Lease Sale vis-à-vis Intangible Property

Q.1 There are conflicting judgments about nature of lease transactions vis-à-vis intangible goods. Please explain the recent position with relation to latest judgments?

Ans. The nature of lease transaction has always remained a debatable issue. In other words, every transaction is emerging as a new transaction and it is difficult to determine the nature in light of earlier judgments.

Amongst others, the intangible goods has further separate status qua lease transactions. In other words, it is difficult to say that the law laid down in relation to tangible goods will remain applicable to intangible goods.

The short background about taxability as lease transaction of intangible goods can be discussed as below.

By deeming clause in Article 366 (29-A) of the Constitution, the transaction of “Transfer of Right to Use Goods” (lease transaction) are made taxable under Sales Tax Laws. The nature of lease transactions is not defined in the Constitution or in any Act. The interpretation is done in light of various judicial pronouncements.

Bharat Sanchar Nigam Ltd. (145 STC 91)(SC)

The issue in this case was about levy of lease tax on services provided by Telephone Companies. Supreme Court held that no sales tax is applicable as the transaction pertains to service. While so holding, one of the learned judges on the Bench, observed as under in para 98, about taxable lease transactions.

“98. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

  1. There must be goods available for delivery
  2. There must be a consensus ad idem as to the identity of the goods;
  3. The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licences required therefore should be available to the transferee;
  4. 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 licence to use the goods;
  5. 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.”

Based on above parameters there are further judgments at various forums where the nature of lease transaction is decided. Reference can be made to following judgments. The common feature is that if use is allowed on non-exclusive basis it is not considered as lease.

Smokin Joe’s Pizza Pvt. Ltd. (A 25 of 2004 dated 25-11-2008) (MSTT)

The facts in this case were that the dealer was holding registered Trade mark “Smokin Joe’s” and allowed its use to its franchisees. The franchise agreement provided for non-exclusive right to use the registered trademark. The agreement also provided for providing various services to Franchisee. Lower authorities held the transaction as taxable lease transaction. Tribunal held that it is not a lease transaction as it is not exclusive. This judgment is before Hon. Bombay High Court by way of Reference.

Malabar Gold Pvt. Ltd. v. Commercial Tax Officer, Kozhikode (63-VST 497)(Ker.)

This is the judgment of Kerala High Court. In this case also the transaction was about granting of franchise right on non-exclusive basis. Hon. High Court has held that when the grant of franchise is non-exclusive it is not lease transaction and not liable to VAT.

On other hand there are also contrary judgments like as under:

Nutrine Confectionery Co. Pvt. Ltd. v. State of Andhra Pradesh (40 VST 327)(A.P.)

In this case also the transaction was for allowing use of trade mark. The said use was also on non- exclusive basis. Still Hon. High Court has held that the transaction is lease transaction. Hon. High Court felt that the judgment of BSNL about exclusive use cannot apply in relation to intangible goods like trade mark.

AGS Entertainment Private Limited v. Union of India and Others (65 VST 88)(Mad).

In this case, it is held that unless all the rights of the films are transferred, there cannot be lease transaction. On the same service tax is applicable. Thus, the law laid is that if in a intangible goods like copyright only singular rights are transferred and all rights are not transferred then there is not lease transaction and service tax can remain applicable.

Thus, regarding intangible goods, there are different judgments. However, it appears that the courts are treating intangible goods separately as compared to tangible goods. When “goods” include intangible goods also, the interpretation as applicable to tangible goods should equally apply to intangible goods also. However, there is distinction made by the Courts which are required to be reconsidered by the Courts.

Latest Judgment of Hon. Bombay High Court

Now we have one more judgment from Hon. Bombay High Court. The judgment is in case of Tata Sons Ltd. v. State of Maharashtra (W.P. No. 2818 of 2012 with Notice of Motion (L) No.214 of 2013 dt. 20-1-2015).

In this case the use of brand name was allowed on non-exclusive basis. Before Hon. Tribunal judgments including in case of Smokin Jeo’s was relied upon for non-liability. However, Tribunal has confirmed the liability. Therefore, this matter before Hon. Bombay High Court, on behalf of assessee. After referring the facts and judgments including in case of BSNL, Hon. High Court has held that even if use of right is given on non-exclusive basis, still it will be lease transaction. The observations of Hon. Bombay High Court are as under:

“50. Para 98 is relied upon by Mr. Chinoy. However, that cannot be read in isolation and out of context. It must be read in the backdrop of the underlying controversy, namely, relationship between a telephone connection service provider and its customer. Such a transaction is essentially of service.

51. It is in relation to such a controversy that the observations, findings and conclusions must be confined. We do not see as to how they can be extended and in the facts and circumstances of the present case to the enactment that we are dealing with. Going by the plain and unambiguous language of the Act of 1985 we cannot read into it the element of exclusivity and a transfer contemplated therein to be unconditional. Therefore the tests in para (d) and (e) cannot be read in the Act of 1985.

58. We are of the opinion that the Tribunal did not act perversely or committed an error apparent on the face of record in rejecting the petitioner’s appeals. May be the Tribunal could have rendered a detailed finding and conclusion. However, upon perusal of the order passed by the Tribunal we find that it referred to the facts. It has also adverted to the contentions of the parties. It also referred to its own conclusions rendered in the case of M/s. Smokin Joe etc. However, it concludes that the facts and circumstances in the present case are not identical to the cases dealt with by it and of the above franchisees. We do not express any opinion as to whether the Tribunal’s conclusions in the case of M/s. Smokin Joe (supra) and M/s. Diageo India (supra) are accurate or correct. We are informed that separate proceedings in that regard are pending in this Court. However, the Tribunal did not err in holding that the cases which have been dealt with by it including the Supreme Court judgment in the case of BSNL (supra) are on distinct facts.”

Not only Hon. High Court distinguished judgment of Hon. Supreme Court in case of BSNL, but also relied upon earlier judgment in case of Dukes and Sons and followed the same. The relevant observations are as under:

“52. We are in agreement with Mr. Kumbhakoni that the judgment of this Court in the case of Commissioner of Sales Tax v. Dukes and Sons Pvt. Ltd., reported in 1999 (1) Mh.L.J. 26 cannot said to be no longer good law in the light of the judgment of the Hon’ble Supreme Court in BSNL’s case. That was the argument canvased by Mr. Chinoy and his further submission is that relying upon BSNL (supra), the Tribunal rendered its decisions in favour of the franchisees, namely, M/s. Smokin’ Joe (supra) and M/s. Diageo India (supra). In M/s. Duke & Sons Pvt. Ltd., similiar controversy fell for consideration and determination of this Court. There, M/s. Dukes was holder of a registered trade mark, namely, Duke’s, Mangola, Pineola, Tango. It manufactured concentrates for manufacturing aerated waters, beverages etc. There were written agreements between the assessee M/s. Dukes and purchasers of the concentrates. The assessee sold the concentrates to the customers for use in manufacturing aerated waters, beverages etc. at their bottling plants. Pertinently such purchasers of the concentrates were permitted to market their beverage by using the trademark of the assessee. The assessee charged royalty for use of the trade mark by the customers. They were styled as Franchise Agreements. One such Franchise Agreement wherein the assessee permitted the customer M/s. Salstar Foods and Beverages Ltd. to use the trade mark of the assessee on the bottles of the beverage manufactured by them in Maharashtra and to market the same under the trade mark of the assessee was subjected to the tax under the Act of 1985. There was some doubt and, therefore, an application under Section 52 of the Bombay Sales Act, 1959 was made by the assessee to the Additional Commissioner of Sales Tax. This was for determination of the question, where it was liable to pay tax on the amount of royalty received by it for transfer of trade mark under the Act of 1985. The Additional Commissioner of Sales Tax (Enforcement Branch) by his order dated 3-3-1989 held that by the agreements in question there was a transfer of right to use the trade mark of the assessee to its customers and amounted to sale under Section 2(10) of the Act of 1985. The assessee was thus held to be liable to pay tax. That order was appealed to the Tribunal. The Tribunal set aside the order of the Additional Commissioner and held that the transaction did not amount to transfer of right to use the trade mark by the assessee to its customers and no tax could be levied on the royalty received on said transfer. The Revenue applied for reference of the ground of law arising from this order of the Tribunal. That is how the question of law framed by this Court at para1 came up for consideration.“

After this Hon. High Court reproduced portion from judgment of Dukes and Sons and observed as under:

“57. Thus, far from the judgment of the Division Bench of this Court in M/s. Dukes and Sons (supra) being no longer a good law, that judgment and the ratio therein has been consistently referred and quoted with approval by the Kerala High Court and Andhra Pradesh High Court. This was subsequent to the judgment of the Hon’ble Supreme Court in BSNL (supra). With respect, we concur with all the aforesaid decisions and rulings.”

Thus, amongst others, Hon. High Court has considered case of intangible goods as separate category. Further important aspect in this judgment is that no reference is made to the judgment of Kerala High Court in case of Malabar Gold Pvt. Ltd.

Thus, the overall issues still remains debatable and any judgment from Hon. Supreme Court will only resolve the issue. In Maharashtra, the learned Commissioner of Sales Tax has issued Circular bearing No.11T of 2015 dt. 13-7-2015, informing that the judgment of Tata Sons Ltd., will govern the cases of intangible goods. Thus in Maharashtra the position will be interpreted in light of above judgment of Tata Sons Ltd.

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