The Kerala High Court in a significant ruling observed that the execution of contract for delivery of goods is taxable event in contract for transfer of right to use goods under the Kerala Value Added Tax Act, 2003 (KVAT Act).
The assessing officer, on scrutiny of the audited statement of accounts and assessment records, noticed that the assessee, M/s Sathyam Audios, had received an amount of Rs.3,68,97,749.05/- towards income from the copyright and royalty for the transfer of right to use ringtone for a specific period during the assessment years in question.
It was found that the assessee, had not declared the said turnover in their monthly/annual return, reopened and completed the assessments under Section 25 (1) of the Kerala Value Added Tax Act, 2003 (‘KVAT Act’). Aggrieved by the order of the assessing officer, appeals were preferred by the assessee, which were allowed in their favour. The State filed a second appeal before the Tribunal challenging the order of the Appellate Assistant Commissioner, and the same was dismissed by the Appellate Tribunal, which is challenged in the revisions.
The issue before the authorities was regarding the taxability of receipts towards royalty and the transfer of the right to use intangible property. According to the assessing authority, under Entry 68 of the III Schedule, intangible items such as copyright, patent, etc., are specifically included, and under Section 6(1)(c) of the KVAT Act, 2003, transfer of the right to use any good for any purpose for a specified period is taxable at 4%.
The Assessing Officer held that courts held that trademark is intangible goods, which can be the subject matter of transfer and royalty received by dealers from franchisees for the use of a trademark is liable to tax, and in the same analogy, royalty received from intangible goods like copyright, patent, etc. is also liable to be taxed as the consideration received for the transfer of the right to use goods under the KVAT Act.
Mohammed Rafiq, the Special Government Pleader appeared for the State, and Jaikrishna R., the counsel appeared for the respondent-assessee.
The Special Government Pleader argued that the Tribunal has clearly erred in law in not finding that the assessee was liable to pay sales tax, despite the finding that what was transferred was the right to use goods. The Tribunal went wrong in finding fault with the assessing authority, which had correctly construed the matter in the light of the principles of law, and those findings were erroneously reversed by the Appellate Authority relying on the judgment of the Division Bench in Malabar Gold.
The Counsel for the respondent-assessee argued that there had been no exclusive transfer and that what has been granted is only a licence, and the same is evident from the agreements executed between them and those who used the same subject to the conditions therein. It is also argued that this position of law is clearly stated by the Madras High Court in the judgment reported in AGS Entertainment Pvt. Ltd. v. Union of India.
A Division Bench of Justice Dr AK Jayasankaran Nambiar and Justice Mohammed Nias CP, noted that “In the light of the above, it has to be held that in a contract for the transfer of the right to use the goods, the taxable event is the execution of the contract for delivery of the goods, and if that has taken place, it was immaterial whether the transfer was exclusively or to the exclusion of all others. In the instant case, the transferee obtained a legal right to use the goods for the period during which he had such legal rights, which had to be to the exclusion of the transferor.”
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
