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2016 Supreme(All) 3831
ALLAHABAD HIGH COURT
Sudhir Agarwal, Kaushal Jayendra Thaker, JJ.
G.D. Goenka (P) Ltd. - Appellant
Versus
State of U.P. and others - Respondent
Writ Tax No. 146 of 2013 and Writ Tax No. 636 of 2015
Decided On : 09-12-2016
For the Petitioner:- S.K. Tyagi, Alok Kumar
For the Respondent:- C.S.C.
Headnote:
VAT - LEVY - FRANCHISE AGREEMENT - BRAND NAME - TRANSFER OF RIGHT TO USE GOODS - SERVICE TAX - LEVY - COMPOSITE TRANSACTION - SALE OF GOODS AND SERVICE - LEVY OF BOTH TAXES - DOMINANT INTENTION TEST - OVERRULED.
Fact of the Case:
Petitioner, a company engaged in imparting and promoting education, entered into a franchise agreement with another company, granting a non-exclusive license to use its brand name for running a school. The agreement provided for payment of a one-time non-refundable franchise fee and a royalty of 12% on the collection of revenue from students. The petitioner challenged notices issued by the Deputy Commissioner, Trade Tax Circle-II, Agra, for assessment years 2010-11 and 2009-10, and an assessment order dated 26.06.2015 for assessment years 2012-13 and 2008-09, contending that the grant of a non-exclusive license to use the brand name amounted to a transaction for transfer of rights to use goods and was not subject to VAT, and that if both VAT and service tax were applicable, the extent of each tax should be determined.
Finding of the Court:
1. The grant of a non-exclusive license to use a brand name under a franchise agreement constitutes a transaction for transfer of rights to use goods and is subject to VAT under the U.P. Value Added Tax Act, 2008 (VAT Act, 2008). 2. If a transaction has two components, one being the sale of goods and the other being a service, both taxes, namely, sales tax and service tax, can be exigible on the respective parts of sale and service. 3. The dominant intention test, which was used to determine whether a transaction was primarily a sale of goods or a provision of services, has been overruled.
Issues: 1. Whether the grant of a non-exclusive license to use a brand name under a franchise agreement amounts to a transaction for transfer of rights to use goods for the purpose of levying VAT. 2. Whether the grant of a non-exclusive license to use a brand name under a franchise agreement comes under the provisions of Service Tax or is amenable to VAT/sales tax, and if both, which part is under the Service Tax Act and which part is under the VAT Act, 2008. 3. Whether the respondent was justified in assessing VAT on the use of the petitioner's trademark without adjudicating the legal issues raised by the petitioner.
Ratio Decidendi: 1. The definition of "sale" under the VAT Act, 2008 includes a 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. The grant of a non-exclusive license to use a brand name under a franchise agreement falls within this definition as it involves the transfer of the right to use the brand name for a specified period in exchange for consideration. 2. The levy of both VAT and service tax on a composite transaction involving the sale of goods and the provision of services is permissible. The dominant intention test, which was used to determine whether a transaction was primarily a sale of goods or a provision of services, has been overruled. Therefore, if a transaction has two components, one being the sale of goods and the other being a service, both taxes can be exigible on the respective parts of sale and service.
Final Decision: Both writ petitions were dismissed, holding that the grant of a non-exclusive license to use a brand name under a franchise agreement is subject to VAT under the VAT Act, 2008, and that both VAT and service tax can be levied on a composite transaction involving the sale of goods and the provision of services.
Dr. Kaushal Jayendra Thaker, J.
1. In both these writ petitions, same petitioner-M/s G.D. Goenka (P) Ltd. has challenged notices issued by Deputy Commissioner, Trade Tax Circle-II, Agra.
2. In Writ Petition No. 146 of 2013, it has challenged notices dated 21.12.2012 and 15.01.2013 issued under Section 28(3) of U.P. Value Added Tax Act, 2008 (hereinafter referred to as the "VAT Act, 2008") in respect of Assessment Years 2010-11 and 2009-10 respectively. In Writ Petition No. 636 of 2015 it has challenged assessment order dated 26.06.2015 for Assessment Years 2012-13 and 2008-09 and consequential demand of tax of Rs. 14,17,575/- and Rs. 8,35,993/- respectively.
3. The common questions raised in both these writ petitions are as under:
a) Whether grant of Non-Exclusive License to Franchise for use of brand name of petitioner under Franchisee Agreement amounts to transaction for transfer of rights to use goods for the purpose of levying VAT in terms of settled law laid down by Supreme Court in Bharat Sanchar Nigam Ltd. and another Vs. Union of India, AIR 2006 SC 1383 and State of A.P. Vs. Rashtriya Ispat Nigam Ltd., 126 STC 114 SC.
b) Whether grant of non-exclusive licence to Franchise for use of brand name of petitioner under Franchisee Agreement comes under the provisions of Service Tax or is amenable to VAT/sales tax, and if both than which part is under Service Tax Act and which part is under VAT Act, 2008.
c) Whether respondent no. 2 is justified in assessing VAT on such use of trade mark of petitioner without adjudicating legal issues raised by petitioner vide its various reply filed with respondent no. 2 alongwith judgment as the exercise of process of levying VAT on petitioner will be futile if this Court decided this question of law in favour of petitioner.
4. Before answering aforesaid questions, brief facts, relevant and necessary for adjudication of both these writ petitions, may be stated as under.
5. M/s G.D. Goenka (P) Ltd. (hereinafter referred to as the "Assessee/Franchisor") is a Company registered under Companies Act, 1956 (hereinafter referred to as the "Act, 1956") having its registered office at N-85, Cannaught Place, New Delhi. Petitioner entered into an agreement with M/s KPS Educational Trust, G-7, Puneet Vrindavan, Sanjay Place, Agra (hereinafter referred to as the "Franchisee"). Copy of agreement is on record as Annexure-3 to the Writ Petition No. 636 of 2015). It is dated 17.12.2009. Salient features of agreement are as under:
(A) Petitioner is termed as Franchisor in agreement and is engaged in business of imparting and promoting education and has earned and established reputation under Brand name titled as "G.D. Goenka Public School" with its logo, sign, symbol, moto, registered trademark, design and copyright.
(B) It is authorized to grant non-exclusive license for use of said Brand name.
(C) Franchisee owns a big chunk of land measuring 22300 sq. meter of land at Magtai, Bodla-Bichpuri Road, Agra and intends to construct a modern fully equipped Senior Secondary School on said land.
(D) Franchisee has approached Franchisor, i.e., petitioner, to use its brand name, i.e., "G.D. Goenka Public School" for running said school under the guidance of petitioner and remain at par with standards of Franchisor in technical, pre-opening, academic and operational matters for betterment and welfare of children by spreading standards of education under various terms and conditions mentioned in memorandum of understanding.
(E) The Franchisor, i.e., petitioner in its turn is willing to appoint Franchisee and Franchisee is willing to accept such appointment for Agra on the terms and conditions contained in agreement. (emphasis added)
6. Some relevant terms and conditions of agreement, for our purpose, are reproduced as under:
"3. DURATION
FRANCHISOR hereby grants to the FRANCHISEE the non exclusive license for use of the said Brand name for running the School and under the guidance of the FRANCHISOR and to remain
