# Commissioner Commercial Tax U.P v. M/S Pan Parag India Ltd

- **Citation:** (2024) 5 ILRA 1083
- **Court:** High Court of Judicature at Allahabad
- **Decided:** 2024-05-24
- **Case number:** Sale/Trade Tax Revision No. 30 of 2023
- **Bench:** Shekhar B. Saraf
- **Source:** https://unisonlegal.in/judgment/allahabad-high-court/commissioner-commercial-tax-u-p-v-m-s-pan-parag-india-ltd-51953
- **Pages:** 13

## Headnote

U.P. Value Added Tax Act, 2008 - Section 58
-
Double
taxation
-
franchise
of
a
trademark - Issue before the Court was
whether the franchise of a trademark
constitutes a transfer of the right to use
goods, thereby making it subject to VAT ?
- In the case license was given by the
respondent for the use of his brand name.
Said franchise agreement granted only
representational right and not an exclusive
right to the licensees to sell/manufacture
goods. Permission granted by the dealer
under the agreement was a non-exclusive
right given to the licensees, as it was not to
the exclusion of others. Held: Franchise
agreement in the 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.
Respondent received royalty amounts from
various
dealers
under
the
franchise
agreement, and service tax at a rate of
15% was already paid by the respondent
on the amount of royalty received by them
from the licensees under the franchise
1084 INDIAN LAW REPORTS ALLAHABAD SERIES
agreement. If the payments have been
subjected to service tax, they cannot be
recharacterized as the sale of goods to levy
VAT or sales tax. Prevention of double
taxation is a fundamental principle of tax
law. Constitution of India does not permit
overlapping of taxes. Once an activity is
taxable as a service, it cannot be taxed as
a sale/deemed sale of goods. (Para 27, 28,
29)

Dismissed. (E-5)

List of Cases cited:

## Text

_Characters 0–39,989 of 44,698. This is a partial read: ask again with offset=39989 for what follows._

5 All. Commissioner Commercial Tax U.P. Vs. M/S Pan Parag India Ltd.
1083
property is higher than the rent earned then
the amount of compensation for continued
use and occupation of the property by the
tenant can be assessed at the higher value.
We find ourselves in agreement with the view
taken by the Nagpur High Court."

14. The Apex Court has held that
after determination of tenancy, the position
of tenant is akin to that of a trespasser and
he cannot claim that the measure of
damages, should be awarded under the
provision of Rent Control Order. In case the
real property is higher than the rent earned,
amount of compensation for use and
occupation of property can be assessed at the
higher value.

15. In light of discussion made
hereinabove as well as law laid down by the
Court, this Court is also of the view that
once after service of notice under Section
106 of Transfer of Property Act, 1882,
tenancy is terminated, the status of tenant
would only be tresspasser and mesne profit
shall be determined, based upon market rate
prevailing in the area. Provisions of Rent
Control Act would not be applicable.

16. In the present case, the facts are
entirely same, notice was served, tenancy
was terminated and status of petitioner
became trespasser. Mesne profit with the
enhancement at the rate of 15% per annum
is based upon the market rate produced by
the plaintiff respondent not controverted or
denied by the petitioner-defendant.

17. Therefore, under such facts and
circumstances, law laid down by this Court
as well as Apex Court, I found no illegality
or irregularity in the impugned order.

18. Accordingly, the revision is
dismissed, affirming the judgment of trial
Court so far it relates to payment mesne
profit at the rate of 15%.
----------
(2024) 5 ILRA 1083
REVISIONAL JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 24.05.2024

BEFORE

THE HON'BLE SHEKHAR B. SARAF, J.

Sale/Trade Tax Revision No. 30 of 2023

Commissioner Commercial Tax U.P.
 ...Petitioner
Versus
M/S Pan Parag India Ltd. ...Respondent

Counsel for the Petitioner:
Sri Bipin Kumar Pandey, Addl. C.S.C.

Counsel for the Respondent:
Sri Shubham Agarwal

U.P. Value Added Tax Act, 2008 - Section 58
-
Double
taxation
-
franchise
of
a
trademark - Issue before the Court was
whether the franchise of a trademark
constitutes a transfer of the right to use
goods, thereby making it subject to VAT ?
- In the case license was given by the
respondent for the use of his brand name.
Said franchise agreement granted only
representational right and not an exclusive
right to the licensees to sell/manufacture
goods. Permission granted by the dealer
under the agreement was a non-exclusive
right given to the licensees, as it was not to
the exclusion of others. Held: Franchise
agreement in the 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.
Respondent received royalty amounts from
various
dealers
under
the
franchise
agreement, and service tax at a rate of
15% was already paid by the respondent
on the amount of royalty received by them
from the licensees under the franchise
1084 INDIAN LAW REPORTS ALLAHABAD SERIES
agreement. If the payments have been
subjected to service tax, they cannot be
recharacterized as the sale of goods to levy
VAT or sales tax. Prevention of double
taxation is a fundamental principle of tax
law. Constitution of India does not permit
overlapping of taxes. Once an activity is
taxable as a service, it cannot be taxed as
a sale/deemed sale of goods. (Para 27, 28,
29)

Dismissed. (E-5)

List of Cases cited:

1. Commissioner of Sales Tax Vs Duke & Sons
Pvt. Ltd. (1999) 112 STC 370

2. S. P. S. Jayam & Co. Vs Registrar, Tamil Nadu
Taxation Special Tribunal 2004 SCC OnLine Mad
1018

3. M/s Mc Donalds India Pvt. Ltd. Vs
Commissioner of Trade Taxes New Delhi reported
in 2017 (5) GSTL 120

4. Malabar Gold Pvt. Ltd. Vs Commercial Tax
Officer, Kozhikode & ors. reported in (2013) 63
VST 497

5. Godfrey Phillips India Limited Vs St. of U.P.
(2005) 2 SCC 515

(Delivered by Hon'ble Shekhar B. Saraf, J.)

1. This is a commercial tax revision
petition under Section 58 of the U.P. Value
Added Tax Act, 2008 (hereinafter referred
to as the 'UPVAT Act'). The following
question of law has been admitted by this
Court:
"Whether on the facts and circumstances of
the case the Commercial Tax Tribunal was
legally justified in deleting the amount of tax
which is taxable under schedule 2 part A at
serial No. 3 (All intangible goods like
copyright, patent, license etc. transfer of
right to use goods)."

2. In the instant case, first appellate
authority
had
concluded
that
the
dealer/respondent had sold his brand
name/title under the franchise agreement,
and since it is to be considered as a sale,
therefore, Value Added Tax has to be levied
on it.
3. Against the order of the first
appellate authority, the dealer/respondent
had gone into appeal before the Commercial
Tax Tribunal. Relying upon the judgment of
Delhi High court in M/s Mc Donalds India
Pvt. Ltd. V. Commissioner of Trade
Taxes New Delhi reported in 2017 (5)
GSTL 120, the Commercial Tax Tribunal
held that since the franchise of trademark
can be transferred to several persons at the
same time, it is merely a license to use the
goods and not a transfer of the exclusive
right to use the goods, and therefore, no
Value Added Tax can be levied on the same.
It is this order which is assailed before this
Court.
CONTENTIONS OF THE
REVISIONIST
4. Mr. Bipin Kumar Panday,
learned Standing Counsel appearing on
behalf of the revisionist has made the
following submissions before this Court:
a Once the copyright has been
transferred and royalty amount has been
received in lieu of the same, it becomes
taxable under the provisions of the Act
because entry at Serial No. 3 in Part A of
Schedule- II of the Act makes clear that "All
intangible goods like co pyright, patent, rep.
license etc; transfer of right to use of goods"
are taxable.
b. It is further submitted by him that
since franchise or trademark falls within the
5 All. Commissioner Commercial Tax U.P. Vs. M/S Pan Parag India Ltd.
1085
meaning of transfer of right to use the goods
hence Value Added Tax is leviable on it.
c. It is further submitted by him that
even if service tax was paid, it does not
absolve the liability under the UPVAT Act,
as Value Added Tax and Service Tax were
separate and distinct taxation regimes before
the introduction of the Goods and Services
Tax Act, 2017. Further, the term 'sale' as
defined under Section 2 (ac) of the UPVAT
Act 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.
d. In support of his contentions, he
relies upon the judgment of the Supreme
Court in case of Vikas Sales Corporation
V. Commissioner of Commercial Tax
reported in (1996) 4 SCC 433 wherein it
was held that REP license/Exim scrips were
goods on the sale of which sales tax can be
levied.
e. Further reliance has been placed
upon the judgment of Madras High Court in
the case of S. P. S. Jayam and Co. v.
Registrar, Tamil Nadu Taxation Special
Tribunal reported in 2004 SCC OnLine
Mad 1018 and the judgment of Bombay
High Court in Commissioner of Sales Tax
v. Duke & Sons Pvt. Ltd. reported in
(1999) 112 STC 370.

CONTENTIONS
OF
THE
RESPONDENT

5. Mr. Shubham Agrawal, learned
counsel appearing on behalf of the
respondent has argued as follows:

a. The franchise agreement which
the respondent dealer had entered into with
various parties, only a mere license was
given by the respondent for use of his brand
name. The said franchise agreement grants
only a representational right and not an
exclusive
right
to
the
licensees
to
sell/manufacture goods.
b. The permission granted by the
dealer under the agreement was a nonexclusive right given to the licensees, as it
was not to the exclusion of others. Thus, the
license does not constitute a 'transfer of
right to use of goods'.
c. He further relies upon the
judgment of the Supreme Court in the case
of BSNL V. Union of India reported in 2006
(3) SCC 1 wherein the Supreme Court
propounded a test for the constitution of a
transaction as the transfer of right to use the
goods.
d. He further submits that service
tax at a rate of 15% has already been paid by
the respondent on the amount of royalty
received by them from the licensees under
the franchise agreement. In view of this fact,
no intention to evade tax on the part of the
respondent can be inferred.
e. Finally, he argues that Service
Tax and VAT are mutually exclusive levies
and a single consideration cannot be
subjected to both the levies. To buttress his
argument, he relies upon the judgment of the
Hon'ble Supreme Court in case of Imagic
Creative Pvt. Ltd. v. Commissioner of
Commercial Taxes reported in (2008) 2 SCC
614.

ANALYSIS

6. I have heard the learned counsels
appearing for the parties and perused the
materials on record.

7. The pivotal issue revolves around
whether the franchise of a trademark
1086 INDIAN LAW REPORTS ALLAHABAD SERIES
constitutes a transfer of the right to use
goods, thereby making it subject to VAT.

8. Section 65(47) of the Finance Act, 1994
which is relevant to the instant issue is
extracted herein:

"65(47) "franchise" means an
agreement by which- (i)Franchisee is
granted representational right to sell or
manufacture goods or to provide service or
undertake any process identified with
franchisor, whether or not a trade mark,
service mark, trade name or logo or any
such symbol, as the case may be, is involved;
(ii)
The
franchisor
provides
concepts
of
business
operation
to
franchisee, including know how, method of
operation, managerial expertise, marketing
technique or training and standards of
quality control except passing on the
ownership of all know how to franchisee;
(iii) The franchisee is required to
pay to the franchisor, directly or indirectly,
a fee; and
(iv) The franchisee is under an
obligation not to engage in selling or
providing similar goods or services or
process, identified with any other person;"

9. Reliance has been placed by the
revisionist upon the judgement of the
Bombay High Court in Commissioner of
Sales Tax v. Duke & Sons Pvt. Ltd.
(supra) wherein the Bombay High Court
held that for transfer of the right to use
trademark, it is not necessary to hand over
the trademark to the transferee or give
control or possession of trademark to him.
The Bombay High Court further stated that
it can be done merely by authorizing the
transferee to use the same in the manner
required by the law as has been done in the
present case. The right to use trademark can
be transferred simultaneously to any number
of persons. Relevant paragraph is extracted
below:

7. "Trade mark" has been defined in
Section
2(1)(v)
of
the
Trade
and
Merchandise Marks Act, 1958 to mean a
mark used in relation to goods for the
purpose of indicating a connection in the
course of trade between the goods and some
person having the right, either as a
proprietor or as registered user, to use the
mark whether with or without any indication
of the identity of that person. There is a
distinction between transfer of right to use a
trade mark and assignment of a trade mark.
"Assignment" of trade mark is taken to be a
sale or transfer of the trade mark by the
owner or proprietor thereof to a third party
inter vivos. By assignment, the original
owner or proprietor of trade mark is
divested of his right, title or interest therein.
He is not so divested by transfer of right to
use the same. Licence to use a trade mark is
thus quite distinct and different from
assignment. It is not accompanied by
transfer of any right or title in the trade
mark. The transfer of right to use a trade
mark falls under the purview of the 1985 Act
and not the assignment thereof. The manner
of transfer of the right to use the goods to the
transferee would depend upon the nature of
the goods. For transfer of right to use a
trade mark, permission in writing as
required by law may be enough. In case of
tangible property, handing over of the
property to the transferee may be essential
for the use thereof. All that will depend upon
the nature of the goods. Take for instance,
transfer of right to use machinery. The right
to use the machinery cannot be transferred
by transferor to the transferee without
transfer of control over it. The case before
the Andhra Pradesh High Court in
Rashtriya Ispat Nigam Ltd. v. Commercial
Tax Officer was a case of transfer of right to
5 All. Commissioner Commercial Tax U.P. Vs. M/S Pan Parag India Ltd.
1087
use machinery. It was in that context, the
above decision came to be rendered. But the
position in case of trade mark is different.
For transferring the right to use the trade
mark, it is not necessary to hand over the
trade mark to the transferee or give control
or possession of trade mark to him. It can be
done merely by authorising the transferee to
use the same in the manner required by the
law as has been done in the present case.
The right to use the trade mark can be
transferred simultaneously to any number of
persons. The decision of the Andhra
Pradesh High Court in Rashtriya Ispat
Nigam Ltd. v. Commercial Tax Officer thus
has no application to the transfer of right to
use a trade mark."

10. Further, a strong reliance has
also been placed by counsel for the
revisionist on judgment of Madras High
Court in S. P. S. Jayam and Co. v.
Registrar, Tamil Nadu Taxation Special
Tribunal (supra). Relevant paragraphs are
extracted herein:

"8. Coming to the facts of the
present case, the petitioner/ assessee
permitted M/s. Muthu Agencies to use their
trademark in the course of trade at the rates
specified therein for various items during a
particular period. Of course, it retained the
liberty to make use of the trademark in the
event of the licensor starting to manufacture
the products. Equally, it retained the liberty
to grant licence to any other individual
person or company to use the trademarks.
Trademark is the property right and it
exclusively belongs to the party who has
registered it. Such a right is an intangible or
incorporeal
goods,
which
can
be
merchandised by the registered owners. As
pointed out by the Supreme Court, the word
"goods" is defined in very wide terms so as
to bring in both tangible and intangible
objects. General Clauses Act would explain
movable property as property of every
description except immovable property.
Trademark right is intangible goods, which
can be subject-matter of transfer. As already
pointed out, M/s. Muthu Agencies was
granted permission to use the trademark
without any restriction whatsoever for a
particular period. Consequently, it can only
be taken as transfer of a right to use and not
a mere right to enjoy. Simply because the
assessee retained the right for himself to use
the trademark and reserved the right to
grant permission to others to use the
trademark, it would not take away the
character of the transaction as one of
transfer of a right to use. That being so, this
Court has to only hold that the order of the
Tamil Nadu Taxation Special Tribunal,
Chennai, confirming the order of the Joint
Commissioner-III (SMR), Chepauk, is well
in order."

11. In Duke & Sons (supra), the
Court's interpretation highlighted that the
right to use a trademark could be granted
without transferring the physical control or
possession of the trademark itself. This
perspective was further validated in S.P.S.
Jayam (supra), wherein the Madras High
Court elaborated on the nature of trademarks
as intangible goods, capable of being
transferred
without
relinquishing
ownership. The Madras High Court's
reasoning underscored that such transfers
should be viewed as the transfer of the right
to use, rather than a mere license for
enjoyment. However, these judgments must
be re-evaluated in the context of Finance
Act, 1994, which introduced specific
provisions for the taxation of franchises. The
legislative intent behind this Act was to
bring clarity and uniformity to the taxation
of service-based transactions, which had
become increasingly prevalent with the rise
1088 INDIAN LAW REPORTS ALLAHABAD SERIES
of franchising as a business model. Finance
Act, 1994 delineated the boundaries of what
constitutes a taxable service in the realm of
franchising, thereby superseding earlier
judicial interpretations that did not account
for this legislative framework.

12. The judgments in Duke & Sons
(supra) and S.P.S. Jayam (supra) were
rendered in a legal landscape where the
specific nuances of franchising agreements
were not explicitly covered by the prevailing
tax laws of the assessment periods that the
High Courts in those cases were dealing
with. The assessment year under challenge
in S.P.S. Jayam (supra) was 1987-88. The
order impugned in Duke & Sons (supra)
dated back to 1989.

13. With the introduction of the
Finance Act, 1994, the legal foundation has
shifted. The introduction of the said law
significantly altered the landscape of how
such transactions are to be treated under tax
law. The statutory provisions of the Finance
Act, 1994 override judicial interpretations
that did not consider franchising under a
unified tax framework. This means that
earlier judgments, such as those in Duke &
Sons (supra) and S.P.S. Jayam (supra) must
now be read in light of the new legislative
context. As such, the precedential value of
these decisions is diminished.

14. By Finance Act, 1994, the
distinction between the transfer of right to
use a trademark and its assignment was
further nuanced. Licensing agreements,
where the franchisee is granted limited
rights to use a trademark or business
concept, are clearly delineated from outright
assignments or sales of trademarks. This
distinction is crucial for tax purposes, as it
determines the nature and extent of tax
liability for the parties involved.
15. In light of the aforesaid, it is
pertinent to look at judicial decisions on
taxation
of
franchisees,
or
licensing
agreements, which were rendered after the
introduction of the Finance Act, 1994.

16. The Delhi High Court in the
case of Mc Donalds India Pvt. Ltd. V.
Commissioner of Trade Tax reported in
2017 (5) GSTL 120 espoused that
commercial transactions primarily revolve
around tangible items, with trademarks
serving as valuable assets that contribute to
the overall value and demand of the products
or services. The Court further stated that
since an agreement of franchise of
trademark grants only a non-exclusive right,
it does not constitute a transfer of right to use
the
goods.
Relevant
paragraphs
are
extracted below:

"38. Now, hypothetically, even if we
are to agree that the McDonald's system as
well as trade marks of the petitioners would
fall within the definition of "goods", for it to
be taxable within the DVAT and DSTRTUG
Act, a transfer of the right to use goods
needs to take place; occasioned from the
franchise agreements read concurrently
with the relevant law. Section 65(47) of the
Finance Act 1994 reads as follows:
"(47)
'franchise'
means
an
agreement by which the franchisee is
granted representational right to sell or
manufacture goods or to provide service or
undertake any process identified with
franchisor, whether or not a trade mark,
service mark, trade name or logo or any
such symbol, as the case may be, is involved.
Thus, by definition, the franchise agreement
grants only a representational right and not
an exclusive right to sell/ manufacture
goods. Further, the provisions of the
franchise agreements are only to the effect
of giving the franchisee the non-exclusive
5 All. Commissioner Commercial Tax U.P. Vs. M/S Pan Parag India Ltd.
1089
right to use, for instance, as was reiterated
in clause 11(d) of the MLA (of McDonald's)
as below :
"Franchise
and
joint
venture
partner shall acquire no right to use, or to
license the use of, any name, mark or other
intellectual property right granted or to be
granted herein, except in connection with
the operation of the restaurant."
***
42. Under trade mark law in India,
trade mark use even for advertisement
purposes is to be preceded by prior consent
of the proprietor and any unauthorized use
of the trade mark without such prior
permission of the proprietor could lead to an
infringement of the trade mark (in India,
under section 29 of the Trade Marks Act,
1999). The function of the MLA and other
franchise agreements in the case of
petitioners and the trade mark licensing
agreement (in the case of GSK) was (a) to
provide for a strictly limited usage of the
marks, i.e., only for advertisement and
promotion of the services in the restaurant;
(b) to provide for restrictions on usage of
such marks, i.e., not for any commercial
purposes such as use on merchandise, etc.
43. The grant of a right, in the form
of license to use the mark is primarily to be
utilized in the licensee's product. In usual
cases of licensing, the trade mark owner
may not wish to use mark its products or
services in an area or region ; it instead
would license the mark, to be used by the
licensee's products, subject to limitations.
The licensee has no right to initiate legal
proceedings, in the event of infringement,
(i.e., statutory right given to an owner or
someone having proprietary rights over the
mark, to seek injunction and damages). This
is clear from section 28 of the Trade marks
Act :
"28.
Rights
conferred
by
registration.-(1) Subject to the other
provisions of this Act, the registration of a
trade mark shall, if valid, give to the
registered proprietor of the trade mark the
exclusive right to the use of the trade mark
in relation to the goods or service in respect
of which the trade mark is registered and to
obtain relief in respect of infringement of the
trade mark in the manner provided by this
Act.
(2) The exclusive right to the use of
a trade mark given under sub-section (1)
shall be subject to any conditions and
limitations to which the registration is
subject."
The property in the mark always
vests
with
the
owner.
Furthermore,
importantly the use of the mark by the
licensee inures to the owner, as the latter's
continuous use, in terms of section 48 of the
Trade marks Act, which is as follows :
48. Registered users.-(1) Subject to
the provisions of section 49, a person other
than the registered proprietor of a trade
mark may be registered as a registered user
thereof in respect of any or all of the goods
or services in respect of which the trade
mark is registered.
(2) The permitted use of trade mark
shall be deemed to be used by the proprietor
thereof, and shall be deemed not to be used
by a person other than the proprietor, for the
purpose of section 47 or for any other
purpose for which such use in material
under this Act or any other law."
44. Therefore, when a trade vendor,
distributor, establishment or anyone else
permitted to sell articles or offer services the
trade marks (or brand) which belongs to
another, it is incorrect to state that the brand
or mark, associated with the product,
constitutes the sale rather than from sale of
the underlying goods or services that are the
subject of the trade mark (dishes in a
restaurant)
themselves.
It
would
be
incorrect, therefore, to conclude what is
1090 INDIAN LAW REPORTS ALLAHABAD SERIES
involved is not the sale of the product, but
the intangible property or mark connected
with the reputation of the mark, though that
reputation guarantees a high demand for the
product, from which the seller benefits.
Likewise, in the case of distribution, a
distribution agent is under an agreement
with the manufacturer to sell its goods ; it
also possesses the right to advertise the
goods and brands of the manufacturer. This
implies a licence of the manufacturer's trade
mark. In such an event, the distributor need
not pay for the right to use the intellectual
property under which the goods are sold; he
merely pays for obtaining the commercial
right to sell the goods he buys from the
manufacturer for enabling onward sale.
***
47. For a transfer of the right to use
goods to be effective, such transfer of right
should be one that the transferee can
exercise in exclusion of others; which is not
the case in the present appeals and petitions,
as the franchise agreement only grants a
non-exclusive
right,
retaining
the
franchisor's right to transfer the composite
bunch of services to other parties, apart
from it retaining ownership to the same. The
ownership in the trade mark, logo, service
marks, and brand name is solely vested in
appellant and the petitioners and has not
been transferred; as is clearly manifested in
the various clauses of the franchise
agreements.
The
appellant
and
the
petitioners grant a non-exclusive licence to
the franchisees, which can be revoked upon
non-compliance of the terms and conditions
as stipulated in their franchise arrangement.
Clearly, this does not amount to a transfer of
the right to use goods."

17. Reference at this juncture can
also be made to the judgment of the Hon'ble
Supreme Court in BSNL (supra) wherein the
Hon'ble Supreme Court laid down the test
for a transaction to be constituted as the one
for the transfer of right to use the goods:

"97. To constitute a transaction for
the transfer of the right to use the goods, the
transaction
must
have
the
following
attributes:
(a) there must be goods available
for delivery;
(b) there must be a consensus ad
idem as to the identity of the goods;
(c) the transferee should have a
legal right to use the goods-consequently
all legal consequences of such use including
any permissions or licences required
therefor should be available to the
transferee;
(d) for the period during which the
transferee has such legal right, it has to be
the exclusion to the transferor-this is the
necessary
concomitant
of
the
plain
language of the statute viz. a "transfer of the
right to use" and not merely a licence to use
the goods;
(e) having transferred the right to
use the goods during the period for which it
is to be transferred, the owner cannot again
transfer the same rights to others."

18. The Kerala High Court in the
case of Malabar Gold Private Limited v.
Commercial Tax Officer, Kozhikode and
Others reported in (2013) 63 VST 497
wherein the trade mark of the petitioner was
transferred to the franchisees for their use
and the consideration received was the
royalty paid to the petitioner, held that, such
a transaction cannot be treated as a "deemed
sale". Relevant paragraphs are extracted
below:

"61. The issue therefore can be
considered in the light of the dictum laid
down in Bharat Sanchar Nigam Ltd.'s case
[2006] 3 VST 95 (SC); [2006] 145STC 91
5 All. Commissioner Commercial Tax U.P. Vs. M/S Pan Parag India Ltd.
1091
(SC); [2006]282 ITR 273 (SC); (2006) 6 RC
276; (2006) 3 SCC 1. Herein, the term
"franchise
is
included
in
section
65(105)(zze) of the Finance Act. The same is
a taxable service and the taxable event is the
service rendered by the company. Thus, any
service provided or to be provided to a
franchisee will come within the purview of
the said provision. The meaning of the terms
franchise and franchisor under section
65(47) and (48) are also important. Going
by the definition of franchise, it is an
agreement by which the franchisee is
granted representational right to sell or
manufacture goods or to provide service or
undertake any process identified with
franchisor, whether or not a trade mark,
service mark, trade name or logo or any
such symbol, as the case may be, is involved.
The terms of the agreement herein will show
that Clause II of the Preamble has
specifically given under items (i) to (v) the
activities to be carried out by the franchisee
which are as follows :
"(i) Retailing of gold ornaments.
(ii) Retailing of diamond and other
precious stone ornaments.
(iii) Retailing of premium watches.
(iv) Retailing of platinum and other
premium fashion accessories.
(v) Any other items introduced by
MALABAR GOLD in future."
62. Clause 2 under the heading
"products" will show that the franchisee
cannot stock, exhibit or sell any products in
the authorised showroom during the period
of the agreement except the products
authorised by Malabar Gold, which may
include products manufactured or sourced
by Malabar Gold. Therefore, the same will
definitely satisfy the meaning of "franchise"
as contained in section 65(47) of the
Finance Act, 1994. The learned Special
Government Pleader for Taxes referred to
the agreement herein and said that no
service is referred to in the clauses therein.
We do not agree, in the light of clauses 3, 4
and 5 of the model agreement as already
noticed. Since what is termed as "taxable
service" is any service to be provided to a
franchisee by a franchisor in relation to a
franchise, the terms of the agreement will
have to be understood in that context.
63. In the light of the principles
stated in para 98 of the judgment in Bharat
Sanchar Nigam Ltd.s case [2006] 3 VST 95
(SC); [2006] 145 STC 91 (SC); [2006] 282
ITR 273(SC); (2006) 6 RC 276; (2006) 3
SCC 1, the provisions of the agreement,
especially clauses (3) and (5) will show that
the franchisor retains the right, effective
control and possession and it is not a case of
transfer of possession to the exclusion of the
transferor. We notice that under clause(12)
the franchisee has no right to sub-let or sublease or in any way sell, transfer, discharge
or distribute or delegate or assign the rights
under the agreement in favour of any third
party, which is also significant. On
termination of the agreement also, going by
clause 25.3, the franchisee shall forfeit all
rights and privileges conferred on them by
the agreement and the franchisee will not be
entitled to use the trade name or materials
of "Malabar Gold". Merely because, going
by clause 18, the franchisee is not an agent,
it will not get any other exclusive right.
***
67. Therefore, we are unable to
agree with the view taken by the learned
single judge. The view taken in para 14 of
the judgment is that the transaction in
question is a deemed sale as defined under
section 2(x)(iii) of the KVAT Act. The above
view was taken by concluding that the trade
mark of the appellant is transferred to the
franchisees
for
their
use
and
the
consideration received is the royalty paid to
the appellant. In para 17, the principles
stated in Bharat Sanchar Nigam Ltd.s case
1092 INDIAN LAW REPORTS ALLAHABAD SERIES
[2006] 3 VST 95 (SC); [2006]145 STC 91
(SC); [2006] 282 ITR 273 (SC); (2006) 6
RC276; (2006) 3 SCC 1 were distinguished
on the facts of the said case and it was held
that in the said case the court was not
dealing with a case involving transfer of
intellectual property rights such as trade
mark. It was held that there is total transfer
of trade mark on payment of royalty which
alone will attract the provisions of the KVAT
Act. With great respect, we are unable to
agree with the same.
68. Accordingly, we allow the
appeals reversing the judgment of the
learned single judge* and hold that the
franchise agreement will not attract the
provisions of the KVAT Act. No costs."

19.

Commercial
transactions
primarily revolve around tangible items,
with trademarks serving as valuable assets
that contribute to the overall value and
demand of products or services. However, as
highlighted by the Delhi High Court in
McDonald's (supra), since, a franchise
agreement grants only a non-exclusive right,
it does not constitute a transfer of the right
to use goods. As defined by the Finance Act,
1994
"franchise
agreements"
grant
representational rights, not exclusive rights
to sell or manufacture goods. The judgment
of Kerala High Court in Malabar Gold
(supra) also bears relevance. The Kerala
High Court noted that the terms of
agreement made it clear that the franchisor
retained effective control and possession,
preventing a transfer of possession to the
franchisee. The Division Bench of Kerala
High Court disagreed with the earlier view
that the transaction constituted a deemed
sale and held that the franchise agreement
did not attract provisions of the Kerala
Value Added Tax Act, as it involved nonexclusive rights and control retained by
the franchiser.
20. 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. The nonexclusive nature of these rights ensures that
the franchisor retains control and can license
the same rights to multiple franchisees,
reinforcing the licensing framework rather
than a full transfer.

21. 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. For instance, in
typical licensing arrangements, the licensee
does not acquire the right to initiate
infringement proceedings, which remains
with the trademark owner. This legal nuance
affects the control dynamics and the nature
of the transaction, influencing whether the
arrangement is taxed as a service (licensing)
or as a transfer of goods (sale). 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.

22. The differentiation between
licensing and transfer also extends to the
method and scope of use. 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
5 All. Commissioner Commercial Tax U.P. Vs. M/S Pan Parag India Ltd.
1093
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.

23. Enter the protagonists, the
franchisors, and franchisees, each adorned
with their roles and responsibilities. The
franchisor, akin to the playwright, holds the
script of the brand, trademarks, and business
model, while the franchisee, like the eager
actor, steps onto the stage with dreams of
entrepreneurial success. Together, they form
a dynamic duo, ready to bring their shared
vision to life. As the plot thickens, the script
of franchise agreements unfolds, revealing
the terms and conditions that will govern the
partnership
between
franchisors
and
franchisees. Like the lines of a well-crafted
drama, these agreements detail the rights
and obligations of each party, setting the
stage for a performance of mutual benefit
and cooperation. Tax authorities, like astute
critics, scrutinize each scene, seeking to
unravel the true nature of franchise
agreements. Yet, amidst the confusion, one
question
looms
large:
can
franchise
agreements be taxed as sales of goods?

24. Franchise agreements have
become a ubiquitous feature of modern
commerce, facilitating the expansion of
businesses across diverse industries and
geographies. However, the tax treatment of
franchise
agreements
poses
intricate
challenges, with implications for both
franchisors and franchisees. Transfer of the
right to use a trademark does not necessitate
the physical handover or control of the
trademark. Instead, it can be affected by
authorizing the transferee to use the
trademark in accordance with the law. This
underscores
the
intangible
nature
of
trademark rights and their transferability
without the need for physical possession.
Franchise agreements primarily grant a
representational
right
rather
than
an
exclusive right to sell or manufacture goods,
thereby categorizing such transactions as
services rather than sales of goods.
Franchise agreements are fundamentally
licensing agreements rather than sales of
goods.
Licensing
involves
granting
permission to use intellectual property
rights, whereas sales of goods involve the
transfer of ownership of tangible items.
Understanding this distinction is crucial for
determining the appropriate tax treatment
for franchise agreements.

25. At first glance, franchise
agreements may appear analogous to sales
of goods, as they involve the transfer of
rights and benefits from one party to another
in exchange for monetary consideration.
However, a deeper examination reveals
crucial distinctions that warrant disparate
tax treatment. Unlike conventional sales
transactions, which involve the transfer of
tangible property, franchise agreements
primarily entail the licensing of intangible
assets, such as trademarks, trade secrets, and
proprietary know-how. One of the central
aspects of franchise agreements is the grant
of intellectual property rights from the
franchisor to the franchisee. These rights
include trademarks, trade names, logos, and
1094 INDIAN LAW REPORTS ALLAHABAD SERIES
proprietary
business
methods.
Unlike
tangible goods, which can be bought and
sold outright, intellectual property rights are
licensed for use under specific terms and
conditions.
Another
key
factor
that
distinguishes franchise agreements from
sales transactions is their non-exclusive
nature. Franchise agreements typically grant
franchisees the right to operate a business
using the franchisor's brand and system
within a defined territory. However, this
right is not exclusive, as the franchisor may
grant similar rights to other franchisees
within the same or overlapping territories.
Franchise agreements also entail an ongoing
relationship between the franchisor and
franchisee,
characterized
by
training,
support, and ongoing assistance. Unlike a
one-time sale of goods, which concludes
once the transaction is complete, franchise
agreements involve continuous interaction
and collaboration between the parties. The
financial aspects of franchise agreements
further underscore their distinction from
sales transactions. Franchise fees and
royalties are payments made by the
franchisee to the franchisor in exchange for
the right to use the franchisor's brand and
system. These payments are not for the
purchase of goods but rather for the ongoing
support and benefits provided by the
franchiser.

26. In conclusion, 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. By recognizing the unique
characteristics of franchise agreements,
including the prevalence of intangible assets
and the importance of intellectual property,
tax authorities can develop nuanced tax
policies that promote fairness, efficiency,
and compliance.