Introduction: Intangible or incorporeal rights such as patents, trademarks, computer software etc. are characterised as goods. It was observed in Vikas Sales vs. Commissioner of Commercial Taxes (1996) 102 STC 106 (SC) that since incorporeal rights are capable of transfer and transmission they are movable property and therefore included in the ambit of goods. In Commissioner of Sales Tax vs. Duke & sons Pvt. Ltd. (1999) 112 STC 370 (Bom), upholding applicability of sales tax, the Court held, “the manner of transfer of the right to use the goods to the transferee would depend upon the nature of the goods…… For transferring the right to use the trademark it is not necessary to handover the trademark to the transferee or give control and possession of trademark to him, it can be done merely by authorizing 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 trademark can be transferred simultaneously to any number of persons” Also in SPS Jayam & Co. vs. Registrar, Tamil Nadu Taxation Special Tribunal & Others (2004) 137 STC 117, it was held that trademark is intangible goods which is subject matter of transfer. Giving permission to use trademark for a particular period while also retaining this right to use such trademark for self-use or to be able to grant license to some other person simultaneously is only a transfer of right to use and not merely a right to enjoy. It was observed that simply by retaining the right for oneself to use the trademark while granting permission to others to use the trademark, it would not take away the character of the transaction as one of transfer of right to use. This view was also echoed by the Andhra Pradesh High Court in G.S. Lamba & Sons vs. State of A.P. 2012-TIOL-49-HC-AP-CT that levy of tax under Article 366-(29A)(d) of the Constitution of India is not on the use of goods but on the transfer of right to use goods which accrues only on account of transfer of such right. Transfer of Right is sine qua non for the right to use any goods and such transfer takes place when a contract is executed under which the right is vested in the lessee. G.S. Lamba (supra) however involved providing tangible goods on hire.
Nevertheless, considering a significant tax potential in the transactions involving intangible goods, the Central Government incorporated section 66(55b) in the Finance Act, 1994 from September 10, 2004 in terms of which “intellectual property service” was defined as one which means a) transferring whether (permanently or otherwise) amended from 16/06/2005 as temporarily or (b) permitting the use or enjoyment of any intellectual property right”. This category of service in its new version under the negative list based taxation in force from 01/07/2012 appears as declared service in section 66E(c) as “temporary transfer or permitting the use or enjoyment of any intellectual property right.”
At this point, it must be noted that mutual exclusivity of VAT and service tax has been envisaged in Imagic Creative P. Ltd. vs. CCE 2008 (9) STR 337 (SC) by the Supreme Court. So also, in Bharat Sanchar Nigam Ltd. & Anr. vs. UOI & Others 2006 (2) STR 161 (SC), it was held that value of service cannot be included in the sale of goods or the price of goods in the value of service. Further, in the case of Bharat Sanchar Nigam Ltd. (supra), a test was laid down to determine whether a transaction is for transferring right to use goods as provided below:
“Para 97
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 statue – viz. a “transfer of the right to use” and not merely a license 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”. (emphasis supplied)
Thus the test of exclusivity is laid down by the Supreme Court. This criteria is followed in a large number of decisions. However, the Courts have distinguished in a few others leading to a controversy whether the transaction involves transfer of right to use and thus a deemed sale liable for sales tax/VAT tax or a service liable for service tax.
Key Rulings of the Courts: Test of Exclusivity
In the case of Nutrine confectionary Co. Pvt. Ltd. vs. State of Andhra Pradesh (2012) 21Taxmann.com 555 (Andhra Pradesh), the petitioner allowed the right to use a trademark on non-exclusive basis, against payment of royalty. The dispute related to whether or not there was transfer of right to use goods. Relying on State of Andhra Pradesh vs. Rashtriya Ispat Nigam Ltd. (2002) 126 STC 114 (SC) it was observed that ‘assignee’ was free to make use of the trademark and logo and had full control over such use. The petitioner did not in any manner regulate the use of trademark or logo by the assignee and also used trademark for its own use. These facts did not mitigate in favour of the petitioner. Distinguishing the BSNL’s case, the Court observed, “BSNL dealt with a case of mobile connections. It is not a case of transfer of trademark or logo. The contract for providing a mobile connection invariably contains a clause that the licensee shall use a mobile connection exclusively for himself/herself and nobody else would use. In the case of trademark, the same can be used by an assignee without any exclusive right. This itself does not remove the transaction under the agreement outside the purview of section 5E” and therefore liable for sales tax (VAT). (Note: Section 5E of the GST Act overrides all other provisions of the said Act when it is the case of transfer of right to use any goods). Not in line with this, a Division Bench of Kerala High Court in Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer (2013) 35 Taxmann. com 569 (Kerala) while analysing an agreement for franchise followed the dictum of Bharat Sanchar Nigam Ltd.’s case (supra) after considering various cases including Rashtriya Ispat Nigam (supra), Duke & Sons Pvt. Ltd. (supra), SPS Jayam & Co. (supra) and even the above Nutrine’s case (supra). In this case, the assesse engaged in the business of marketing, trading etc. of gold and diamond jewelery under the brand “Malabar Gold”, received royalty under a franchise agreement containing various clauses including permitting the use of trademark. The assessee paid service tax on royalty receipts under franchise service. The VAT department considering the use of trademark as transfer of right to use trademark demanded VAT . The clauses in the franchise agreement were examined in detail by the Court. In spite of the revenue’s heavy reliance interalia on the above Nutrine’s case (supra), the facts were distinguished observing that Nutrine’s case was decided because of applicability of section 5E of the Andhra Pradesh General Sales Tax Act and the Court held that the test laid down in BSNL’s case (supra) squarely applied as there were no deliverables at any stage and the right was not transferred to the exclusion of the franchisor, who could transfer the same right simultaneously to others and thus the test laid down in BSNL judgment was not satisfied. The Court also distinguished two earlier decisions of Kerala High Court itself viz. Jojo Frozen Foods Pvt. Ltd. vs. State of Kerala (2004) 24 VST 327 (Ker) and Kareem Foods Pvt. Ltd. vs. State of Kerala (2009) 24 VST 333(Ker.) on the ground that in these cases, there was no occasion to consider either Entry 97 of LIST-I under the 7th Schedule of the Constitution or the service tax provision u/s. 65(105)(zze) of the Finance Act,1994 in respect of franchise service brought in the law from 2003, as the cases were of pre-2003 period and service tax is correctly paid as the transaction is of franchise service. Yet in another case relating to franchise viz. Vitan Departmental Stores & Industries Ltd. vs. The State of Tamilnadu 2013-TIOL-897-HC-MAD-CT, the agreement related to granting exclusive right to operate departmental store for a specified period. The High Court held that the transaction was not a mere license or mere right to enjoy but a transfer of right to use intangible goods as the right was provided to operate the store on exclusive basis. In a recent decision of Tata Sons Limited & Another vs. The State of Maharashtra 2015-TIOL-345-HC-MUMCT, the decision in Bharat Sanchar Nigam Ltd. (supra) was distinguished observing that the controversy dealt with in this case related to telephone service and not similar to issue of trademarks and held that in relation to intangibles such as trademarks, the transfer of right to use need not be exclusive and unconditional and such transaction is capable of multiple transfers and transferor continuing to use goods such as trademarks would constitute sale exigible to the State value added tax.
Thus the question that arises is whether the test laid down by the Supreme Court in BSNL’s case (supra) is required to be followed even in the case of intangible goods or whether it applies only to the transfer of right to use tangible goods and distinguishable for determination of transfer of right to use intangible goods. Consequently, the issue is whether it is simply on account of the inherent nature of the intangible goods which allows simultaneous use by multiple persons that a transaction cannot be treated as sale or simply because the service tax law now contains provisions to tax the transaction as ‘service’, the transaction is held as service and not as deemed sale. In this context, it is apposite to discuss one more decision in AGS Entertainment Pvt. Ltd. vs. Union of India 2013 (32) STR 129 (Mad) wherein validity of provisions of section 65(105)(zzzzt) of the Finance Act,1994 (dealing with the service of temporary transfer or permitting the use or enjoyment of any copyright) was examined. In this case, a service provided by producer/distributor/exhibitor was challenged on the ground that transfer of right to use the goods amounted to sale and not service. The High Court followed BSNL’s case (supra) to contend that ”the temporary transfer of copyright did not satisfy principles laid down in BSNL’s case (supra) and it is neither a sale nor a deemed sale. Service tax is a levy on “temporary transfer” or “permitting the use or enjoyment” of the copyright as defined under the Copyright Act, 1957. In the case of Sales Tax Act, there would be “transfer of right to use goods” whereas under the Service Tax Act what is levied is temporary transfer/ enjoyment of the goods. The pith and substance of both enactments are totally different. “Temporary Transfer” or “permitting the use or enjoyment of the copyright is not within the State’s exclusive power under Entry 54 of List-II.”
Conclusion:
The issue thus remaining open is whether the test of exclusivity laid down in BSNL’s case is applicable to intangibles or is the decision distinguishable for transfer of right to use intangibles. Also whether there is a difference between granting permission to use and transfer of right to use. If transfer of use necessarily involves transfer of right to use whether the goods are tangible or intangible, the levy of service tax has no place. When any of the matters reaches Supreme Court, it would have to decide these issues among others. In the interim, the Courts would have other cases to decide with new perspective to the controversy when the facts are different and therefore in spite of paying one of the two taxes, the assessee may have to face litigation initiated by the other authority.
