Lease vis-à-vis License of Trade Mark

Thus certain guidelines are available from the above
observations. However still a difficulty is experienced in relation to
intangible goods like trade mark, copy rights, etc. In relation to tangible
goods there cannot be difficulty in applying above guidelines. But in relation
to intangible goods the difficulty persists mainly due to nature of intangible
goods. Tangible goods, once delivered to lessee, cannot be further delivered to
any other person simultaneously and the above guidelines can be applied very
easily. However, intangible goods can be allowed to be used by number of persons
at a time, unless exclusive transfer of right to use is made to one lessee. In
respect of such type of transactions, i.e., where intangible goods are
involved, in Maharashtra, there is direct judgment of the Bombay High Court in
case of Dukes & Sons (112 STC 370).

In this case the issue before the Bombay High Court was about
tax on royalty amounts 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 is capable of being given for use to more than one party, there is no lease
transaction. The transaction was referred to as Franchise transaction. The
requirement of exclusive use or exclusive possession to transferee, for
considering transaction as lease, was given stress 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 as lease transaction.

Therefore, there was a situation that in relation to
intangible goods, the transactions were considered to be lease transactions in
spite of non-exclusive transfer of right. This judgment was delivered on 22nd
Sep. 1998. Therefore, after having the judgment of the Supreme Court in BSNL,
delivered on 02nd March, 2006, it was a feeling that the above judgment in case
of Dukes & Sons cannot be a good law.

A similar issue has now been decided by the Maharashtra Sales
Tax Tribunal. The reference is to the recent judgment of the Tribunal in case of
M/s. Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004, dated 25-11-2008). In this case
the facts were that the appellant M/s. Smokin Joe’s was holding registered trade
mark for pizza i.e., “Smokin Joe’s”. The appellant has allowed this trade
mark to be used by others on franchise basis. In other words, due to franchise
agreement the franchisees were entitled to use the said trade name on their
premises as well as on the T shirts of the delivery boys, on packing materials,
etc. The appellant has entered into franchise agreement with such other parties
for above purpose. As per the franchise agreement, in addition to allowing above
use, the appellant has to provide number of other services, like helping in
layout of the premises, selection of raw materials, training to the staff,
instructions/know-how for method of manufacture of pizzas and delivery, etc. The
appellant was of the opinion that this is a licensing transaction and not a
lease transaction. In the alternative it was understood to be composite
transaction of lease and service and in absence of any authority to divide the
transaction into lease and service, it was considered as non-taxable transaction
under the then Maharashtra Lease Act. However for sake of legal order, an
application for determination was filed before the Commissioner of Sales Tax as
per the provisions of the Lease Act read with S. 52 of BST Act, 1959. In
determination order the Commissioner of Sales Tax held that the transaction is
covered by the Lease Act and hence liable to sales tax as leasing of trade mark.

In appeal before the Tribunal the appellant reiterated his
arguments. In addition, reliance was also placed on the judgment of the Supreme
Court in the case of Gujarat Bottling Co. Ltd. & Others (AIR 1995 Supreme Court
2372) where the nature of lease and licensing of trade mark has been discussed.
The appellant also relied upon judgment in the case of BSNL as referred to above
and also further fact that he is discharging liability under Service Tax
considering the transaction as of service. The clarification issued by the
Service Tax Authority, namely, vide Circular dated 28-6-2003, clarifying the
meaning of franchise was also relied upon.

The Tribunal made reference to the above position and came to the conclusion that in the given circumstances the transaction of franchise of trade mark is not lease transaction but amounts to licensing transaction. Therefore, the Tribunal held that no tax is payable on the above transaction under the Sales Tax Law.

The Tribunal in concluding Para observed as under:

“This Departmental clarification of the concerned authorities will be helpful to us to some extent to know the nature of the franchise agreement. It may be noted that in the franchise agreement as commonly understood the use of trade mark may not be involved. The basic equipment of franchisee agreement is that the franchisee has to follow the concept to business operation, managerial expertise, market techniques, etc. of the franchisor and to maintain standard and quality of such production as required by the franchisor. Thus only because the permission to use the trade mark has also been granted while entering into the franchise agreement, the said item of the agreement cannot be carved out from the main agreement of franchisee to hold that it as a transfer of right to use.

As such, after giving anxious consideration to all pros and cons of the matter, we are of the view that the impugned transaction does not involve the transfer of right to use the trade mark. It is a licence granted to use the trade mark simultaneously to various persons. It is a composite agreement of providing various services to ensure the standard and quality of the product in order to maintain the reputation of the franchisor and permission to use the trade mark is incidental. It is therefore, not covered under the Lease Act and the levy is not justified.”

In the light of above judgment of the Tribunal it can also be said that the judgment of Dukes & Sons is indirectly overruled by the judgment in the case of BSNL.The ratio of the above Tribunal judgment will also apply to many other intangible goods, like copyright, technical know-how, etc., if in relation to such transactions it can be shown that there is no exclusive right given to the lessee. It will not be a lease transaction, but it will be a licensing transaction not covered by Sales Tax Laws. In other words, the law explained by the Supreme Court in para 98 reproduced above will apply to all goods, whether tangible or intangible. The taxability as a lease transaction is to be decided in the light of above judgment of BSNL. This judgment will also clarify the position as to when a transaction will be other than lease, where Service Tax can be attracted.