The consideration received under the franchise agreements in the three cases (and trade mark licensing agreement in GSK’s petition) was not for transfer of right to use the goods, i.e., the trade mark, under the Delhi Sales Tax on Right to Use Goods Act, 2002 and under the Delhi Value Added Tax Act, 2004.

S. RAVINDRA BHAT

1. The appeal (STA 27/2013) and writ petitions, (W.P.(C)3404/2015, W.P.(C)3408/2013, W.P.(C) 4453/2013 and W.P.(C)10726/2006) all are concerned with the same question of law. Resultantly, they were heard alongwith STA 26/2013.The question of law in STA 26/2013, which is the lead case in this batch, is as follows:

Whether the Tribunal was right in holding that consideration received under the franchise agreement was for transfer of right to use the goods, i.e., the trade mark, under the Delhi Sales Tax on Right to Use Goods Act, 2002 and under the Delhi Value Added Tax Act, 2004?

2. The appellant is a wholly owned subsidiary of McDonald’s Corporation, Delaware (a term hereinafter referred to as “McDonald’s or “the Appellant” in respect of the two appeals, i.e. STA 26-27/2013). It entered into joint venture agreements, with Connaught Plaza Restaurants Private Limited, Hardcastle Restaurants Private Limited and Golden Kitchens Private Limited; and held 50% of their capital, during the period under consideration. McDonald’s also entered into franchise agreements with various franchisees to allow them to adopt and use the “McDonald’s system”, for the purpose of operating its restaurants in India. McDonald’s receives a fixed amount as location fee from the franchisees, at the time of opening of the restaurants. Further, it collects royalty of approximately 5% of the gross sales, from the restaurants operated by the franchisees. Also, with the introduction of the taxable category of franchise service, in the service tax laws, viz. the Finance Act, 1994, the Appellant obtained service tax registration with effect from 01.07.2003 and since then has been regularly filing the service tax return and duly discharging the service tax liability, on the entire service fee, received in connection with the franchise agreement.

3. For the assessment year 2005-2006, the Delhi Value Added Tax authorities (hereafter “revenue” or “DVAT”) stated and took the position that royalty payments were liable to levy on the ground that they constituted consideration for the transfer of rights to use the trade mark “McDonald’s”. On 17.03.2006 the Value Added Tax Officer (hereafter “VATO”) issued a letter alleging that McDonald’s had a sale turnover from trade mark and patents, in the form of royalty received from the franchisees, which attracted a levy of sales tax, under the provisions of the Delhi Sales Tax on Right to Use Goods Act, 2002 (hereinafter the “DSTRTUG Act”). Further, McDonald’s was asked to produce the details with regard to the collection of royalty, for the period 15.09.2004 to 31.03.2005, its balance sheet for the AY 2004-05 and the list of franchisees which McDonald’s subsequently submitted on 02.05.2006 and 05.05.2006. Thereafter, on 05.07.2006 it filed its reply resisting levy of tax under the DSTRTUG Act and subsequently submitted a copy of the Master License Agreement (MLA) executed between the Appellant and McDonald’s India.

4. Further to a Show Cause Notice dated 09.10.2006, McDonald’s was asked to show cause why it should not be assessed to tax under Section 23 (6) of the Delhi Sales Tax Act, 1975, read with Section 9 of the DSTRTUG Act, for the AY 2004-05 and why a penalty should not be imposed upon the appellant for the same. The Value Added Tax Officer, Special Zone (‘Assessing Authority I’), vide an order, dated 16.01.2007, treated the “McDonald’s system” as goods and invoked a demand of Rs.13,44,684/-. Aggrieved, McDonald’s appealed to the Joint Commissioner, Trade and Taxes. The Joint Commissioner, by an order dated 01.07.2008 held that the transactions entered into by McDonald’s involved the transfer of the right to use “McDonald’s system”, which constitutes goods in terms of Article 366(29A) of the Constitution and Section (1)(n) of the DSTRTUG Act, thereby upholding the order of the Assessing Authority.

5. Being aggrieved with the above order, McDonald’s appealed to the Appellate Tribunal on 01.09.2008.Th