TMI Blog2018 (2) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case is an agreement of permissive use of the trade mark Swastik and no transfer of right to use of the said trade mark - the said transaction is liable to Service Tax under Finance Act, 1994. Extended period of limitation - Held that: - It is a fact that in their Service Tax-3 returns for the relevant period, the Appellant had willfully mis-stated that they have received zero amount towards provision of this service - willful mis-statement on the part of the appellant stands established and thus extended period has been correctly invoked. Penalty - Held that: - the elements for imposing the penalty are identical to those necessary to invoke the extended period of limitation. In these circumstances, no separate specific findings are needed for imposition of penalty under Section 78 of the Finance Act, 1994 - penalty upheld. Appeal dismissed - decided against appellant. - ST/85557 & 85558/14 - A/85255-85256/18 - Dated:- 31-1-2018 - Shri Ramesh Nair, Member ( Judicial ) And Shri Raju, Member ( Technical ) Shri Bharat Raichandani, Advocate for Appellant Shri Dilip Shinde, Asstt. Commr. ( AR ) for Respondent ORDER Per: Raju These appeals have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he physical control and possession of the petitioner at all times and there was neither any physical transfer of such goods nor any transfer of the right to use such equipment or apparatuses. One of the issues that arose for consideration was whether there was any transfer of the right to use goods by providing access or a telephone connection by the 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., one that admits of no variance. As discussed above, we do not think this can ever be the a correct reading of BSNL. In para 38 captured above, Hon'ble High Court was responding to the argument presented in para 27 of the said decision, which read as follows: - 27. Mr. Venkatraman concludes his summation of the law on the transfer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement were as follows: - Company hereby confirms to use of trademark namely Swastik on the following terms and conditions:- 1. You have agreed to permit us for our use of trademark namely Swastik in manufacturing, selling, marketing and other allied business activities for a period of ten years commencing from 1st January 2006. 2. A company will pay a license fee for use of trademark @ 0.1% of its sales. 3. The company shall pay the monthly license fee regularly on or before 15th day of succeeding month subject to tax deduction at source. 4. During the term of license, New Sahyadri Industries Ltd. shall use the trademark for its own business activities and shall not assign the trademark to any other party. 5. These understandings are for a period ten years, which may be renewed for further period on such terms and conditions as mutually agreed by both of us. Anyone of us shall be entitled to terminate this understanding by giving the notice to other party for the period not less than three months. 6. The Company shall be entitled to use the said trademark for the purpose of lawful business and shall not use the trademark for any other purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferee can exercise in exclusion of others; which is not the case in the present appeals and petitions, as the franchise agreement only grants a non-exclusive right, retaining the franchisor s right to transfer the composite bunch of services to other parties, apart from it retaining ownership to the same. The ownership in the trademark, logo, service marks, and brand name is solely vested in appellant and the petitioners and has not been transferred; as is clearly manifested in the various clauses of the franchise agreements. The appellant and the petitioners grant a non-exclusive license to the franchisees, which can be revoked upon non-compliance of the terms and conditions as stipulated in their franchise arrangement. Clearly, this does not amount to a transfer of the right to use goods. 47. The peculiarity of intangibles or incorporeal property, of the kind this Court has to deal with, i.e. intellectual property, is that unlike real property, its boundaries are unset. These rights are only real and effective to the extent they enable the owner or transferee to keep out from use those who are not permitted to do so. In other words, the nature of intellectual property a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 57. Mr. Shroff's argument on behalf of Subway is that the franchise agreement is not one for sale or transfer of right to use but merely permits the franchisee to display certain marks and to use certain technologies and methods in preparing the salads and sandwiches for sale. Therefore, he submits, it is liable to be taxed as a service, which Subway has been paying in any case. He adopts virtually all of Mr. Venkatraman s arguments. Mr. Shroff also refers to the cases of Tata Sons. He relies on these cases 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 Agreement, Mr. Shroff submits, and we agree with him, all the rights of the franchisee are terminated. A breach of the agreement also results in potential termination at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 given to the contracting parties intentions. The label or description of the document is irrelevant. An agreement styled as a franchise might, on a proper examination, turn out to be nothing more than a mere licence (as in Subway s case). On the other hand, an agreement that calls itself a licence might actually be a franchise. If, in a given case, a franchise agreement is effectively nothing more than a mere permissive use, it cannot be made liable to VAT. It would be a service, and hence liable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Legislature intended was to be included only those franchise agreements that involved a transfer of the right to use or some other aspect of a deemed sale as defined under Article 366(29A) of the Constitution. As discussed above, we find that 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. It is apparent from the above decision that the terms of agreement need to be examined in each case before the decision regarding leviability of VAT or Service Tax can be taken. Hon'ble Apex Court in the case of BSNL - 2006 (2) STR 161 (SC) had prescribed the following test: - 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration was whether there was any transfer of the right to use goods by providing access or a telephone connection by the 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., one that admits of no variance. As discussed above, we do not think this can ever be the a correct reading of BSNL. 4.2 From the above discussions, it is apparent that there are no universal tests for testing of levy of Sales Tax or Service Tax and each contract is to be examined with respect to its own terms. In this regard, the facts in the case of Mahyco Monsanto (supra) were as follows: - 11. The Petitioner in Writ Petition No. 9175 of 2015, Monsanto India, is a joint venture company of Monsanto Investment India Private Limited ( MIIPL ) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insects. Using biotechnology, Monsanto USA introduces a specific BT gene into the cotton genome. This produces a toxin protein in the cotton seed sufficient to kill specific insects, viz., boll weevils or bollworms. These Bollgard cotton seeds, called the donor seeds , containing the BT gene were initially imported by MHPL in India from Monsanto USA. MHPL also uses these seeds to produce more donor seeds in its facilities, and licences the technology to Monsanto India in return for a 16.5% royalty on the latter s turnover. The process thereafter is as follows. Monsanto India enters into sub-licensing 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 (Monsanto Petition, Exhibit D, pp. 44-69.). 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 seed companies to assist them in using the donor se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsee during the term of the agreement. 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 agreement, nor any additional donor seeds the sub-licensee may have produced. The control (and ownership) of the Bollgard Technology contained in those initial fifty donor seeds, as also in the additional donor seeds produced by the sub-licensee is with the sub-licensee. Monsanto India has nothing whatsoever to do with this portion of the technology. The only restriction appears to be on the sale of the GMO cotton planting seeds. The sub-licensee is given a two-years window to sell or otherwise 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a sale to each of them. In the case of CD containing software, say for example Microsoft Word, the medium would again be the CD holding the intellectual property, which would be the software technology. This would also be a sale, despite the fact that this same software technology could be put on unlimited number of CDs and sold to multiple users simultaneously. Effective control of that particular software on that one CD is passed 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 disqualify the transaction itself from being a sale. These are all sales. 42. In our opinion, the most fundamental aspect of permissive use of goods is that at the end of the period for which the use is granted, the goods must be returned to the transferor. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... franchisee. In return, the franchisee undertakes to carry on the business of operating sandwich shops in Subway s name. The agreement only provides for a very limited representational or display right, and the franchisee cannot transfer or assign these 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 not more than a right to display Subway s intellectual property in the form of marks and logos, and a mere right to use such confidential information as Subway discloses and as prescribed by the franchise agreement. Learned Counsel for M/s Subway elaborated the terms of contract in his own words as follows: - 58. Mr. Shroff formulates his case on several distinct grounds. First, the franchisee is entitled to display the name Subway only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which these franchisees operate [Subway Petition, Clause 11(l) of the Agreement, p. 46]. The franchisee cannot unilaterally sub-franchise [Subway Petition, Clause 9 of the Agreement, p. 42.]; if it could do without Subway s prior permission or leave, then the consideration might be wholly different and it may then be possible to say that there is a transfer of the right to use. We find that the right of transferability is extremely restricted and is impossible without Subway control throughout. Similarly, 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resumed 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 sweeping effect as to bring all franchise agreements within the ambit of the MVAT Act. Presumably, what the Legislature intended was to be included only those franchise agreements that involved a transfer of the right to use or some other aspect of a deemed sale as defined under Article 366(29A) of the Constitution. As discussed above, we find that 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. 4.5 In view of the above decision, we examined the terms of the contract in the appellant s case. The agreement reads as follows: - Company hereby confirms to use of trademark namely Swastik on the following terms and conditions:- 1. You have agreed to permit us for our use of trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ik and no transfer of right to use of the said trade mark. 4.7 In these circumstances, we do not find any merit in argument of the appellant that the said transaction is not liable to Service Tax under Finance Act, 1994. 4.8 Learned Counsel has further argued that they have paid VAT and therefore, no Service Tax can be demanded. It is not in the jurisdiction of this Tribunal to adjudicate on the leviability of VAT or otherwise. This Tribunal is competent to adjudge regarding leviability of Service Tax under the Finance Act, 1994 only. In these circumstances, in so far as the payment of VAT is concerned, the appellant may approach the appropriate authority. 4.9 Learned Counsel has further argued that the impugned order does not give any findings with respect to imposition of penalties. We find that the Commissioner (Appeals) in his order as observed as under: - 18. The appellant have contended that they had not suppressed the facts from the department, when they had produced all the documents before the investigating officers and the demand in the initial case (Appeal No. 191/2013) is hit by time limitation. I find that the appellant had obtained registration under t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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