levy of service tax or sales tax. As it turns out, the facts are materially distinct; and as the following judgment shows, the two cases seem to us to be mirror images of each other: if one fails, on a parity of reasoning, the other must succeed. 2. We have heard Mr. Venkatraman for the Petitioners, Mr. Sonpal for Respondents Nos. 2 and 4, and Mr. Jetly for Respondent Nos. 1 and 3 in Writ Petition No. 9175 of 2015 ( the Monsanto Petition ). In Writ .....

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at least attempt to distill the essence of the arguments in his Petition and, therefore, in the companion Petition. In doing so, we leave aside for the present all questions of legislative competence. (a) If we may be permitted a small latitude, the kernel (or seed , as it were) of Mr. Venkatraman s case is this: Mahyco Monsanto Biotech (India) Pvt. Ltd. ( Monsanto India ) supplies to third parties a certain type of hybrid cotton seed. This seed is impregnated with a proprietary technology that .....

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seed do mighty cotton plantations grow. Monsanto India says that what it provides when it gives the third party purchasers the parent, impregnated seed is a service, and this is liable to be taxed under the relevant provisions of the Finance Act as amended, read with the Rules that pertain to service tax. This is a central levy. The transaction between Monsanto India and the third party with whom it deals is not, and cannot be, a sale assessable under the Maharashtra Value Added Tax Act, 2002 ( .....

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define a sale or a deemed sale (viz., a transfer of the right to use), it must be held to be a service. Central to this argument is the aspect of non- exclusivity: Monsanto India passes no property or estate in the technology itself to the third party developer. It merely licenses it. Monsanto India may issue innumerable such technology licenses to various third party developers. Those developers in turn cannot further sub-license the technology. They can only use it to produce a hybrid, sowable .....

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r, the technology is in itself useless. Once this is seen, it becomes apparent that all the qualities that Monsanto India describes as applicable to a sale apply exactly to the third party developers acquisition of that impregnated seed. That third party developer may further sell it as is or do what he wishes with it. There is clearly not only a transfer of a right to use (as there would be in a deemed sale), but there is in fact a direct sale of the impregnated seed; this is in no way a servic .....

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sub-license the intellectual property further downstream to sub-franchisees; it cannot sell or alienate that intellectual property; it enjoys no estate or title in any of the marks. This is, therefore, not a sale or even a deemed sale; it is purely a service. The State Government argues that these submissions are irrelevant. The franchisee has acquired a right to use the marks, and there is, therefore, a transfer of the right to use those marks. In any case, certain amendments to the MVAT Act ma .....

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ely assigned to them, that is to say- (29A) tax on the sale or purchase of goods includes- (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a tax on the delivery of goods on hire- purchase or any system of payment by instalments; (d) a tax on the transfer .....

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t intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made; 6. The incidence of tax in sub-clause (a) is on the transfer of property in goods; in sub-clause (b), too, it is on the transfer of property in go .....

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erwise requires,- (24) sale means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words sell , buy and purchase , with all their grammatical variations and cognate expressions, shall be construed accordingly; Explanation.- For the purposes of this clause,- (a) … (b)(i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferr .....

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chase or any system of payment by instalments; (iv) 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; (v) the supply of goods by any association or body of persons incorporated or not, to a member thereof for cash, deferred payment or other valuable consideration; (vi) the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other arti .....

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ied from time to time by the State Government in the OfficialGazette. 5% 1-4-2010 to date 8. The relevant provisions of the Finance Act, 1994 are set out below. 65. Definitions.- In this Chapter, unless the context otherwise requires, (55a) intellectual property right means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright; (55b) intellectual property service .....

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ed throughout) 9. Mr. Venkatraman relies on a number of judgments to elucidate the meaning and requirements of Article 366(29A)(d). These, he says, must always be present for a transaction to fall within the ambit of this Article. Mr. Shroff too has adopted his formulation of the law. Although these are considered in detail later in this judgment, a summary of these legal submissions on this aspect would be helpful. Briefly, Mr. Venkatraman s argument is that for a transaction to qualify as a tr .....

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exist simultaneously in the hands of both the transferor and the transferee; (e) the original owner must not be able to effect a further transfer of the same rights to others, during the period they are vested in the transferee; and (f) the concept of transfer is the same for both tangible and intangible goods. 10. We have not found this summation of the law to be entirely accurate. We do not think that points (c), (d) and (e) must always be satisfied. The judgments cited in support were in a c .....

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d ( MIIPL ) and the Maharashtra Hybrid Seeds Co. Monsanto India develops and commercializes insect-resistant hybrid cottonseeds using a proprietary Bollgard technology , one that is licensed to Monsanto India by Monsanto USA through its wholly-owned subsidiary, Monsanto Holdings Private Limited ( MHPL ). This technology is further sub-licensed by Monsanto India to various seed companies on a non-exclusive and non- transferable basis to use, test, produce and sell genetically modified hybrid cott .....

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tition, filed under Article 226 of the Constitution of India, brings a challenge to Entry 39 of Schedule C to the Maharashtra Value Added Tax Act, 2002 ( the MVAT Act ); the definitions under Sections 65(105)(zzr), 65(55a) and 65(55b) of the Finance Act, 1994; and sub-clause (c) of Section 66E of the Finance Act, 1994. The challenge is on two grounds. First, that these are ultra vires Articles 14, 19(1)(g) and 265 of the Constitution of India. Second, that the exercise of power of the Respondent .....

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d sale in the nature of transfer of right to use goods under clause (b)(iv) of the Explanation to Section 2(24) of the MVAT Act read with Article 366(29A)(d) and Entry 54 List II of the Constitution. 14. A brief background of the Monsanto technology and business structure is necessary. Bacillus Thuringlensis ( BT ) is a naturally occurring bacterium that produces proteins that kill specific insects. Using biotechnology, Monsanto USA introduces a specific BT gene into the cotton genome. This prod .....

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agreements with other seed companies through which it claims to grant permissive use of the technology via donor seeds. A sample of such sub-licensing agreement is annexed.1 Monsanto India delivers fifty sample BT donor seeds to the seed companies for BT cotton hybrid production, along with the standard operating procedure (SOP) manual prepared by Monsanto USA. The seed companies produce or generate additional donor seeds from these given seeds. Monsanto India provides initial training to the s .....

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e Department of Biotechnology, Ministry of Science and Technology, Ministry of Environment, Genetic Engineering Advisory Committee (GEAC) and others responsible. These approvals need certificates of validation and test reports, which are provided by Monsanto India. Once such approval is obtained from the GEAC, each sub-licensee can produce BT cotton hybrid seeds. These BT cotton hybrid seeds are then sold to farmers. 15. At present, the technologies licensed are Bollgard I ( BG I ) and Bollgard .....

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rom assisting the seed companies in obtaining the required approvals and conducting zygosity tests. This training includes classroom training and sharing of protocols. Under the sub-licensing agreement, Monsanto India receives consideration from the seed companies in the form of a one-time fixed fee and a recurring variable based on the sale of the genetically modified seeds; in essence, a trait fee. 16. Prior to the introduction of the VAT system in Maharashtra, tax on transfer of right to use .....

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he order provided that Monsanto India would be expected to pay a 4% sales tax on the sub-licensing transaction. Monsanto Petition, Exhibit G , pp. 79-91. Aggrieved by this order, Monsanto India appealed to the Maharashtra Sales Tax Tribunal. The appeal succeeded. Monsanto Petition, Exhibit H , pp. 92-110. 17. From 1st April 2005, the VAT regime replaced the sales tax regime, and this covers lease transactions, attracting a tax of 4% (increased to 5% since April, 2010) on the basis of the rate sp .....

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Ltd v Union of India, 2006 (2) STR 161 (SC). Monsanto India made another DDQ application. Monsanto Petition, Exhibit K , pp. 116-123. However, there is no order against this DDQ application. By its letter dated 4th February, Monsanto India requested the Commissioner of Sales Tax, Maharashtra to pass an order against this application. Monsanto Petition, Exhibit L , p. 124 There, too, no order has been passed till date. 18. Monsanto India is a registered Service Tax assessee with the registration .....

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I. One of these is annexed. Monsanto Petition, Exhibit N , pp. 131-142. Monsanto India was initially engaged in licensing the BG I technology, but this did not come under the ambit of Intellectual Property Services because it was not patented. Monsanto India, in 2007, started to license the technology in BG II, which, being patented, required it to remit service tax. Monsanto India has been paying service tax since 2007. 19. Monsanto India submits that while under Section 66E of the Finance Act .....

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it of a permissive use rather than a transfer of a right to use. It is, therefore, a service and not a deemed sale within the meaning of Article 366(29A)(d) of the Constitution of India. The transaction, he says, is a single composite transaction and cannot be taxed as both a sale and a service. Sales tax and service tax are mutually exclusive and this, he says, is well-settled: BSNL, 2006 (2) STR 161 (SC). Imagic Creative Private Limited v CTO 2008 (9) STR 337. and Association of Leasing and Fi .....

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fficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided. The approach of this assessing authority, to us, thus, appears to be correct. 21. The expression transfer of a right to use under Article 366(29A) of the Constitution, Mr. Venkatraman says, was first considered by a Constitution Bench of the Supreme Court in 20th Century Finance Corporation Limited v State of Maharashtra. (2000) 6 SCC 12 .....

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use goods. The various sub-clauses of Clause (29A) of Article 366 permit the imposition of tax thus: Sub-clause (a) on transfer of property in goods; Sub-clause (b) on transfer of property in goods; Sub-clause (c) on delivery of goods; Sub-clause (d) on transfer of the right to use goods; Sub-clause (e) on supply of goods; and Sub- clause (f) on supply of services. The words "and such transfer, delivery or supply..." In the latter portion of Clause (29A), therefore, refer to the words .....

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ing that the tax under Sub-clause (d) is to be imposed not on the transfer of the right to use goods but on the delivery of the goods for use. Nor, in our view, can a transfer of the right to use goods in Sub- clause (d) of Clause (29A) be equated with the third sort of bailment referred to in "Bailment" by Palmer, 1979 edition, page 88. The third sort referred to there is when goods are left with the bailee to be used by him for hire, which implies the transfer of the goods to the bai .....

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thereof is also required to be executed. Given that, the locus of the deemed sale is the place where the right to use the goods is transferred. Where the goods are when the right to use them is transferred is of no relevance to the locus of the deemed sale. Also of no relevance to the deemed sale is where the goods are delivered for use pursuant to the transfer of the right to use them, though it may be that in the case of an oral or implied transfer of the right to use goods, it is effected by .....

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, Mr. Venkatraman says, is neither novel nor recent. It is jurisprudentially well-established. The essence of a transfer , he submits, is the acquisition of a right by the transferee, and the corresponding loss of it by the transferor. When applied to goods, it would mean the the passing of the goods from the hands of the transferor to the hands of the transferee. He relies on Salmond on Jurisprudence, Corpus Juris Secundum and the judgment of the Andhra Pradesh High Court in Rashtriya Ispat Nig .....

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ndum defines transfer as follows: Volume 87, p. 892. The common use of the word transfer is to denote the passing of title in property, or an interest therein, from one person to another, and in this sense the term means that the owner of property delivers it to another person with the intent of passing the right which he had it to the later. 25. In Rashtriya Ispat Nigam Limited v Commercial Tax Officer, (1990) 77 STC 182. the High Court of Andhra Pradesh, relying on Salmond and Corpus Juris Sec .....

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sferor or transferee, has effective control over the goods. If the effective control over the goods is given to the transferee, then, he says, it would be a transfer of the right to use goods. If, on the other hand, the transferor retains effective control, then it would be a case of a mere permissive use or license to use. The term effective control is used in contrast to mere physical control. It is the power to exercise those rights that arise out of ownership, as opposed to, say, a bailment. .....

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present for a transaction to qualify as a transfer of the right use goods. Most pertinent, Mr. Venkatraman says, are attributes 4 and 5. He refers to these two collectively as the BSNL twin test . Paragraph 91 lists these attributes as follows: 91. 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 .....

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to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others. (Emphasis added) 28. Mr. Venkatraman then submits that although the law on the concept of transfer in the context of the transfer of the right to use goods, as seen above, has been laid down in the context of tangible goods, it applies equally to intangible goods as well. The reason, he says, is that the expression goods includes both tangibles and intangibles. The Con .....

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h intangibles are captured in some media, which is a tangible form, the intangibles, too, become goods. Similarly, in Sunrise Associates v Government of NCT of Delhi (2006) 5 SCC 603. and Yasha Overseas v Commisioner of Sales Tax (2008) 8 SCC 681. the Supreme Court held that a right, tangible or intangible, that is capable of being bought and sold independently for consideration becomes goods. 29. Therefore, Mr. Venkatraman says, there is no distinction in law between tangible and intangible goo .....

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mulation, the following tests must be met: (a) there must be a transfer goods; (b) such a transfer requires divesting in one and vesting in another of the same rights or goods; (c) the effective control over the goods must pass to the transferee; (d) the original owner must be temporarily excluded from using the right himself and besides the conveyance of title, every other right should accrue absolutely in the hands of the transferee -the right cannot exist simultaneously in the hands of both t .....

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ke and Sons (1999) 1 Mah LJ 26 and Tata Sons Limited v State of Maharashtra, 2012 SCC OnLine Bom 697; (2015) 80 VST 173 (Bom). and that of the Andhra Pradesh High Court in Nutrine Confectionary Company Private Limited v State of Andhra Pradesh (2011) 40 VST 327 (AP). do not represent the correct position in law. 31. Mr. Venkatraman urges us to hold the decision of this Court in Duke & Sons was per incuriam because substantially relevant law had not been considered; or, at any rate, it is no .....

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er in 2000, the Supreme Court held in 20th Century Finance Corporation that mere use would not constitute a deemed sale, and that transfer is the sine qua non of any sale. Even Salmond on Jurisprudence and Corpus Juris Secundum say that transfer is an acquisition of right on the part of the transferee and loss of that right by the transferor. The decisions of the Supreme Court in Aggarwal Brothers and in Rashtriya Ispat Nigam Limited also hold that effective control is a sine qua non for transfe .....

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deemed sale . Mr. Venkatraman submits that the holding in Duke & Sons that the decision of the Andhra Pradesh High Court in Rashtriya Inspat Nigam Limited does not apply to trade marks is not the correct position in law today. This is so, he submits, because the Supreme Court has clarified time and again, right from 20th Century to BSNL, that there must be an vesting in the hands of the transferee and a concomittant divesting from the hands of the transferor. There is also nothing in the law .....

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the issue in question were not brought to the Court s notice. To begin with, he says, Tata Sons followed the ratio in Duke & Sons, which, as stated earlier, is not the correct position in law in light of subsequent judgments of the Supreme Court. These were not placed before the Court. Further, during the period in question, i.e., 1998 to 2002, only the transfer of a right to use goods was taxable under Article 366(29A)(d), and a mere permissive or license to use was not liable to service ta .....

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e Court expressly stated that it did not express any opinion as to the propriety of the Maharashtra Sales Tax Tribunal s decisions in M/s. Smokin Joe s Pizza Pvt. Ltd. v State of Maharashtra (2009) 39 MTJ 266; Appeal No. 25 of 2004; decided on 25th November 2008., and Diageo India Pvt. Ltd. v State of Maharashtra, (2009) 40 MTJ 285; Second Appeal Nos. 1432 to 1438 of 2006 decided on 12th February 2009. as separate proceedings in that regard were pending. These were cases where the issue of sale .....

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ee decisions had subsequently been distinguished by the Kerala High Court itself in Malabar Gold Private Limited v CTO. (2013) 32 STR 3. This was not pointed out to the Court. 33. Mr. Venkatraman submits that the decision of the Andhra Pradesh High Court in Nutrine Confectionary Co Pvt Ltd v State of Andhra Pradesh (2011) 40 VST 327 (AP)., does not correctly interpret the test laid down in BSNL. In Nutrine, the Court held that in BSNL, the goods in question were mobile telephone connections, whi .....

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in Nutrine did not apply the BSNL twin test that was expressly laid down by the Supreme Court. Without appreciating that Nutrine Confectionary Company was not divesting effective control or retaining exclusivity, the Bench held it to be a transfer of right to use. This is contrary, Mr. Venkatraman says, to BSNL. 34. The Finance Act tells us that a service is a transaction without a sale. This means, Mr. Venkatraman says, that any transaction that is not a sale (or a deemed sale within the meani .....

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material while considering the question of whether this transaction is a sale or a service, and should be ignored. The licensee is merely permitted to use the Bollgard Technology and nothing further. How it acquires that permission to use is of no consequence. Clause 2.1 of the sub- licence agreement explicitly states that the grant to the sub-licensee is of a non-exclusive and non-transferable sub-license to use the Bollgard technology. The expression non-exclusive , he says, has important impl .....

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goods, i.e., the intangible technology, remains with Monsanto India. Therefore, this is a case of mere permissive use. Had the right to use the technology been granted exclusively to the sub-licensee, then, he says, it would have been a case of transfer of the right to use. 36. He explains this using the following illustrations: (a) A is the owner of an intangible right. A transfers this right to use the intangibles to B temporarily, to A s exclusion. This case, he says, would fall under Articl .....

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n any of these States, thus rendering temporarily numb the transferor s right to use. In this case, too, he says, the BSNL twin tests would apply. The question that arises here is whether the second aspect of the BSNL twin test (incapacity of the transferor to make further transfers) is satisfied, given that A has transferred the right to three different individuals. Had the goods in question been tangibles, the test of incapacity to make further transfers would mean that once the goods are tran .....

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ands of the transferor and the inability to transfer it again to somebody else. When, therefore, A makes a temporary transfer to B in Maharashtra, he agrees that it is to his exclusion. This precludes A from further transferring it to B2, B3 or B4 in Maharashtra. This makes the transfer to B in Maharashtra, and likewise to C and D in Karnataka and Tamil Nadu respectively, exclusive and to the exclusion of A. Therefore, he says, the BSNL twin test is satisfied. (c) Lastly, A grants a license to u .....

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ve use or license to use goods but not a case of a transfer of the right to use. He submits that Monsanto India s case falls under this third scenario. 37. We have considered most carefully this submission. It is indeed sophisticated in its construction, and, at first blush, appears most appealing. On reflection and a closer examination, we find ourselves unable to subscribe to the interpretation Mr. Venkatraman so eloquently commends, viz., that his transaction is one of a merely permissive use .....

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nd on Jurisprudence and Corpus Juris Secundum both say. In our opinion, the seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in these fifty seeds and these are fully vested in the sub-licensee. Mr. Venkatraman is not correct when he says that the effective control of the goods is with Monsanto India. In RINL, the Supreme Court concluded that the contractor (transferee) did not have effective control over the machi .....

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use the seeds (and the embedded technology) in accordance with Monsanto India s wishes. Monsanto India cannot further dictate to the sub-licensee what he or it may do with these technology-infused seeds. The sub-licensee can do as it wishes with them. It may not use them at all. It may even destroy the seeds. Once the transaction is complete, i.e., once possession of the technology-imbued seeds is effected, and those seeds are delivered, Monsanto India has nothing at all to do with the technolo .....

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een given to the sub-licensee without them; and there is no other method demonstrated anywhere of effecting any such transfer. 38. We must note that Mr. Venkatraman s submission that the BSNL test must always be present in each and every case for a transaction to be considered a transfer of the right to use goods is overbroad. We do not think that in BSNL the Supreme Court intended to prescribe a test of global or universal application without regard to individual circumstances. The judgment of .....

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telephone service provider to a subscriber. This BSNL test, was, therefore, set out in these circumstances. The Court had no occasion to consider its applicability to intangible property like intellectual property. This is how BSNL has been interpreted by us in Tata Sons. We think that this interpretation is correct. In any case, it binds us. The Kerala High Court in Malabar Gold, in paragraph 35, took a contrary view. It took the BSNL twin test to be applicable as a general proposition, i.e., o .....

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ontrol must be transferred to the transferee. This Court, in Duke and Sons, held that this test would not be applicable in the case of trade marks. It was held that for the transfer of a trade mark it was not necessary to hand over the trade mark to the transferee or give control or possession of trade mark such transferee. We think that this represents the correct position in law. Indeed, when it comes to trade and service marks, there are several intermediate positions that are possible: there .....

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ight to display, and there is no transfer of the right to use those marks. There is a mere permission to display goods bearing the mark. An agreement that allows for a mere right to display would be purely a service, and never a sale. At the end of the agreement, the retailer would have to cease all display of the mark; any continued use would be an infringement. The fact that the retailer vends goods bearing those marks does not in any sense confer on him ownership of those marks, nor does it d .....

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eement. The word owned implies that a sale has taken place. The term of the agreement, as provided under clause 9.1, is for an initial period of ten years and is further renewable in increments of five years by mutual consent of both parties, unless it is otherwise terminated earlier. What happens after the expiry or termination of the agreement is most interesting. Under clause 9.4, the sub-licensee is not bound to return to Monsanto India any portion of the initial fifty seeds given under the .....

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dispose of any remaining GMO planting seeds. After this period, Monsanto India has the option of requiring the sub-licensee to sell these planting seeds to Monsanto India itself or to dispose them for non-planting purposes. This clause makes it evident that the ownership of even the planting seeds is with the sub-licensee. Clause 2.5(d) then provides that Monsanto India can further sublicense the Bollgard Technology to a maximum of three other companies in the same territory as that the of the o .....

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missive use, there would be no question of the Monsato India having to first consult the sub-licensee before effecting further transfers. Further, under clause 7.1 the sub-licensee can assign the agreement and its rights and obligations under it to its wholly-owned subsidiaries without Monsanto India s permission. Mr. Sonpal rightly says that this can never happen in a case of a permissive use. In law, a wholly-owned subsidiary is a distinct legal entity. In a case of service or permissive use, .....

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e intellectual property, viz. the songs, passes to the buyer. The manufacturer can sell it to an end-user or to an intermediate retailer. The same song can be put on countless CDs. This too is a sale. When one buys a car, one buys the technology that is contained in the body of the car; the body is just the medium. On ITunes, when one buys a song, the song is transferred into a format which is accessible to the buyer, a proprietory format that needs a special device or software. Yet it is a sale .....

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d to the buyer. The buyer could use it, alienate it, destroy it, and do anything at all that he likes with it. If he made illicit copies of it, this would constitute infringement; and that in itself would not make the transfer of the software on a CD a service. Even if the buyer transferred this non- transferable software, it would amount to a breach of contract provided in the CD package, just as it would under Monsanto India s sub-licensing agreement. However, this does not do anything to disq .....

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rson renting the car can only use it. He cannot part with it and certainly cannot destroy it. Once the period of hire comes to an end, the car must be returned to the transferor. Therefore, the effective control over the car remains with the transferor. Likewise, in the case of a book library, the books must be returned to the library. With the Kindle Unlimited, one must pay a subscription fee to gain access to an unlimited number of books in the proprietory AZW format. When the subscription exp .....

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That might perhaps be a service. 43. Mr. Sonpal relies on a great many authorities, not all of them apposite. In a case like this, we will not be detained by his submission that Monsanto India s petition is not maintainable because it is a company and therefore disentitled to a high prerogative discretionary remedy under Article 226 of the Constitution of India for a violation of Article 14.34 The questions raised cannot be countered in so facile a manner. In any case, the Petition was admitted .....

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ch a submission, Mr. Sonpal might well be, as the Bard famously put it, 34. State Trading Corporation of India v Commercial Tax Officer, AIR 1963 SC 1811. hoist by his own petard; for then the very judgments he cites Deepak Bhandari v Himachal Pradesh State Industrial Development Corporation Ltd, AIR 2014 SC 961; Jitendra Nath Singh v Official Liquidator, (2013) 1 SCC 462. would have to be held to be restricted to the facts in each. It is also, in our view, not only incorrect but also improper t .....

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, well-founded. The facts of that case are that one G manufactured ready mix concrete to its customers specifications. Dealers entered into contracts with G to provide a transportation service for ready-made concrete by hiring transit mixers. G was given access to a dedicated fleet of such mixers, coloured and sized to its specifications, and could decide the delivery schedule of these mixers. The Additional Commissioner levied sales tax. The dealers contended that this was a contract of transpo .....

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vered for use, subject to the condition that the goods should be in use forever; (iii) in a transaction for the transfer of right to use, the delivery of goods is not a condition precedent but one of the elements of the transaction; (iv) the effective or general control does not always mean physical control and even if the manner, method, modalities and the time of the use of goods is decided by the lessee or the customer, it would be under the effective or general control over the goods; (v) th .....

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understand the very nature of the transaction and to understand the intention of the parties while contracting. Courts cannot rely only on the wording of the transaction. This is often of no help and could suggest an entirely different nature. After testing the transaction with the facts of the case, the Bench held that the transaction between G and the dealers was a transfer of right to use. 45. Requirement (iv) of the decision in Lamba is vital to Mr. Sonpal s argument on effective control. Th .....

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technology may possibly even be an outright sale. For a transaction to qualify for a sale, there must be a transfer of the property in the goods. In legal usage, the word property is a generic term, of broad and extensive application; perhaps, the most comprehensive of all terms which can be used. Corpus Juris Secundum, Volume 73, p. 135. Property embraces everything which is or which may be subject to ownership of any kind at all, and is legally understood to include every class of acquisition .....

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service. In his formulation, the medium (CD, pen drive, etc) is irrelevant. Surely this cannot be correct. Software may be downloaded too, without any physical medium intervening - the medium is as intangible as the goods. It is impossible, we think, and does not stand to reason to suggest that unless, say, Microsoft or Adobe wholly cede all control over their software products there is no sale, and when they allow a user to download and use their software they are only providing a service. Ind .....

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ys for a subscription - for an annual or monthly fee, the software can be downloaded and used; if the subscription ends, at the very least updates end and very possibly the software will not function optimally. The latter may be a service, very like car rental or book borrowing from a library. The former is clearly a sale. The difficulty with Mr. Venkatraman s argument is that it tries to draw a completely unnecessary distinction between the technology and the medium in which it is delivered. Ne .....

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o not have to be sold or transferred . Microsoft and Adobe retain all those rights, and all intellectual property continues to vest in them. This is, therefore, a transfer of the right to use that software, and to that extent, the intangible (the software) is sold; but the terms of that license allow the software vendor to retain complete seizin and dominion over all intellectual property rights. The transfer is not of those intellectual property rights, but of the right to use an identified and .....

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ense is such that the licensed intangible is with the licensee in perpetuity or whether the licensor has the right to terminate and repossess and deny further access to that intangible. In a software sale, there is no question of termination or repossession. It is for the licensee to use forever. This is clearly a sale or a deemed sale and it is in respect of not the medium or the intellectual property (the marks, copyright, patents, etc), but is the transfer of the right to use that software su .....

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perspective, Mr. Venkatraman s clients underlying fears are, we believe, unfounded. 48. Mr. Venkatraman, in the alternative and without prejudice, argues that the seeds themselves are exempt from being taxed under Entry 41 of Schedule A of the MVAT Act, 2002, even if the transaction in question is held to be a sale. Entry 41 of Schedule A reads thus: SCHEDULE A LIST OF GOODS FOR WHICH THE RATE OF TAX IS NIL% 41. Seeds of all types excluding oil seeds and seeds to which any other entry of this Sc .....

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s. Monsanto s Compilation, Volume II, p. 445. Para 2 of the Circular reads as follows:- Queries have been raised about the scope and limits of this entry. It is accordingly clarified that all types of sowing seeds are covered by the scope of the entry A-41 and such sowing seeds will accordingly stand exempted from tax. This would include sowing seeds for cereals, pulses as well as sowing seeds for oil seeds. In addition to sowing seeds, which includes certified seeds and truthfully labeled seeds .....

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e to pay a rate of only 5%. Therefore, even in the worst-case scenario, Monsanto India is not liable to pay more than 5% sales tax. 52. Given our previous discussion, we do not think it is necessary to go into this question at all, for what is being taxed is not the seed itself but the license that transfers a right to use the seed. Therefore, in our opinion, it makes no difference if the seeds are coker seeds or oil seeds. 53. Mr. Venkatraman makes one more without prejudice argument, in case n .....

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aid service tax for the entire period at a rate significantly higher than what is provided under the MVAT Act and therefore he says that it is not liable to pay further tax. For the period between May 2007 and February 2009, it has paid service tax at a rate of 12.36%, for March 2009 to March 2012 at a rate of 10.3%, for April 2012 to May 2015 at 12.36%, and for the period beginning June 2015 at a rate of 14%. Under Entry 39 of Schedule C of the MVAT Act, the applicable rate of sales tax is only .....

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BWAY PETITION 54. In Writ Petition No. 497 of 2015, Subway is a private limited company of which Petitioner No. 2 is a full time director. Subway operates and franchises sandwich shops in India. It is part of an international chain. Petitioner No.3 is an executive of the outsourced agency that maintains Subway s account books. Respondent Nos. 1 and 2 are the State of Maharashtra and the Union of India respectively. Respondent No. 3 is the Commissioner of Service Tax, an officer of Respondent No. .....

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ited liability corporation to establish, operate and franchise others to operate SUBWAY-branded restaurants in India. This non-exclusive license was granted to SIBV itself by Subway Systems International Ansalt, which in turn was granted such a license by Doctor s Associates Inc., an entity that owns the proprietary system for setting up and operating these restaurants. These restaurants serve sandwiches and salads under the service mark SUBWAY. The agreement includes not only the trade mark SUB .....

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exclusive rights to any third person. Subway also reserves the right to compete with these franchisees in the agreement. Under this agreement, Subway receives two kinds of consideration, one being a one-time franchisee fee which is paid when the agreement is signed; and the second is a royalty fee paid weekly by the franchisee on the basis of its weekly turnover. A sample franchise agreement is annexed. Subway Petition, Exhibit A , pp. 30-49. Under these agreements, the franchisees have no more .....

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nsideration should be subject to VAT; on 21st November 2014, Respondent No. 4 issued a notice to this effect. Subway Petition, Exhibit D , pp. 59-70. Subway received several notices asking it to show cause why the consideration it received should not be assessed to sales tax, and why no penalty should be imposed on the whole time director and the executive of the agency that maintained Subway s books of accounts. Subway Petition, Exhibit G , pp. 92-98; Exhibit H , p. 99. The cumulative penalty f .....

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it I , pp. 100-102; Exhibit J , pp. 103-107. Respondent No. 4 did not accept this request but passed an ex parte assessment order, including interest and penalties ₹ 17,98,988/- Subway Petition, Exhibit L , p. 109-118. in view of the decision of this Court in Tata Sons Limited v State of Maharashtra. 2012 SCC OnLine Bom 697. On 31st March 2015, the 4th Respondent issued a Notice of Demand in this amount. Subway Petition, Exhibit M , p. 119. VI. SUBMISSIONS AND FINDINGS IN SUBWAY 57. Mr. Sh .....

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es to urge that in Subway s case, all that is granted is a permissive use. The franchisee under the agreement obtains a mere permission to display the name Subway in a particular fashion, along with other services. 58. Mr. Shroff formulates his case on several distinct grounds. First, the franchisee is entitled to display the name Subway only for a limited period of time as stipulated in the agreement. After the expiry of this period of time, as provided in Clauses 8 and 8(g) of the Franchise Ag .....

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as many or as few franchisee agreements as it wants, even simultaneously, and it can on its own directly compete with its franchisees too. 59. Mr. Shroff submits that in light of the decisions of the Supreme Court on various composite contracts, Article 366(29A) was amended in 1983 to introduce a legal fiction by which six instances of transactions, enlisted as the clauses of the Article, were to be considered as deemed sales. The Amendment allows certain specific composite contracts to be divi .....

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m the agreement to render service and therefore would not be permitted to impose a tax on the sale component. This, Mr. Shroff submits, is of course subject to the exception that the transaction does not represent two distinct contracts. He contends that Subway s agreement comes within the ambit of sub-clause (d) and therefore cannot be split in light of the Constitutional provisions. Here, the transaction does not involve two distinct agreements. There is no intention of separate agreements and .....

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L. The thrust of these decisions is that it is not permissible for the State to tax composite contracts comprising of both sale and service components. The contracts cannot be artificially split to enable the sale element to be taxed, and neither can the whole agreement be taxed as a sale. The State in doing this would be entrenching on the legislative power of the Union. 61. Mr. Shroff, in the alternative and without prejudice to the preceding argument, submits that even if the transaction does .....

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nsfer at all. The limited license, he says, is embodied in an agreement from Subway to its franchisees in Delhi. Therefore, Mr. Shroff contends, to determine the situs, the movement of goods, location of the goods, the place where the license is made available, and the place where such agreement is executed will be considered as the key factors. He submits that in this case, that place is Delhi. Therefore, even if the transaction were considered to be a sale, the State of Mahrashtra would have n .....

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5/CR-114/Taxation-1), dated 1st June 2005, in which trade marks and franchises were included as goods for the purpose of Entry 39. In light of this express provision of law, Mr. Sonpal submits that Subway s franchise agreements are liable to be assessed to VAT. The Notification reads: Serial No. (1) Name of the goods of intangible or incorporeal nature (2) 1 Patents 2 Trade marks 3 Import licenses including exim scrips, special import licenses and duty free advance licenses. 4 Export Permit or l .....

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mbol, as the case maybe, is involved. (Emphasis added) 63. Mr. Sonpal relies on the decision of the Supreme Court in Vikas Sales Corporation v Commissioner of Commercial Taxes (1996) 102 STC 106 and Tata Consultancy Services v State of Andhra Pradesh (2004) 24 PHT 581. in support of his argument that incorporeal rights can also be considered as goods for the purpose of sales tax. Therefore, he says, that purely because the agreement involves incorporeal rights, it cannot be exempted from sales t .....

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at the place where it is being used. Therefore, he urges, despite the execution being Delhi, the use is in Maharashtra and this entitles the State of Maharashtra to levy VAT on the transaction. 65. Mr. Sonpal submits that the State cannot decide the eligibility of service tax of a transaction, but it can determine whether the transaction has to be taxed under the MVAT Act. This is, he urges, within its powers. The whole amount of the agreement can be liable to both sales and service tax as prov .....

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mined by the State, and therefore it could levy a sales tax on a transaction which already attracts service tax. The decisions in BSNL, Imagic Creative, and Associated Lease Finance are exactly on this; service and sales tax are mutually exclusive of each other. 68. We have the greatest difficulty in accepting Mr. Sonpal s argument that Article 366(29A) allows a split of even a single composite agreement, where this is not the intention of the parties to the agreement. In our opinion, Mr. Shroff .....

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ust cannot be done. 69. We believe that Mr. Shroff is correct when he says 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 .....

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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. 70. 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 .....

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iler is granted by a company the exclusive right of retailing its goods in a specified area … 72. We find, on facts, that the Subway franchise does not meet these tests. There is no such exclusivity. The agreement itself says that Subway may itself open and operate its own outlets in direct competition with the franchisee. Subway Petition, Clause 11(l) of the Agreement, p. 46. The agreements themselves expressly contemplate that Subway may create further franchisees in the very area in wh .....

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larly, if there is no requirement of having to cease display and use, Subway Petition, Clause 8(e) of the Agreement, p. 41. or return the intangible property at the end of the franchise agreement s term, Subway Petition, Clauses 8(e) and (j) of the Agreement, p. 41. then the transaction might arguably be a sale. Exercises in co-branding or sub-branding, where one party franchises its mark on a territorially-restricted basis and allows the franchisee to combine it with its own or other marks may .....

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se. This gives Subway deep and pervasive control and dominion over the franchisee s daily operations, without, at the same time, ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology. This is, therefore, diametrically opposed to the Monsanto model, for Monsanto India has no control whatever in what its licensee does with the BT-infused donor seeds; that licensee may choose not to use them at all. There is also no question of any return .....

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chise agreement does not, on the facts of this case, constitute a sale to bring it within the purview of that Act. Equally, we reject any general proposition to the effect that anything that is nothing but a service can be artificially converted into or treated as a sale merely by the insertion of an omnibus clause in a state-level taxing statute. To accept this argument, we would have to accept that the State Legislature can encroach upon the legislative powers of the Union in respect of items .....

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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. 74. In our opinion, the mere inclusion of franchises under the MVAT Act would not automatically make all franchise agreements liable to sales tax. What must be looked at is the real nature of the transaction and the actual intention of the parties. The agreement must be considered holistically, and effect must be .....

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le to service tax. When interpreting a taxing statute, or for that matter any statute, full effect must be given to the words used by the Legislature. This, however, does not mean that this principle must be stretched to a point which leads to an absurd result, or one that was not contemplated by the Legislature. The Legislature is presumed to know the law and to have acted in accordance with it. We, therefore, do not think that the Legislature intended for this Notification to have such a sweep .....

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ot 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. 75. Once we arrive at this conclusion, then the argument on situs, which is really one of jurisdiction, is entirely irrelevant. If the franchise agreement is not liable to sales tax, then it is not liable to sales tax by any state agency anywhere, irrespective of locati .....

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While considering tangible assets, there is no doubt as to where their situs is. It is where the goods are physically located. But, an intangible asset does not have any physical form or existence in any physical location. The legislature could have, by some appropriate deeming fiction, expressly provided for the situs of an intangible asset. This it has not done, so far as intellectual property is concerned. It has, however, specifically so provided for shares. Explanation 5, Section 9(1)(i) of .....

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