2024-VIL-519-ALH
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VAT High Court Cases

U.P. Value Added Tax Act, 2008 - Taxability of sale of brand name/Trademark under the franchise agreement under entry at Serial No. 3 in Part A of Schedule-II of the UPVAT Act, 2008 – The Tax Tribunal held that since the franchise of trademark is merely a license to use the goods and not a transfer of the exclusive right to use the goods, therefore, no VAT can be leviable - Whether the franchise of a trademark constitutes a transfer of the right to use goods, thereby making it subject to VAT under UPVAT Act – HELD - Franchise agreements typically grant non-exclusive rights to use trademarks and business systems. Such agreements do not constitute a transfer of the right to use goods in a manner that excludes others, which is a critical criterion for considering a transaction as a deemed sale - When trademarks are licensed, the licensee’s use of the mark is considered the owner’s use, maintaining the continuity of the trademarks’ reputation and legal protections. This distinction between ownership and licensed use is crucial for determining the scope of rights and the corresponding tax liabilities - The retention of ownership and control by the franchisor or licensor ensures that the transaction remains within the purview of service tax rather than sales tax - the taxation of franchise agreements and sales of goods represents a complex and multifaceted issue that defies easy categorization. While both involve commercial transactions, they embody distinct economic realities and legal considerations that necessitate differential tax treatment - the franchise agreement in present case grants a non-exclusive license rather than a transfer of the right to use goods. As such, the transaction does not attract Value Added Tax under the UPVAT Act – further, respondent-assessee had received royalty amount from various dealers under the franchise agreement and service tax has been duly paid by it on the same. If these payments have been subjected to service tax, they cannot be recharacterized as the sale of goods to levy VAT or sales tax - no reason to interfere with the view taken by the Commercial Tax Tribunal, and accordingly, the Revenue revision application is dismissed - Differentiation between licensing and transfer - In licensing, the licensor often imposes stringent conditions on the use of the trademark to ensure that the brand's reputation and quality are maintained. These conditions might include guidelines on marketing, product quality, and even operational standards. Failure to comply with these conditions can result in the revocation of the license. This level of control is indicative of a licensing arrangement rather than a transfer, where the new owner would have the autonomy to use the trademark without such restrictions. In contrast, a transfer or assignment of a trademark involves transferring all rights associated with the trademark to the transferee. This includes the right to use, license, and enforce the trademark. Once transferred, the original owner relinquishes all control and ownership rights over the trademark. This kind of transaction is more straightforward in terms of taxation as it involves a clear transfer of an asset, typically subject to sales tax or capital gains tax depending on the jurisdiction and the specifics of the transaction.
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