VAT- Franchisee Agreement for Use of Trade Mark –Is Transfer of Right to Use Goods- Deemed Sales- Liable to VAT, s/s. 2(xx),(xliii) of The Kerala Value Added Tax Act, 2003
Facts
The petitioner company engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum ornaments, watches, etc., was the sole proprietor of the trade mark, ‘Malabar Gold’. The company had entered into franchisee agreements with several companies, situated inside and outside the State of Kerala and also abroad, as per which, on mutually agreed terms and conditions, these companies were allowed to use the trade mark owned by the petitioner. Franchisee services, being an activity attracting service tax under the Finance Act, 1994, the petitioner had obtained registration under section 69 of the Finance Act. For the year 2008-09, the petitioner received royalty of Rs. 3,27,68,607 from its franchisee companies for use of its trademark and for sharing business know-how and on this amount, they paid service tax. While so, the assessing authority issued notice stating that transfer of right to use any goods is taxable u/s. 6(1) of the Act and that, royalty received by the petitioner from its franchisees for use of its trade mark would attract VAT under entry 68 of the Third Schedule to the Act. On receipt of the notice, the petitioner contended that the transaction in question attracted service tax and payments of service tax and VAT are mutually exclusive and hence VAT is not payable.
Thereafter, the assessing authority passed the assessment order confirming the demand for Rs. 13,10,744 along with interest of Rs. 2,78,009 and also imposed penalty by a separate order. The petitioner company filed writ petition before the Kerala High Court to quash the assessment order as well as penalty order.
Held
From the constitutional and statutory provisions, it is clear that a transfer of right to use any goods for any purpose, for cash, deferred payment or other valuable consideration is deemed to be a sale for the purposes of the Act. In the pleadings in the writ petition itself, the petitioner company admitted that by virtue of the agreements entered into with their franchisees, the franchisees were authorised to use their trade mark and that in consideration thereof, they were receiving the agreed royalty. In such circumstances, it can be concluded that the trade mark of the petitioner is transferred to the franchisees for their use and the consideration received is the royalty paid to the petitioner. Such a transaction is a “deemed sale” as defined in section 2(xliii) of the Act read with Explanation V thereof.
The High Court further observed that as far as the requirement that transfer of trade mark to the transferees should be to the exclusion of the transferor is concerned, if the petitioner had a case that the franchisee has no exclusive right within the territory allotted to it, it was for them to plead and prove this contention. There was no such plea before the High Court and copy of the agreements were not even been produced before the Court. Further, the specimen franchisee agreement, made available by the counsel for petitioners before the Court, showed that the franchisee had undertaken not to use the showroom for any purpose or activity other than that were provided in the agreement and to stock only products authorised by the petitioner. In such circumstances, the High Court held that even according to the petitioner, the trade mark had been transferred for the use of their franchisees for royalty paid on terms which are agreed between the parties. Therefore, the contention with respect to nonexclusive transfer of right was not accepted by the Court.
The High Court further held that royalty received is liable to be taxed under the Act and the court was not called upon to decide the legality of the levy of service tax on the royalty received by the petitioner. Therefore, if the petitioner had a case that levy of service tax is illegal for any reason; it is up to them to challenge the levy in appropriate proceedings. Accordingly, the High Court dismissed the writ petition filed by the petitioner company.
