Service Tax - Royalty on Trade Mark - Taxable?
IS Trademark "Goods"? Is transfer of Trademark taxable under State VAT Acts as sale of goods? The High Court of Kerala had an occasion to decide this issue recently while disposing a Writ Petition. The Petitioner Company had 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 were allowed to use the Trademark owned by the petitioner. 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 obtained registration under Section 69 of the Finance Act and is paying service tax.
They were issued notice by the State VAT authorities 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.
The company filed Writ Petitions against the demand of VAT on Royalty received. However, the Kerala High Court upheld the demand of VAT by holding that Trade Mark is goods and Royalty received from franchisees for use of its trademark and for sharing business know-how is leviable to VAT. The Court held "As per Article 366 (29A) of the Constitution of India, "tax on the sale or purchase of goods" includes 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 as per the definition of Goods under Section 2(xx), the expression would mean all kinds of movable property, including live stock, all materials, commodities and articles other than what are excluded in the section itself.
The High Court was not called upon to decide the legality of the levy of service tax on the royalty received by the petitioner.
In the Negative List regime, the definition of Service given under Section 66B reads:
(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) an activity which constitutes merely,-
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution; or
(iii) a transaction in money or actionable claim;
So, when permitting to use the Trademark is taxable (to VAT) as deemed sale within the meaning of clause (29A) of article 366 of the Constitution, then the same is excluded from the definition of service. However, "temporary transfer or permitting the use or enjoyment of any intellectual property right" is a declared service under Section 66E. Isn't it contradictory?
A Netizen wrote to us "Royalty payments or IPR are taxable under VAT / sales tax as deemed sales, so no Service Tax is applicable as per Service Definition, however it also appears under declared services. When the definition of the service excludes such deemed sale transaction, then why has‘temporary transfer for use of IPR' not been deleted from declared services? This anomaly/ contradiction existing in Act/Rules is creating confusion and will lead to unnecessary litigation".
Will CBEC look into this?
(Please See )