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TMI Blog2024 (5) TMI 1268X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax has to be levied on it. 3. Against the order of the first appellate authority, the dealer/respondent had gone into appeal before the Commercial Tax Tribunal. Relying upon the judgment of Delhi High court in M/s Mc Donalds India Pvt. Ltd. V. Commissioner of Trade Taxes New Delhi reported in 2017 (5) GSTL 120, the Commercial Tax Tribunal held that since the franchise of trademark can be transferred to several persons at the same time, it is merely a license to use the goods and not a transfer of the exclusive right to use the goods, and therefore, no Value Added Tax can be levied on the same. It is this order which is assailed before this Court. CONTENTIONS OF THE REVISIONIST 4. Mr. Bipin Kumar Panday, learned Standing Counsel appearing on behalf of the revisionist has made the following submissions before this Court: a. Once the copyright has been transferred and royalty amount has been received in lieu of the same, it becomes taxable under the provisions of the Act because entry at Serial No. 3 in Part A of Schedule- II of the Act makes clear that "All intangible goods like copyright, patent, rep. license etc; transfer of right to use of goods" are taxable. b. It is furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement. In view of this fact, no intention to evade tax on the part of the respondent can be inferred. e. Finally, he argues that Service Tax and VAT are mutually exclusive levies and a single consideration cannot be subjected to both the levies. To buttress his argument, he relies upon the judgment of the Hon'ble Supreme Court in case of Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes reported in (2008) 2 SCC 614. ANALYSIS 6. I have heard the learned counsels appearing for the parties and perused the materials on record. 7. The pivotal issue revolves around whether the franchise of a trademark constitutes a transfer of the right to use goods, thereby making it subject to VAT. 8. Section 65(47) of the Finance Act, 1994 which is relevant to the instant issue is extracted herein: "65(47) "franchise" means an agreement by which- (i)Franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved; (ii) The franchisor provides concepts of business operation to franchise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. In case of tangible property, handing over of the property to the transferee may be essential for the use thereof. All that will depend upon the nature of the goods. Take for instance, transfer of right to use machinery. The right to use the machinery cannot be transferred by transferor to the transferee without transfer of control over it. The case before the Andhra Pradesh High Court in Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer was a case of transfer of right to use machinery. It was in that context, the above decision came to be rendered. But the position in case of trade mark is different. For transferring the right to use the trade mark, it is not necessary to hand over the trade mark to the transferee or give control or possession of trade mark to him. It can be done merely by authorising the transferee to use the same in the manner required by the law as has been done in the present case. The right to use the trade mark can be transferred simultaneously to any number of persons. The decision of the Andhra Pradesh High Court in Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer thus has no application to the transfer of right to use a trade mark." 10. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fers should be viewed as the transfer of the right to use, rather than a mere license for enjoyment. However, these judgments must be re-evaluated in the context of Finance Act, 1994, which introduced specific provisions for the taxation of franchises. The legislative intent behind this Act was to bring clarity and uniformity to the taxation of service-based transactions, which had become increasingly prevalent with the rise of franchising as a business model. Finance Act, 1994 delineated the boundaries of what constitutes a taxable service in the realm of franchising, thereby superseding earlier judicial interpretations that did not account for this legislative framework. 12. The judgments in Duke & Sons (supra) and S.P.S. Jayam (supra) were rendered in a legal landscape where the specific nuances of franchising agreements were not explicitly covered by the prevailing tax laws of the assessment periods that the High Courts in those cases were dealing with. The assessment year under challenge in S.P.S. Jayam (supra) was 1987-88. The order impugned in Duke & Sons (supra) dated back to 1989. 13. With the introduction of the Finance Act, 1994, the legal foundation has shifted. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, is involved. Thus, by definition, the franchise agreement grants only a representational right and not an exclusive right to sell/ manufacture goods. Further, the provisions of the franchise agreements are only to the effect of giving the franchisee the non-exclusive right to use, for instance, as was reiterated in clause 11(d) of the MLA (of McDonald's) as below : "Franchise and joint venture partner shall acquire no right to use, or to license the use of, any name, mark or other intellectual property right granted or to be granted herein, except in connection with the operation of the restaurant." *** 42. Under trade mark law in India, trade mark use even for advertisement purposes is to be preceded by prior consent of the proprietor and any unauthorized use of the trade mark without such prior permission of the proprietor could lead to an infringement of the trade mark (in India, under section 29 of the Trade Marks Act, 1999). The function of the MLA and other franchise agreements in the case of petitioners and the trade mark licensing agreement (in the case of GSK) was (a) to provide for a strictly limited usage of the marks, i.e., only for advertisement and promot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he brand or mark, associated with the product, constitutes the sale rather than from sale of the underlying goods or services that are the subject of the trade mark (dishes in a restaurant) themselves. It would be incorrect, therefore, to conclude what is involved is not the sale of the product, but the intangible property or mark connected with the reputation of the mark, though that reputation guarantees a high demand for the product, from which the seller benefits. Likewise, in the case of distribution, a distribution agent is under an agreement with the manufacturer to sell its goods ; it also possesses the right to advertise the goods and brands of the manufacturer. This implies a licence of the manufacturer's trade mark. In such an event, the distributor need not pay for the right to use the intellectual property under which the goods are sold; he merely pays for obtaining the commercial right to sell the goods he buys from the manufacturer for enabling onward sale. *** 47. For a transfer of the right to use goods to be effective, such transfer of right should be one that the transferee can exercise in exclusion of others; which is not the case in the present appeals a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .'s case [2006] 3 VST 95 (SC); [2006] 145STC 91 (SC); [2006]282 ITR 273 (SC); (2006) 6 RC 276; (2006) 3 SCC 1. Herein, the term "franchise is included in section 65(105)(zze) of the Finance Act. The same is a taxable service and the taxable event is the service rendered by the company. Thus, any service provided or to be provided to a franchisee will come within the purview of the said provision. The meaning of the terms franchise and franchisor under section 65(47) and (48) are also important. Going by the definition of franchise, it is an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved. The terms of the agreement herein will show that Clause II of the Preamble has specifically given under items (i) to (v) the activities to be carried out by the franchisee which are as follows : "(i) Retailing of gold ornaments. (ii) Retailing of diamond and other precious stone ornaments. (iii) Retailing of premium watches. (iv) Retailing of platinum and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the royalty paid to the appellant. In para 17, the principles stated in Bharat Sanchar Nigam Ltd.s case [2006] 3 VST 95 (SC); [2006]145 STC 91 (SC); [2006] 282 ITR 273 (SC); (2006) 6 RC276; (2006) 3 SCC 1 were distinguished on the facts of the said case and it was held that in the said case the court was not dealing with a case involving transfer of intellectual property rights such as trade mark. It was held that there is total transfer of trade mark on payment of royalty which alone will attract the provisions of the KVAT Act. With great respect, we are unable to agree with the same. 68. Accordingly, we allow the appeals reversing the judgment of the learned single judge* and hold that the franchise agreement will not attract the provisions of the KVAT Act. No costs." 19. Commercial transactions primarily revolve around tangible items, with trademarks serving as valuable assets that contribute to the overall value and demand of products or services. However, as highlighted by the Delhi High Court in McDonald's (supra), since, a franchise agreement grants only a non-exclusive right, it does not constitute a transfer of the right to use goods. As defined by the Finance Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can result in the revocation of the license. This level of control is indicative of a licensing arrangement rather than a transfer, where the new owner would have the autonomy to use the trademark without such restrictions. In contrast, a transfer or assignment of a trademark involves transferring all rights associated with the trademark to the transferee. This includes the right to use, license, and enforce the trademark. Once transferred, the original owner relinquishes all control and ownership rights over the trademark. This kind of transaction is more straightforward in terms of taxation as it involves a clear transfer of an asset, typically subject to sales tax or capital gains tax depending on the jurisdiction and the specifics of the transaction. 23. Enter the protagonists, the franchisors, and franchisees, each adorned with their roles and responsibilities. The franchisor, akin to the playwright, holds the script of the brand, trademarks, and business model, while the franchisee, like the eager actor, steps onto the stage with dreams of entrepreneurial success. Together, they form a dynamic duo, ready to bring their shared vision to life. As the plot thickens, the script ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These rights include trademarks, trade names, logos, and proprietary business methods. Unlike tangible goods, which can be bought and sold outright, intellectual property rights are licensed for use under specific terms and conditions. Another key factor that distinguishes franchise agreements from sales transactions is their non-exclusive nature. Franchise agreements typically grant franchisees the right to operate a business using the franchisor's brand and system within a defined territory. However, this right is not exclusive, as the franchisor may grant similar rights to other franchisees within the same or overlapping territories. Franchise agreements also entail an ongoing relationship between the franchisor and franchisee, characterized by training, support, and ongoing assistance. Unlike a one-time sale of goods, which concludes once the transaction is complete, franchise agreements involve continuous interaction and collaboration between the parties. The financial aspects of franchise agreements further underscore their distinction from sales transactions. Franchise fees and royalties are payments made by the franchisee to the franchisor in exchange for the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list but not including fees taken in any court. List I and List II of Schedule VII thus avoid overlapping powers of taxation and proceed on the basis of allocating adequate sources of taxation for the federation and the provinces, with the result that few problems of conflicting or competing taxing powers have arisen under the Government of India Act, 1935. This scheme of the legislative lists as regards taxation has been taken over by the Constitution of India with like beneficial results." *** 46. Therefore, taxing entries must be construed with clarity and precision so as to maintain such exclusivity, and a construction of a taxation entry which may lead to overlapping must be eschewed. If the taxing power is within a particular legislative field, it would follow that other fields in the legislative lists must be construed to exclude this field so that there is no possibility of legislative trespass." 29. It is clear from the factual matrix of the instant case that the respondent herein had received royalty amount from various dealers under the franchise agreement and service tax has been duly paid by it on the same. If these payments have been subjected to service tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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