SKP Tax Alert
11 August 2015 | Volume 8 Issue 15
Clarifications on the 'transfer of right to use' for intangibles 
 
According to the Maharashtra VAT Act, (2002) (MVAT), VAT is applicable on the sale of goods, in which tangibles as well as intangibles are included. The Maharashtra VAT Schedule specifies the rates of VAT and specifically covers goods of intangible or incorporeal nature such as patents, trademarks, etc. Accordingly, VAT would be levied under the MVAT Act on the 'transfer of right to use the goods'.

Regarding the above, the landmark judgment of the Supreme Court in the case of Bharat Sanchar Nigam Ltd (BSNL) and another vs Union of India and others ((2006) 3 VST 95 (SC)) had laid down principles in order to constitute a transaction as transfer of the right to use the goods. It emphasised that a transaction for the transfer of the right to use the goods must have the following attributes:
  • For the period during which the transferee has such a legal right, it has to be to the exclusion of the transferor i.e. transfer of the right to use and not merely a licence to use the goods.
  • On having transferred the right to use the goods during the specified period of transfer, the owner cannot transfer the same rights to others again.
 
High Court's Ruling
The TATA Group has been engaged in diverse business activities in various sectors, conducted by the subsidiaries and companies promoted by the TATA Group. The subsidiaries had entered into an agreement with the TATA Group for the use of the TATA name and the trademarks in the course of business.

The question before the Bombay High Court was whether the consideration received by the TATA Group from its subsidiaries under such an agreement would attract the levy of Sales Tax/Value Added Tax under "The Transfer of Right to use Goods for Any Purpose Act, 1985"(the Act).

The Bombay High Court has distinguished BSNL's Supreme Court ruling in the case of TATA Sons Ltd where it observed that:
  • In the case of intangible goods, the right to use them can be transferred and if transferred, may be subject to tax.
  • The Act does not lay any provisions with respect to the exclusive transfer of the right to use incorporeal goods in favour of the transfer.
  • The Act does not envisage exclusive and unconditional transfer of the right to use goods.
  • The Supreme Court held that in the case of BSNL, the transaction was in the nature of service and hence cannot be equated with the facts underlined above in the case of TATA Sons.
The High Court relied on the judgment of Duke & Sons Pvt Ltd vs Commissioner of Sales Tax ((1999) 112 STC 370 (Bom)), wherein a similar issue was evaluated. Duke & Sons Pvt Ltd engaged in the manufacture of concentrates and was the holder of a registered trademark, namely Duke's. The purchasers of such concentrates were permitted to market the beverage manufactured by them using procured concentrates under the Duke's trademark. Duke & Sons Pvt Ltd was paid royalty for this purpose. The court held that even if the trademark is used by multiple users, it would attract the levy of sales tax. The High Court stated that the case of Duke & Sons Pvt Ltd is still good law, which has been quoted and referred to, time and again, even subsequent to the Supreme Court judgment of BSNL.
 
Clarification by Trade Circular No. 11T of 2015 - Maharashtra VAT Act
 
Based on the aforesaid Bombay High Court decision, the Commissioner of Sales Tax has recently issued a Trade Circular (11T of 2005) reiterating the observations of the High Court dealing with the issue of applicability of VAT on the transfer of right to use intangibles. It clarified that VAT is leviable on the transfer of right to use goods of intangible nature i.e. trademark, technical know-how, copyright and other intangibles, etc. even if it is transferred to multiple users, irrespective of the fact that the owner cannot transfer the same right to others.

 
SKP's comments
The recent ruling has reignited the issue of levy of VAT on the transfer of right to use the goods, which was considered settled, pursuant to the Supreme Court's ruling in the BSNL case. This circular is likely to trigger issuance of notices on similar transactions relating to the transfer of the right to use intangibles. It is advisable for businesses to evaluate the past positions adopted for such transactions and decide the position to be adopted henceforth. Given the thin line between the distinguishing factors in the BSNL Supreme Court Ruling and the case of TATA Sons, it is advisable that businesses analyse in detail the taxability and application of the various court rulings before adopting a tax position.

The transfer of right to use the goods is also covered under the Declared Services under Service Tax legislation. Furthermore, Taxation of Services: An Education Guide by CBEC has clarified that in cases where the effective control and possession of the goods transferred remains with the owner, service tax would be levied and vice-versa. On this basis, there will be dual levy of service tax and VAT on transactions where the right to use intangibles is given and ownership is not transferred. It is advisable that both central and state laws should be aligned to avoid the levy of dual taxes on transactions relating to the transfer of the right to use the goods.

This Bombay High Court ruling has raised another question on whether a High Court ruling can prevail over the Supreme Court's ruling.

We expect that the ambiguity of whether the transaction is a sale of goods or a supply of service should be resolved given that a single Goods and Services Tax rate (GST) could be proposed. However, in case there are different GST rates laid down for such transactions, the ambiguity with respect to whether the transaction is a sale of goods or a supply of service would remain.

SKP
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ABOUT THIS TAX ALERT
This SKP Tax Alert contains general information existing at the time of its preparation only. It is intended as a news update and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or opinion or services. This tax alert is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and also refer to the source pronouncement/documents on which this tax alert is based. It is also expressly clarified that this tax alert is not a solicitation or an invitation of any sort whatsoever or a source of advertising from SKP Group or any of its entities to create any adviser-client relationship.

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