Introduction Transfer of right to use any goods for any purpose’ (Lease) is deemed to be a sale and liable to tax under VAT/CST Acts. Nature of lease transaction is not defined under Constitution of India or under Sales Tax Laws. Thus, the nature is required to be ascertained in light of judicial pronouncements. A few important judgments in relation to above issue can be noted as under:
Dukes & Sons (112 STC 370)(Bom) This is one of the earliest cases dealing with nature of lease transaction vis-à-vis intangible goods. In this case, the issue before Bombay High Court was about tax on royalty amount received for leasing of Trade Mark. The argument was that since the trade mark is not given for exclusive use to one party, but is given or capable of being given for use to more than one party, there is no lease transaction. The requirement of exclusive use or exclusive possession to transferee was emphasised before the High Court. However, the Bombay High Court held that since the nature of goods, in this case, is intangible goods the condition of exclusive use cannot apply. Accordingly the High Court held that even if the goods i.e. trade mark is leased to more than one party still the transaction is taxable.
Bharat Sanchar Nigam Ltd. (145 STC 91)(SC) This is the latest case in the series from Hon. Supreme Court. This is a Larger Bench judgment. The issue in this case was about levy of lease tax on services provided by Telephone Companies. Supreme Court held that no such tax is leviable as the transaction pertains to service. While holding so, one of the learned judges on the Bench observed as under in para 98 of the judgment about nature of taxable lease transaction:
“98. 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 transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a licence to use the goods;
e. Having transferred the right to use the goods, during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”
Thus the nature of lease transaction is required to be decided in light of above parameters.
Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004 dt. 25-11-2008)
The facts in this case were that the dealer was holding registered Trade mark “Smokin Joes” and allowed its use to its franchisees. The franchise agreement provided for non exclusive right to use the registered Trade mark. The agreement also provided for providing various services to Franchisee. Lower authorities held the transaction as taxable lease transaction. Tribunal made reference to judgments in case of Gujarat Bottling Co. Ltd. (AIR 1995 Supreme Court 2372) and Bharat Sanchar Nigam Ltd. (145 STC 91) and came to the conclusion that in the given circumstances the transaction of franchise of trademark is not lease transaction but amounts to licensing transaction. At a time more than one franchise agreement can be entered into in respect of same trademark. Hence, it is a licence transaction and not lease. Therefore, Tribunal has held that no tax is payable on above transaction under Sales Tax Law. In this case Hon. Tribunal, though it referred to the Bombay High Court’s judgment in case of Dukes and Sons, in light of judgment of Hon. Supreme Court in BSNL held that the transaction is not lease transaction.
Subsequent to the above judgment there is also a judgment of Hon. Andhra Pradesh High Court in case of Nutrine Confectionery Co. Pvt. Ltd. vs. State of Andhra Pradesh (40 VST 327)(A.P). In this case, the transaction was for allowing use of trade mark. The said use was also on non exclusive basis. Still Hon. High Court has held that the transaction is lease transaction. Hon. High Court felt that the judgment of BSNL about exclusive use could not apply in relation to intangible goods like trade mark.
Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer, Kozhikode (2013-VIL-49-KER-ST dt.24.6.2013).
This is the latest judgment of Kerala High Court. In this case, the transaction was about granting of franchise right on non exclusive basis. Hon. High Court has held that when the grant of franchise is non exclusive it is not lease transaction and not liable to VAT. In this judgment Hon. Kerala High Court has distinguished the judgment of Hon. Andhra Pradesh High Court in above case of Nutrine Confectionery Co. Pvt. Ltd. on the ground of difference in terms of agreement. Hon. Kerala High Court has also referred to Supreme Court judgments about non attraction of Service tax and VAT on same transaction. The observations of the Hon. High Court are as under:
“44. The issue therefore can be considered in the light of the dictum laid down in BSNL’s case (supra). 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 u/s. 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 other premium fashion accessories.
v. Any other items introduced by MALABAR GOLD in future.”
Clause 2 under the heading “Products” will show that the franchisee cannot stock, exhibit or sell any products in the authorised showroom during the period of the agreement except the products authorised by Malabar Gold, which may include products manufactured or sourced by Malabar Gold. Therefore, the same will definitely satisfy the meaning of ‘franchise’ as contained in section 65(47) of the Finance Act, 1994. The learned Special Government Pleader for Taxes referred to the agreement herein and said that no service is referred to in the clauses therein.
We do not agree, in the light of clauses 3, 4 and 5 of the model agreement as already noticed.
Since what is termed as ‘taxable service’ is any service to be provided to a franchisee by a franchisor in relation to a franchise, the terms of the agreement will have to be understood in that context.
45. In the light of the principles stated in para 98 of the judgment in BSNL’s case (supra), the provisions of the agreement, especially clauses (3) and (5) will show that the franchisor retains the right, effective control and possession and it is not a case of transfer of possession to the exclusion of the transferor. We notice that under clause (12) the franchisee has no right to sub-let or sub-lease or in any way sell, transfer, discharge or distribute or delegate or assign the rights under the agreement in favour of any third party, which is also significant. On termination of the agreement also, going by clause 25.3, the franchisee shall forfeit all rights and privileges conferred on them by the agreement and the franchisee will not be entitled to use the trade name or materi-als of “Malabar Gold”. Merely because, going by clause 18, the franchisee is not an agent, it will not get any other exclusive right.
46. Since this Court in the two judgments relied upon by the learned Special Government Pleader, viz. Jojo Frozen Foods (P) Ltd.’s case {(2009) 24 VST 327} and Kreem Foods (Pvt.) Ltd.’s case {(2009) 24 VST 333} had no occasion to consider Entry 97 and the provisions u/s. 65(105)(zze) of the Finance Act and the definition of franchise and franchisor u/s. 65(47) (48) of the Finance Act, and those judgments related to transactions of pre 2003 period, we are of the view that the same are distinguishable on the facts of this case.
The judgment in Mechanical Assembly Systems (India) Pvt. Ltd.’s case (supra), as we have already explained, is a case of exclusive transfer of know-how.
47. One of the judgments relied upon by the learned Special Government Pleader for Taxes is that of the Andhra Pradesh High Court in Nutrine Confectionary Co. Pvt. Ltd. vs. State of Andhra Pradesh {(2012) 20 KTR 38}. Therein, the transaction involved is by way of an agreement between the petitioner company and the assignee companies and a royalty of Rs.500/- per ton of production by the assignee, has been granted to the petitioner company for the use of trademark and logo for the goods. The matter was considered u/s. 2(h) of the Andhra Pradesh General Sales Tax Act, 1957. The Bench was of the view, after going through the terms of the agreement, that “the assignee is free to make use of the trademark and logo. The petitioner does not in any manner regulate the use of trademark or logo although, “keeping in view the facilities available with the assignee, the petitioner undertook to suggest suitable terms provide formulas and recipes and suggest locations for marketing.” After analysing the agreement therein, it was held that the consideration received as royalty, is taxable u/s. 5E of the Andhra Pradesh General Sales Tax Act. We have already analysed the terms of the agreement herein. Even though learned Special Government Pleader for Taxes placed heavy reliance on the judgment in Nutrine Confectionery Co. Pvt. Ltd.’s case (supra), we are of the view that the same is distinguishable on the facts of the said case and in the light of the provision u/s. 5E of the Andhra Pradesh General Sales Tax Act also.
48. Therefore, even though both sides relied upon the provisions of Articles 246 and 254 of the Constitution of India, we need not enter into a finding on the said question, as we are of the view that the tests laid down in BSNL’s case (supra) are squarely applicable here. Herein, it cannot be said that there are goods deliverable at any stage which is the test laid down by the Apex Court in paragraphs 78 and 79 of BSNL’s case (supra) and for that reason also, there is no transfer of right to user at all. Coupled with the same, is the fact that during the period in question the franchisee is having the right, it is not to the exclusion of the franchisor and as it is seen that even during the period during which the transaction is going on, the franchisor can again transfer the right to others, the tests laid down in sub paragraphs (d) and (e) under para 97 of BSNL’s case (supra) are not satisfied.”
Thus the position about nature of lease transaction vis-à -vis intangible goods can be said to be fluid and more light needs to be thrown by the Bombay High Court so far as Maharashtra State is concerned. However, from overall discussion it can be said that the latest judgment of Kerala High Court in Malabar Gold Pvt. Ltd. has interpreted the legal position from various angles which can be considered as guiding judgment.
