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2016 (11) TMI 550 - ALLAHABAD HIGH COURT

2016 (11) TMI 550 - ALLAHABAD HIGH COURT - 2017 (49) S.T.R. 3 (All.) - Jurisdiction of AO - levy of tax under U.P. VAT Act, 2008 on Royalty - palace of execution of contract - franchise service u/s 65(105)(zze) of Finance Act, 1994 - Reverse charge mechanism - whether the stand of the petitioner that notice is without jurisdiction since agreement between petitioner and JFL was executed outside India, therefore, AO has no jurisdiction to levy tax on transaction executed outside India is justified .....

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at be so, the agreement can be said to become a concluded contract and executed when it is communicated to Proposer/ Offeror at NOIDA wherefrom offer was made. The ultimate result would be that the very foundation of argument that taxing authorities in Uttar Pradesh had no jurisdiction, disappears and vanishes. It cannot thus be said that impugned orders are patently without jurisdiction - Quantum of assessment made by Assessing Officer is not under challenge. Assessment was challenged before us .....

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he statute. - Jurisdiction of AO not questionable and is justified - petition dismissed - decided against petitioner. - WRIT TAX No. 657 of 2015, WRIT TAX No. 465 of 2016 - Dated:- 10-11-2016 - Hon'ble Sudhir Agarwal And Hon'ble Dr. Kaushal Jayendra Thaker, JJ. For the Petitioner : Nishant Mishra, Tarun Gulati For the Respondent : C.S.C.,C.B. Tripathi ORDER ( Delivered by Hon'ble Sudhir Agarwal, J. ) 1. In both these writ petitions, assessments made by Deputy Commissioner, Commer .....

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015 is taken as leading case. 4. The facts as pleaded by petitioner are that, it is a Corporation registered in Netherland, being P.O. Box No. 717444, 1008, DE Amsterdam, the Netherlands. It is engaged in the business of franchising Domino Pizza Stores. Such stores specialize in business of sale of pizza, feature carry out, delivery services and operate a uniform business format, specially designed equipment, recipes, methods procedures and designs. It entered into a licence agreement dated 17.0 .....

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nchise Agreement") with M/s Jubilant Foodworks Ltd. (hereinafter referred to as the "JFL") to develop and operate Dominos Pizza Stores and to grant sub-franchise of Dominos Pizza Stores in India, Nepal, Bangladesh and Srilanka. The franchise agreement dated 23.09.2009 was executed in Netherland. In lieu of grant of such franchise, JFL was paying consideration, equivalent to 3% of total sales, made in stores, as "Royalty" to petitioner. JFL is also paying applicable " .....

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ds is taxable under U.P. Value Added Tax Act, 2008 (hereinafter referred to as the "VAT Act, 2008"). 6. Petitioner replied notice on 22.04.2015 stating that notice is without jurisdiction since agreement between petitioner and JFL was executed outside India, therefore, Respondent-3 has no jurisdiction to levy tax on transaction executed outside India. Respondent-3, however, passed Assessment Order dated 30.04.2015 holding petitioner liable to pay VAT and assessed tax liability for Asse .....

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ntire proceedings are wholly without jurisdiction. 9. The principal contention is that incidence of tax is on 'dealer' and levy of tax is, "sale and purchase of goods". Term ''dealer' is defined under Section 2(h) of VAT Act, 2008 which includes any person who carries on business of transfer of right to use any goods for any purpose (whether or not for a specified period) for cash or for deferred payment or other valuable consideration in State of U.P. It is said th .....

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and petitioner is already subject to Service Tax which it is paying to concerned department. Reliance is placed on decisions in 20th Century Finance Corpn. Ltd. and another Vs. State of Maharashtra, 2000(6) SCC 12; Imagic Creative Pvt. Ltd. Vs. CCT, 2008(9) STR 337; Goa Carbon Ltd. Vs. Commissioner of Trade Tax, 2008(11) SCC 176; Idea Mobile Communication Ltd. Vs. C.C.E. & C., Cochin, 2011 TIOL 71 SC-ST; and, Bharat Sanchar Nigam Limited Vs. Union of India, 2006(3) SCC 1. 10. Learned Standi .....

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act or where the right to use goods is exercised and in that view of the matter since right to use goods is exercised in State of U.P., it is taxable under VAT Act, 2008. Reliance is placed on this Court's decision in M/s Vysya Bank Ltd. Vs. The Commissioner of Trade Tax, U.P., Lucknow, 2009 NTN (Vol. 41) 327. It is also argued that, a transaction, if is a deemed 'sale' under VAT Act, 2008, such transfer of right to use goods are outside the purview of Service Tax. It is submitted th .....

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ames, trade and service marks and commercial symbols in connection with operation of "Domino's Pizza Stores", including the mark "DOMINO'S PIZZA", is Domino's IP Holder LLC, organized under the laws of State of Delaware, United States of America (hereinafter referred to as "IP Holder"). 13. Another Company was constituted at Netherland, namely, "Domino's Pizza Overseas Franchising B.V." (hereinafter referred to as the "Franchiser/DPOF& .....

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States of America. 15. M/s "Domino's Pizza India Limited" then requested Franchiser/DPOF to grant Master Franchise to develop and operate and to grant sub-franchises of Domino's Pizza Stores in the area of India, Nepal, Bangladesh and Sri Lanka. Referring to aforesaid request made by M/s "Domino's Pizza India Limited" and in reference to original agreement dated 27.03.1995, and all subsequent amendments, a new agreement was executed on 23.09.2009/ 01.10.2009/ 02.1 .....

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"lease", lessee", "lessor", "place of business" and "sale" as defined under Section 2(e), (h), (q), (r), (s), (x) and (ac) of VAT Act, 2008. Since basic contentions raised in this writ petition is that the agreement has been executed outside India, therefore, we reproduce hereat the "place of business" defined in Section 2(x) as under: "(x) "place of business" means any place where a dealer carries on business and includes- ( .....

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ned counsel for the petitioner contended that Assessing Officer has not disputed that agreement for transfer of right to use any goods was executed in Netherland, therefore, it is an admitted fact. 19. In this regard we find that Assessing Officer has not gone into this question, whether agreement to transfer of right to use goods was executed in India or outside India but he has proceeded to decide matter on the premise that place of agreement is not relevant and instead it is "place of bu .....

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d Justice Mohapatra. The dispute referred for resolution was, "where is the taxable event on the transfer of right to use any goods". Court also considered power of State Legislature to levy sale tax on transfer of right to use any goods envisaged under Clause (29-A)(d) of Article 366 of Constitution on the premise that goods put to use are located within their State. Several State legislations provided liability of tax on transaction of transfer of right to use goods on location of go .....

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tate trade; and (c) sales are in the course of export or import into the territory of India." 22. Contention on behalf of assessee before Supreme Court was that State Legislature cannot so frame its law so as to convert an outside sale or a sale in course of an inter-State trade or commerce into a 'sale' inside the State. Interpreting Article 366 (29-A) (a) to (f) of Constitution, Court by majority held: (a) Sub- clause (a) to (f) of clause (29A) of Article 366 are not actual sales .....

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t is entered into. (d) Transfer of goods will be a deemed sale in the cases of sub-clauses (a) and (b), the delivery of goods will be a "deemed sale" in case of sub-clause (c), supply of goods and services respectively will be "deemed sales" in the cases of sub- clauses (e) and (f) and transfer of right to use any goods will be a "deemed sale" in the case of sub-clause (d). Clause (29A) cannot be read as implying that tax under sub-clause (d) is to be imposed not on .....

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of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. (g) Where the goods are in existence, the taxable event on the transfer of the right to use goods occurs when a contract is executed .....

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amounts to delivery to consignee. If it takes place outside the State, the fact that subsequently goods have reached the State where they are put to use, cannot be ground for determining tax liability on the ground that the goods are located in that State for use. 23. Conclusions of Constitution Bench's majority judgment, are in para 35, which reads as under: "(35) As a result of the aforesaid discussion our conclusions are these: (a) The States in exercise of power under Entry 54 of Li .....

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e the place where the property in goods passes, i.e. where the written agreement transferring the right to use is executed. (c) Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use. (d) In cases where goods are not in existence or where there is an oral or implied .....

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d to Section 2(h)(iv), Explanation I, clause (ii) of U.P. Trade Tax Act, 1948, which reads as under: "2.(h) 'Sale' with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration and includes - (i) ... (ii) ... (iii) .... (iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period .....

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ii) of Explanation I to Section 2 (h), the ambit of sale has been widen by including outside sale as inside sale on mere location of goods for use within the State irrespective of the fact that the agreement for transfer of right to use has been executed outside the State or whether the sale is outside the State, the tax is chargeable within the State. And, further, on account of a special provision for rates of tax, the other provision such as single point tax as well as exemption etc. is not a .....

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oods into or export of the goods out of the territory of India and (iii) an inter-State sale." (emphasis added) 26. In VAT Act, 2008, provisions as was read down in 20th Century Finance Corpn. Ltd. (supra), has not been inserted and instead in Section 2(x), definition of "place of business" has been mentioned and for our purpose it is clause (iv) of Section 2(x) which says that place of business would be where right to use goods is exercised. Validity of aforesaid provision is not .....

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of fact that agreement was not executed at Delhi and, therefore, a finding of fact was recorded which was not found to be incorrect. There was nothing to show that agreement was executed outside the State of U.P. and it is in these facts and circumstances, Court decided the matter. 28. It does not appear from record, where agreement dated 23.09.2009/ 01.10.2009/ 02.10.2009 was actually signed. Copy of agreement shows that it is dated 23.09.2009 (Page 85 of the paper book) but page 119, which con .....

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hen all the parties were present at one place. 29. The address of registered office of Franchiser/DPOF is that of Amsterdam, Netherland while that of "Domino's Pizza India Limited" is Nehru Place, New Delhi and head office at NOIDA, State of Uttar Pradesh. 30. The name of Company, M/s "Domino's Pizza India Limited" changed to "Jubilant Foodworks Limited", i.e., J.F.L. This change was authorized by shareholders in general meeting dated 16.09.2009 but when thi .....

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ference places. It is also evident from record that initial letter dated 23.09.2009, referred to in para 4 of writ petition, is not by JFL since by that time change of name of Company has not attained finality. Letter dated 23.09.2009 was sent by M/s "Domino's Pizza India Limited" and from reading of entire document page 83 and 84 of paper book, it appears to have been signed on 23.09.2009 by authorized signatory for "Domino's Pizza India Limited" at its Registered Of .....

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o M/s Domino's Pizza India Limited at its Registered Office or Head Office at NOIDA. 33. Basic facts pleaded by learned counsel for petitioner that agreement dated 23.09.2009 was entered at Netherland is contrary to record. 34. In the present case, right to use goods constitute a brand name "DOMINO'S PIZZA". This right was transferred by agreement dated 23.09.2009/ 01.10.2009/ 02.10.2009. As we have already said, record does not show that agreement was executed at Netherland. O .....

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to show that correspondence or whatever action it had taken, was at any other place than NOIDA. 35. In the entire writ petition the only pleading with regard to place of execution of contract is that it was entered at Netherland, i.e., outside India vide Master Franchise Agreement dated 23.09.2009 between petitioner and JFL. This is what has been said in para 4 of the writ petition. Nothing further has been pleaded in entire writ petition. Master Franchise Agreement, as we have already noticed, .....

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2.10.2009. This is evident from page 119 of paper book. 36. Clause 32 of this agreement says that agreement shall take effect upon its execution between parties. There is a covering letter appended to said agreement on page 83 of paper book, sent by Authorized Signatory for Domino's Pizza India Limited on 23.09.2009 to Franchiser/DPOF c/o Equity Trust Co. N.V., Amsterdam (Netherlands) and IP Holder, Michigan (USA). The said covering letter requests aforesaid two Companies to convey their con .....

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ot;) defines contract as, "an agreement enforceable by law". An agreement becomes a concluded contract when proposal is accepted and communicated to proposer. When communication is completed, provided in Section 4 of Act, 1872. It reads as under: "4. Communication when complete.-The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance is complete- as against the proposer, when it is put in a cou .....

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ion 4 of Act, 1872 to show, when communication of acceptance would complete and reads as under: "(b) B accepts A's proposal by a letter sent by post. The communication of the acceptance is complete, as against A. When the letter is posted; as against B, when the letter is received by A." (emphasis added) 40. When a concluded contract will come into existence and where, in our view can be adjudicated by taking recourse to a three Judge's judgment in Bhagwandas Goverdhandas Kedia .....

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tinuously till the offer reaches offeree. The offeror thereby merely intimates his intention to enter into a contract on the terms of offer. Offeror cannot impose upon the offeree, an obligation to accept, nor proclaim that silence of offeree shall be deemed consent. A contract being the result of an offer made by one party and acceptance of that very offer by other, acceptance of offer and intimation of acceptance by some external manifestation which the law regards as sufficient, is necessary. .....

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offeror, unless he has waived such intimation, or the course of negotiations implies an agreement to the contrary." (emphasis added) 41. It was also observed that Act, 1872 does not deal expressly as to how it will be adjudicated where the contract is made. Sections 3 and 4 relate only with respect to communication, acceptance and revocation of proposals. Section 4 does not deal with place where a contract takes place, but with completion of communication of a proposal acceptance and revoc .....

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oposal is said to be accepted. A proposal when accepted, becomes a promise: clause (b). and every promise and every set of promises, forming the consideration for each other is an agreement: clause (e). An agreement enforceable at law is a contract: clause (k). By the second clause of Section 4, communication of an acceptance is complete as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor. This implies that where communication .....

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the person to whom it is made when it comes to his knowledge. 41A. Section 4 does not imply that the contract if is made qua proposer at one place and qua the acceptor at another place, it becomes complete as soon as acceptance is made by acceptor. Unless otherwise agreed expressly or by necessary implication by the adoption of a special method of intimation, when the acceptance of offer is intimated to the offeror. 42. Court in Bhagwandas Goverdhandas Kedia (supra) proceeded further and held t .....

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t the same place and parties are at different places, there is an exception where negotiation is by post. It has been held that contract is complete when acceptance of offer is put into a course of transmission to the offeror. Court summarized exceptions to general rule requiring intimation of acceptance, as under: "When by agreement, course of conduct, or usage of trade, acceptance by post or telegram is authorised, the bargain is struck and the contract is complete-when the acceptance is .....

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taneous communication of messages from a distance, does not alter the nature of conversation so as to make it analogous to that of an offer and acceptance through post or by telegraph. 46. Again a similar issue came up in Life Insurance Corporation of India Vs. Raja Vasireddy Komalavalli Kamba and others, 1984(2) SCC 719. It was held therein that acceptance must be signified by some act or acts agreed on by parties or from which the law raises a presumption of acceptance. That was a case relatin .....

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