No VAT on brand franchisee fee without transfer of effective control over brand

CA Bimal Jain

State of Karnataka, Bangalore Vs. United Breweries Ltd. [(2015) 63 taxmann.com 41 (Karnataka)]

United Breweries Limited (“the Respondent”) being owner of Kingfisher Brand entered into contracts with certain Contract Bottling Units (“CBUs”) for manufacturing of beer.

In terms of the contract:

• The Respondent transferred know-how for manufacturing beer to CBUs which was on non-assignable, non-transferable and non-exclusive basis;
• The CBUs manufactured beer as per the specifications given by the Respondent using his trade marks, names and logos and the entire production was made available to the Respondent;
• The right to market, sell, distribute and package the beer remained under the supervision and control of the Respondent;
• The CBUs neither had any right over the product, nor did they have any right to sell or exploit the beer so produced, nor fix any price of the product.

The Respondent received payments from CBUs as ‘brand franchise fees’ and paid Service tax on the same. However, the Assessing Officer levied Sales tax on such payments by treating these as royalty.

The Hon’ble High Court of Karnataka held that it is settled law that Sales tax can’t be attracted until effective control is transferred. Since CBUs did not get effective control over the brand name as such, it could not be considered as sale of intangible goods. It was further held that since the Respondent had already paid Service tax on the amount received as brand franchise fees, double taxation on same goods is not permissible.