The main legal point established in the judgment is the distinction between the taxability of brand franchise fees and royalty under the Karnataka Sales Tax Act, 1957, based on the transfer of right to use goods.

1. These revision petitions are filed by the State of Karnataka, challenging the order dated 17.1.2014 passed by the Karnataka Appellate Tribunal in STA Nos. 2456 and 2457 of 2012 and Cross Appeal in STA Nos. 1142 and 1143 of 2013 whereby, the respondent-assessee has been exempted from payment of tax for the assessment years 2003-04 and 2004-05.

2. Briefly the facts relevant for the purpose of this case are:

The respondent-assessee, United Breweries Limited owns the following brand names related to beer (1) Kingfisher Premium Lager Beer, (2) Kingfisher Super Strong Premium Beer and (3) Kalyani Black Label Premium Lager Beer. The respondent-assessee also owns the Kingfisher brand of packaged drinking water. Admittedly, in the said assessment years, the assessee did not carry on any manufacturing activity of its own, within the State of Karnataka or outside.

3. The admitted facts in the case regarding manufacture of Beer are that the respondent-assessee had entered into contracts with certain Contract Bottling Units (CBUs for short) for manufacturing beer, in terms of which the assessee was to transfer the know-how for manufacturing beer under its brand name. Such manufacture of beer was to be on behalf of the assessee and supplied only to the assessee or its indentors. No right was given to the CBUs to directly sell the beer to its own customers. In fact, the CBUs were captive manufacturers of beer for the assessee United Breweries Limited.

4. Under the Brewing and Distribution Agreement entered into between the assessee and the CBUs, the brewing and bottling of the beer was to be done as per the specifications given by the assessee and by using the trade marks, names and logos of the assessee, made available by it to the CBUs. The entire production, as well as the trade mark, etc. belonged to the assessee and not to the CBUs. The right to use the know-how was given to the CBUs on non-assignable, nontransferable and nonexclusive basis. However, the right to market, sell, distribute and package the beer, according to the know-how and specifications prescribed by the assessee, was to remain under the supervision and control of the assessee, as per a registered user right. Under the agreement, it was specifically provided that the CBUs shall sell the entire beer manufactured in their jurisdiction to the assessee or its indentors. The agreement also provided that any liability attributable to the CBUs on bulk beer up to the Bright Beer tanks (BBT), was to be of the assessee. Thus, according to the agreement with regard to beer, the CBUs neither had any right over the product, nor did they have any right to sell or exploit the beer so produced, nor fix any price of the produce. It all belonged to the assessee.

5. With regard to Kingfisher packaged drinking water, the agreements with the manufacturers were different than that with the CBUs in the case of manufacture of beer. In the case of manufacture of beer, the beer so manufactured by the CBUs remained to be the sole property of the assessee, whereas it was not so in the case of manufacture of Kingfisher packaged drinking water. For the manufacture of Kingfisher packaged drinking water, the manufacturers were to pay royalty to the assessee for use of brand name/trade name, and were then free to sell the manufactured packaged water to their own customers, and exploit the trade name/brand name, for which they were paying royalty to the respondent-assessee.

6. For the relevant assessment years, the Assessing Officer, though did not levy any tax on the transfer of technical know-how, for manufacture of beer, but subjected the assessee to tax for payment of Rs. 10/- per case, received by the assessee from CBUs as brand franchise fee, treating it as royalty. In the case of drinking water, the Assessing Officer charged tax on 0.15 paisa per liter on Kingfisher drinking water, which was the royalty paid to the assessee by the manufacturers of the packaged water. As already mentioned