HIGH COURT OF KERALA
Malabar Gold (P.) Ltd.
Commercial Tax Officer
WP (C) NOs. 38505, 38524 OF 2010 & 28351, 28376 OF 2011 & 20269 OF 2012
NOVEMBER 14, 2012
1. Malabar Gold Private Limited have filed these writ petitions challenging the levy of tax and penalty under the Kerala Value Added Tax Act (hereinafter referred to as the “Act” for short), on royalty received from their franchisees, in respect of which Service Tax under the Finance Act 1994, as amended from time to time has been paid. Issues raised in these cases are common and therefore, these cases are disposed of by this common judgment, treating WP(C) No. 38505 of 2010 as the leading case.
2. Petitioner is a company incorporated under the Companies Act, 1956. The company is the sole proprietor of the Trade Mark, “Malabar Gold”. They are engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum ornaments, watches etc. They are also a registered dealer under the KVAT and CST Acts.
3. The company has entered into Franchisee Agreements with several companies, situated inside and outside Kerala and also abroad, as per which, on mutually agreed terms and conditions, these companies are allowed to use the Trade Mark owned by the petitioner. Petitioner admits that in return, it is receiving royalty, the rate of which is also specified in the agreement. Franchisee Services, being an activity attracting Service Tax under the Finance Act, 1994, the petitioner has obtained registration under Section 69 of the Finance Act.
4. For the year 2008-09, 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 payable.
While so, the 1st respondent issued Ext.P1 notice stating that transfer of right to use any goods is taxable under Section 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, by Ext.P2 reply, petitioner contended that the transaction in question attracted service tax and that in view of the principles laid down in the Apex Court judgment in Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes  12 STT 392 payments of service tax and VAT are mutually exclusive and hence not payable.
5. Thereafter, the 1st respondent issued Ext.P3 proposal notice, reiterating that the petitioner is liable to pay tax under the Act at 4%, which was also disputed in Ext.P4 reply submitted by the petitioner. Petitioner was granted an opportunity of hearing and finally Ext.P5 order was passed confirming the demand for Rs. 13,10,744/- along with interest of Rs. 2,78,009/-. This was followed by Ext.P6 order levying penalty of Rs. 13,10,744/- under Section 67 (1)(d) of the Act. It was thereupon, this writ petition was filed seeking to quash Exts.P5 and P6. Similar orders issued for the assessment years 2006-07, 2007-08, 2009-10 and 2010-11 are sought to be quashed in WP(C) Nos. 28376/11, 38524/10, 28351/11 and 20269/12 respectively.
6. I heard the learned counsel for the petitioner and the learned Special Government Pleader for Taxes.
7. On behalf of the petitioner, it was contended that, what is transferred by them to their franchisees is only the right to use its Trade Mark and that it being franchisee service, for the royalty received, they are paying the service tax under the Finance Act, 1994. According to them, a transaction of such a nature does not amount to ‘sale’ as defined in the Act and that it does not involve any “goods” to attract the levy of tax there under. In support of this plea, counsel relied on the Apex Court judgment in Bharat Sanchar Nigam Ltd. (BSNL) v. Union of India  3 STT 245 (SC). It was also his case that if service tax is leviable in respect of a transaction, there cannot be any liability for tax under the Act. In this context, reliance was placed on the Apex Court judgment in Imagic Creative (P.) Ltd. (supra), where it was held that both service tax and VAT are mutually exclusive.
8. On the other hand, respondents argued that in view of the provisions of Article 366 (29A) of the Constitution of India and the Act, the transfer of right to use Trade Mark, is a deemed sale attracting tax under entry 68 of the third schedule to the Act. To substantiate this contention, the learned Government Pleader relied on various judgments, which will be referred to at the appropriate stage.
9. At my request for a specimen copy of the franchisee agreement, the counsel for the petitioner made available copy of the agreement dated 2/5/2007 between the petitioner and M/s. Malabar Cochin Arcade Pvt. Ltd., Calicut, having showroom at Ernakulam. In this agreement, among the various provisions, as far as the transfer of Trade Mark is concerned, Clauses 5.3, 5.4 and 5.5. provide thus:
5.3.”NAME BOARD AND DISPLAY- The showroom shall have a name board “MALABAR GOLD” conspicuously displayed as per the design approved by MALABAR GOLD. MALABAR GOLD will specify the approved design from time to time by specific circulars. The FRANCHISEE will not use any other logo or name including the name under which the franchise is taken without the written approval of MALABAR GOLD. The FRANCHISEE agrees to display and maintain MALABAR GOLD’S trade marks, trade names, service marks, logos and advertising and promotional materials including posters at such premises, in the manner authorized by MALABAR GOLD from time to time. The FRANCHISEE agrees to maintain and display signs of MALABAR GOLD only. The colour, colour scheme, size, design and location of such signs shall be, from time to time, be specified by MALABAR GOLD. The FRANCHISEE shall not place additional signs, posters, trade marks, trade names, service marks and logos on premises other than those authorized by MALABAR GOLD. For such usage of MALABAR GOLD trademark (s), trade name(s), service marks(s) and logo(s).
5.4. EXCLUSIVITY- The FRANCHISEE undertakes that the showroom and its infrastructure shall not be used for any purpose or activities other than that provided under this agreement. The FRANCHISEE shall also not conduct any business other than “MALABAR GOLD” business in the name of the entity that has taken up the “MALABAR GOLD” FRANCHISE. The FRANCHISEE shall offer the Businesses covered by this AGREEMENT and any other Business (s) that MALABAR GOLD may introduce from time to time and intimated by MALABAR GOLD.
5.5. The FRANCHISEE shall operate the Show Room in accordance with the standards, specifications and procedures set out by MALABAR GOLD from time to time. The FRANCHISEE agrees further that changes in such standards, specifications and procedures may become necessary from time to time and agrees to accept such modifications, revisions and additions which MALABAR GOLD in good faith considers necessary. The FRANCHISEE agrees not to deviate from the standards as laid down by MALABAR GOLD from time to time”.
10. Clause 22 of the agreement providing for royalty reads thus;
“22. For being allowed to operate the “MALABAR GOLD” franchise, the FRANCHISEE will pay MALABAR GOLD a royalty of 10% of the Net Profit before computing depreciation and income tax. The royalty amount is calculated for every calendar month and shall be remitted by the 15th of the succeeding month by means of a Demand Draft payable to MALABAR GOLD at Calicut. At the end of every financial year the actual annual profit of the FRANCHISEE will be calculated and settled”.
11. In the light of the above factual background, the first question to be examined is whether the transfer of right to use the petitioner’s Trade Mark is a “sale” as defined in the Act. The second question would be whether an intangible goods like Trade Mark is “Goods” as defined in the Act. Both these issues should be answered in the light of the constitutional and statutory provisions and also binding precedents.
12. Prior to the 46th amendment to the Constitution of India, the States were not empowered to levy tax on transfer of right to use goods. By the 46th Amendment, Article 366 (29A) was incorporated in the Constitution of India and Article 366 (29A)(d), being relevant, reads thus;
366(29A) “tax on the sale or purchase of goods” includes-
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made”
13. In the Act, “sale” has been defined in section 2(xliii) and this section with its Explanation V, reads thus:
2. xliii)”sale” with all its grammatical variations and cognate expressions means any transfer whether in pursuance of a contract or not of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or for other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge;
Explanation V- A transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration shall be deemed to be a sale.
14. From these 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 shall be deemed to be a sale for the purposes of the Act. In the pleadings in the writ petition itself, petitioner admits that by virtue of the agreements entered into with their franchisees, the franchisees are authorized to use their Trade Mark and that in consideration thereof, they are 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.
15. Relying on paragraph 97 of the Apex Court judgment in the BSNL case (supra), counsel for the petitioner contended that to constitute a transaction for transfer of the right to use the goods, one of the attributes to be satisfied is that for the period during which the transferee has such a legal right, it has to be to the exclusion of the transferor. According to him, in this case, this attribute is not satisfied and therefore, the transaction in question cannot be one for transfer of right to use the trademark as known to law.
16. To appreciate this submission, reference should be made to paragraphs 95 to 98 of the judgment and these paragraphs are extracted below for reference.
95. The petitioner Bharat Sanchar Nigam Ltd. (for short “BSNL”) is a licensee under the Telegraph Act, 1885. The license of the petitioner is obtained from the Government of India which is the same as the license given also to various private telecom operators which entitles BSNL to carry the activity of operating telegraph limited to the scope of telecommunication facilities.
96. The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses.
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 therefor 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 statute 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 right to others.
98. In my opinion, none of these attributes are present in the relationship between a telecom service provider and a consumer of such services. On the contrary, the transaction is a transaction of rendition of service.
17. Reading of these paragraphs show that the Court was also not dealing with a case involving transfer of intellectual property rights such as trademark and on the other hand, the issue dealt with was regarding the nature of the service rendered by BSNL to its customers, whether it is a sale or service. Further, as is evident from the judgment itself, BSNL was retaining physical control and possession over the entire infrastructure and there was neither any physical transfer of goods nor transfer of right to use any equipment to any one. On the other hand, in this, petitioner themselves concede that their trademark has been transferred for the use of their franchisees and that as consideration thereof, they have received royalty.
18. As far as the requirement that transfer of trademark to the transferee 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 is no such plea and copy of the agreements have not even been produced by them.
Further, the specimen franchisee agreement made available by the counsel for the petitioner shows that the franchisee has undertaken not to use the showroom for any purpose or activity other than that are provided in the agreement and to stock only products authorized by the petitioner. In such circumstances, the aforesaid observations in the judgment cannot be relied on in this case, because even according to the petitioner, the Trademark has been transferred for the use of their franchisees for royalty paid on terms which are agreed between the parties. Therefore, in my view, this contention also does not merit acceptance.
19. The second requirement to be satisfied is that what is transferred for use should be “Goods” as defined in the Act to come within “sale” as defined in the Act. Section 2(xx) of the Act defines “goods” as follows;
2(xx) “goods” means all kinds of movable property (other than newspapers, actionable claims, electricity, stocks and shares and securities) and includes livestock, all materials, commodities and articles and every kind of property (whether as goods or in some other form) involved in the execution of a works contract, and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale;
This expression has been defined to mean all kinds of movable property, including live stock, all materials, commodities and articles other than what are excluded in the section itself.
Therefore, in the light of this provision, what is to be examined is whether Trade Mark is a “goods” within the meaning of this section.
20. The question whether software programmes contain the characteristics of goods was considered by the Apex Court in its judgment in Tata Consultancy Services v. State of Andhra Pradesh  141 Taxman 132 and it was held that goods include all materials, articles and commodities both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use which can be transmitted, transferred, delivered, stored, possessed etc. On this reasoning, the Court held that software programmes are goods containing these characteristics. The relevant part of the judgment reads thus:
“In India the test to determine whether a property is “goods”, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the item concerned is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible”.
21. This Court also had dealt with similar issues on various occasions. In the context of the identical provisions contained in the Kerala General Sales Tax Act, a Division Bench of this Court in the judgment in Mechanical Assembly Systems (India) (P.) Ltd. v. State of Kerala 2006(1) KLT 947 held that technical know-how is “goods” and that its transfer constitutes “sale” as defined in the said Act. Following this judgment, in Jojo Frozen Foods (P) Ltd. v. State of Kerala  24 VST 327, it was held that royalty amount received from franchisees for use of Trade Mark is exigible to tax under the KGST Act. Again in Kreem Foods (P.) Ltd. v. State of Kerala  24 VST 333, this Court held that royalty paid by franchisee is liable to be taxed under the KGST Act. The Andhra Pradesh High Court has also held that royalty received from franchisee as consideration for transfer of Trade Mark for use attracts tax under the sales tax law prevailing in that State in its judgment in Nutrine Confectionary Co. (P.) Ltd. v. State of Andhra Pradesh 20 KTR 38. These judgments unambiguously lay down the principle that Trade Mark is “Goods” as defined in the Act.
22. In this context, it should be stated that the counsel for the petitioner attempted to distinguish these judgments contending that the disputes which were the subject matter of these cases pertained to assessment years prior to 2003, when franchisee service was made taxable under the Finance Act, 1994.
Although this contention is factually correct, fact remains that in the light of the relevant statutory provisions considered, the principles laid down in these judgments reflect the correct legal position. If that be so, since the statutory provisions of the KVAT Act are similarly worded, this court is entitled to place reliance on these principles, which are also binding on this Court. For this reason, introduction of Service Tax is inconsequential and hence, I do not find any merit in this contention also.
23. Once the legal position is clarified as above, it remains to be considered whether transfer of right to use Trade Mark is exigible to tax under the Act. Answer to this question lies in section 6 of the Act. Section 6(1)(c), being relevant, is extracted for easy reference;
6. Levy of tax on sale or purchase of goods.-(1) Every dealer whose total turnover for a year is [not less than ten lakhs] rupees and every importer or casual trader or agent of a non-resident dealer [or dealer in jewellery of gold, silver and platinum group metals or silver articles or contractor or any State Government, Central Government or Government of any Union Territory or any department thereof or any local authority or any autonomous body], whatever be his total turnover for the year, shall be liable to pay tax on his sales or purchases of goods as provided in this Act. The liability to pay tax shall be [on the taxable turnover]-
(c) in the case of transfer of the right to use any goods for any purpose whether or not for a specified period, at the rate of four per cent at all points of such transfer;
24. Having regard to the above provision of the Act, any further elaboration to hold that the royalty received by the petitioner is exigible to tax under the KVAT Act is unnecessary.
25. Faced with this situation, counsel for the petitioner relied on the Apex Court judgment in Imagic Creative (P.) Ltd.(supra) and contended that Service Tax and VAT being mutually exclusive, since the petitioner is paying service tax on royalty received, the impugned demand for tax and penalty are illegal. In this judgment, I have already held that royalty received is liable to be taxed under the Act and this Court is not called upon to decide the legality of the levy of service tax on the royalty received by the petitioner. Therefore, if the petitioner has a case that levy of service tax is illegal for any reason, it is upto them to challenge the levy in appropriate proceedings.
In the light of the legal position as above, these writ petitions should be dismissed and I do so, without any order as to costs.