1. The Querist has approached us for opinion on the agreement dated 1-4-2013 entered into between itself and XYZ Limited (XYZ). The Querist wishes to know what, if any, sales tax consequences can result from the agreement dated 1-4-2013 which is a trademark licensing agreement. The opinion is sought particularly in the context of the judgments of the Hon’ble Bombay High Court in
Tata Sons Limited v. State of Maharashtra1 and Subway Systems India Pvt. Ltd. v State of Maharashtra2.

2. XYZ is the holding company of the Querist. The trademark which is subject matter of the agreement is owned by XYZ. Vide the agreement dated 1-4-2013, XYZ has licensed the trademark to the Querist. The essential features of the agreement are:

a) The trademark can be used by the Querist for purposes of its business including in relation to or upon its products, labels, letterheads, brochures, pamphlets and other advertising material.

b) The trademark can only be used in such form and in such manner as is approved by XYZ. Querist cannot use the mark in any way which can jeopardise the significance, distinctiveness or validity of the mark.

c) Querist is bound to assist XYZ in monitoring of the business of Querist to determine whether Querist has achieved or maintained the standards as are acceptable to XYZ. Failure to achieve or maintain standards required by XYZ can lead to termination of the agreement .

d) The licence has been granted on a non-exclusive basis. XYZ can use the trademark without consent of Querist. Similarly, XYZ can grant any number of licences without the consent of Querist.

e) The agreement dated 1-4-2013 does not envisage any territorial restrictions for the use of the trademark either.

f) The licence cannot be transferred to anyone else by the Querist.

g) XYZ reserves the right to revoke the licence at any point of time if the terms of agreement are breached. Such revocation can happen even if the management or control of the Querist changes.

h) On termination or expiry of the agreement, Querist has to discontinue the use of the trademark and remove any reference to the trademark from products, labels, letterheads, brochures, pamphlets, invoices, advertising material or any other thing, equipment or substance.

3. Under the Maharashtra Value Added Tax Act, 2002, Sales Tax or VAT can be levied on the “transfer of right to use goods”. Such taxation is enabled by Article 366(29A)(d) of the Constitution of India which allows Sales Tax to be levied on the “transfer of right to use goods”. If a transaction amount to mere permission to use, without the transfer of right to use goods, then it does not fall within the ambit of the Maharashtra Value Added Tax Act, 2002 at all.

4. In our considered opinion, the agreement dated 1-4-2013 allows a mere permissive use of the mark and does not transfer any right to use the trademark as such. Our reasons follow:

5. Transfer of possession and effective control of goods were always understood to be the defining features of a transaction which can result “transfer of right to use goods”. Hon’ble Justice Dr. A. R. Lakshmanan’s judgment in the landmark Supreme Court ruling in
Bharat Sanchar Nigam Ltd. v. Union of India3 set out the essential characteristics of a transaction which could be taxed as a “transfer of right to use goods”:

“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 licences 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 licence 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.”

6. Justice Dr. Lakshmanan’s criterion was taken to be locus classicus on the law of “transfer of right to use goods” for a long period of time.

7. However, in Tata Sons4, the Bombay High Court took a divergent view on requirements (d) and (e) of Justice Dr. Lakshmanan’s criterion. That case pertained to a Brand Equity and Business Promotion Agreement under which the mark “TATA” was licensed to group companies of the Tata group. Tata Sons placed reliance on requirements (d) and (e) of Justice Dr. Lakshmanan’s judgment, which say that once the owner has transferred the right to use, he himself has no right to use and therefore it cannot be transferred again till the right to use does not revert back to the owner. Since Tata Sons could use the mark even after it is licensed and since licences could be granted to any number of entities at the same time, Tata Sons argued that there was no “transfer of right to use goods” as such.

8. The Bombay High Court, however, took the view that the requirement of exclusivity were not relevant in case of intangible goods. The Court held that even if the Tata Sons could use the trademark simultaneously with the licensees and could also grant new licences at the same time, the transaction will still be in the nature of “transfer of right to use goods”. After approving the observations of an earlier judgment of the Bombay High Court, that is
Commissioner of Sales Tax v. Duke & Sons,5 the Court observed:

“Thus, there can be a transfer of the right to use these goods and it need not be exclusive and unconditional. The Transferor may simultaneously use it and during the period of a agreement to transfer the right to use it.”

9. Subsequently, the decision in Subway Systems,6 was handed down. In our opinion, the broad observations of the Court in Tata Sons have been watered down by Subway Systems. While Tata Sons “seemed” to totally abandon the requirements of exclusivity and effective control for intangible goods, Subway Systems has retained the same, albeit in a modified form.

10. Subway Systems involved a franchise agreement wherein the franchisees were allowed to display the trademark. The Court, after considering Tata Sons, held that the rules for determining whether a transaction is “transfer of right to use goods” are not the same for tangibles and intangibles. However, bare permissive use was held not to amount to transfer of right to use a trademark. The following features of the Subway agreement were held to be indicative of bare permissive use by the Court:

a) The licensee was allowed to use the trademark only till the time that the agreement did not expire.

b) In case of breach of agreement, the licence to use the trademark would stand revoked.

c) Subway could even compete with their franchisees. There was no territorial exclusivity wherein Subway was prohibited from competing with the licensees in a particular territory or granting any other licensee in that territory.

d) Franchisees were prohibited from sub-licensing the trademark and sub-franchising without consent of Subway.

e) On termination of agreement, the franchisees could no longer display of the marks.

f) Subway had deep and pervasive control over day-to-day activities of the franchisees. Even the ingredients like bread etc. were to be sourced either from Subway or from authorised dealers.

11. As can be seen, the six factors listed above which led the Court to hold that the Subway agreement was not in nature of “transfer of right to use” trademark, are similar to the essential features of the agreement dated 1-4-2013 outlined in Para 2 of this Opinion. The only point of slight distinction is Point No. (f) which talks of deep and pervasive control that Subway exerted over day-to-day activities of franchisees. Even though the control exerted by XYZ is not as deep and pervasive as Subway’s, in our view XYZ exercises sufficient control on the use of trademark which would mean that Querist does not have effective control of the trademark. The trademark in this case can only be used in accordance with the manner prescribed by Querist and any deviation will entitle XYZ to terminate the agreement and ask the Querist to stop using the mark. Furthermore, XYZ monitors performance to determine whether the Querist has achieved the level of excellence which is required by XYZ. If the Querist does not achieve the level of excellence or maintain such level, XYZ is entitled to terminate the agreement and direct that the marks no longer be used by the Querist.

12. In G. S. Lamba & Sons v. State of Andhra Pradesh,7 the Andhra Pradesh High Court has held that:

“the effective or general control does not always mean physical control and even if the manner, method, modalities and the time of the use of goods is decided by the lessee or the customer, it would be under the effective or general control over the goods”.

These observations have been approved in in Para 45 of the Judgment given in case of Monsanto Mahyco,8 which was decided along with Subway Systems vide a common judgment.

13. By parity of reasoning, it can be said that if the manner, method and modalities of use of the goods is decided by the owner of goods and the person who is allowed to use the goods is bound to use the goods in the manner prescribed by the owner of goods, the goods are under the effective control of the owner and there is no transfer of right to use goods.

14. Therefore, as long as the Querist is bound to use the mark in the manner prescribed by XYZ and is bound to observe standards of excellences which entitle it to use the mark, the use of the mark amounts to bare permission to use and there is no transfer of right to use goods. Consequently, no liability can arise under the Maharashtra Value Added Tax Act, 2002.

1 (2015) 80 VST 173 (Bom.)

2 Judgment dated 11th August, 2016 in Writ Petition No. 497 of 2015

3 (2006) 145 STC 91 (SC)

4 Supra (FN1)

5 (1999) 112 STC 370 (Bom.)

6 Supra (FN2)

7 (2011) 43 VST 323 (AP)

8 Supra (FN1)

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