Commissioner of Service Tax Vs Future Brands (CESTAT Delhi)
Held that in case of Trademark License Agreement an exclusive license to use the trademark is granted and hence the same is covered within the phrase “transfer of right to use the goods” and hence not leviable to service tax.
Facts-
The show cause notices had been issued to M/s. Future Brands Ltd alleging therein that the respondent had not paid service tax on the “right to use” component of the Trademark License Agreement executed on August 27, 2008 between the respondent and Pantaloon Retail (India) Ltd for brand ‘Ajile’. The Principal Commissioner, by the impugned order dated May 18, 2015, dropped the show cause notice. Accordingly, department preferred present appeal.
Conclusion-
Held that in the case of the Trademark License Agreement an exclusive license to use the trademark in any manner during the term of the agreement was granted. Such a license could not be granted to any other person during the period of the agreement. This would clearly fall within the meaning of the phrase “transfer of right to use the goods” and would be covered by article 366 (29A) (d) of the Constitution. Service Tax would, therefore, not be payable.
The Principal Commissioner, therefore, committed no illegality in holding that service tax could not be levied on the “right to use” component of the Trademark License Agreement.
FULL TEXT OF THE CESTAT DELHI ORDER
The Commissioner of Service Tax, Delhi-II1 has filed this appeal to assail the order dated May 18, 2015 passed by the Principal Commissioner of Service Tax, New Delhi2, by which the show cause notices dated April 24, 2014 and April 22, 2015 have been discharged.
The show cause notices had been issued to M/s. Future Brands Ltd3 alleging therein that the respondent had not paid service tax on the “right to use” component of the Trademark License Agreement executed on August 27, 2008 between the respondent and Pantaloon Retail (India) Ltd4 for brand ‘Ajile’.
2. The Principal Commissioner, by the impugned order dated May 18, 2015, dropped the show cause notice for the reason that the grant of license under the Trademark License Agreement would amount to deemed sale under article 366 (29A) of the Constitution and, therefore, could not be subjected to levy of service tax. In support of his contention, the Principal Commissioner placed reliance upon the judgment of the Supreme Court in Bharat Sanchar Nigam Ltd. vs Union of India5.
3. Shri Ravi Kapoor learned authorised representative appearing for the Department made the following submissions:
(i) The respondent had intentionally and deliberately bifurcated the gross value into two heads of royalty and right to use and had deliberately paid VAT on this portion of right to use in order to avoid paying service tax the rate of which was on the higher side as compared to VAT;
(ii) Bifurcation of income in two heads of royalty and right to use is arbitrary. Permission to use the brand is strictly according to the licensor’s guidelines and any benefit of goodwill created by licensee’s use is mandated to flow back to the licensor; and
(iii) Further, the fee payments towards license fee and additional license fee and terms and conditions do not indicate any consideration for sale. In this connection reliance has been placed on Eicher Good Earth.
4. Kumar Visalaksh learned counsel appearing for the respondent however supported the impugned order and made the following submissions:
(i) The transfer of right to use the Trademark on an exclusive basis, would qualify as ‘deemed sale’ under article 366 (29-A) of the constitution, thereby attracting the levy of VAT. Such transfer would be outside the purview of service tax;
(ii) An agreement is required to be read in a manner that it reflects the true intension of the parties thereto as regards the consideration agreed to be paid in return for the activities carried out under the agreement;
(iii) Service tax and VAT exclude each other and cannot be levied concomitantly on a transaction;
(iv) Incorporeal property such as ‘trademarks’ constitutes ‘goods’ for the purpose of the levy of VAT; and
(v) As for as the demand of Rs. 10,01,258/- for period April 2008 to September 2008 is concerned, thus it is beyond the limitation period of five years and hence, excludable.
5. In order to appreciate the submissions advanced by the learned authorized representative appearing for the Department and the learned counsel appearing for the respondent, it would be appropriate to refer to the relevant clauses of the aforesaid Trademark License Agreement dated August 27, 2008 between the respondent (referred to as the licensor in the Agreement) and Pantaloon Retail (India) Ltd. (referred to as the licensee in the Agreement). The relevant clauses are reproduced below:
“RECITALS:
A. WHEREAS, the Licensor is the proprietor of the Trademarks set out in Schedule 1 hereto (“Trademarks”) and applied for in respect of the classes of goods detailed therein; and
B. WHEREAS, the Licensee wishes to use the “Trademarks on an exclusive basis, in connection with the Products (defined below) manufactured by the Third Party Manufacturer and sold by the Licensee.
NOW THEREFORE, in consideration of, and subject to, the mutual covenants, agreements, terms and conditions herein contained, the Parties agree as follows:
xxxxx xxxxx
3. GRANT OF LICENSE
3.1 Grant of License
3.1.1 The Licensor grants to the Licensee, an exclusive license to use the Trademarks in any manner during the Term of this Agreement, on the terms set out in this Agreement.
3.1.2 The Licensee hereby acknowledges and agrees that any goodwill created by the Licensee’s exclusive use of the Trademarks shall inure to the sole and exclusive benefit of the Licensor.
3.1.3 The Licensee hereby agrees that the Trademarks shall not be used by the License in any manner prejudicial to the interest of the Licensor.
3.1.4 For the avoidance of doubt, the Trademarks licensed hereunder are exclusively licensed for use.
3.1.5 During the Term of this Agreement, the Licensor shall not grant to any third party, including any Future Group Companies, the license to use or enjoy the Trademarks in any manner.
3.1.6 During the Term of this Agreement, the Licensor shall not use or enjoy the Trademarks in any manner.
xxxxx xxxxx
5. LICENSEE’S RIGHTS AND OBLIGATIONS
5.1 The use of Trademarks by the Licensee shall be in conformity with the recommended brand usage guidelines. The brand usage guidelines as on the Effective Date are set out in Schedule 3 to this Agreement.
5.2 In the event that the Products are not in conformity with the brand usage guidelines, the Licensee shall take necessary steps to align the use of the licensed Trademarks with such guidelines. In the event the use of the Trademarks remain in non-compliance with the brand usage guidelines, even after the License has taken all necessary steps, the License shall cause the Trademarks to be permanently removed from such Products and/or any Packaging and Labels in relation thereto, prior to the distribution or sale or shall cause such Products and/or any Packaging and Labels in relation thereto be destroyed at the sole cost of the Licensee.
5.3 The Licensee agrees to retain test, process and final inspection records on Products bearing the Trademarks for the duration of the time stipulated by the Applicable Law but at least for a period of five five(5) years.
5.4 The Licensee shall during the Term of the Agreement maintain records of all Products manufactured, promoted, distributed or sold under the Trademarks.
5.5 The Licensee shall be entitled to use the Trademarks on an exclusive basis, in accordance with the terms of this Agreement and shall not allege and/or claim any rights, title, interest in or to the said Trademarks by virtue of the use of the Trademarks by the Licensee.”
6. A similar Trademark License Agreement was executed between the respondent and Future Value Retail Limited for brand ‘Srishti’.
7. It would also be appropriate to note that a Retail License Agreement was also executed on October 01, 2007 between the respondent and Pantaloon for brand “Dreamline”. Under this Agreement, a non-exclusive, non-transferable license to use the Trademark was granted by the respondent to Pantaloon. Clause-V of this Agreement relates to Quality and Control. It stipulates that Pantaloon agrees that the respondent has the right to control the standards and quality of the products in connection with which the Trademarks are used by Pantaloon and that Pantaloon also agrees that it will manufacture the products in accordance with such minimum quality standards and manufacturing specifications as the respondent may furnish or fix from time to time.
8. The period of dispute in the present appeal is from 2008-009 to 2013-14 and in connection with the Trademark License Agreement, the respondent has produced details of the royalty component on which service tax was paid and the ‘right to use’ component on which service tax was not paid and only VAT was paid. The Chart is reproduced below:
