The Allahabad High Court has held that the franchise agreement granted a non-exclusive licence rather than a transfer of the right to use goods and the transaction does not attract Value Added Tax ( VAT ) under the Uttar Pradesh Value Added Tax Act ( UPVAT Act ), 2017.
The department has filed the commercial tax revision petition under Section 58 of the U.P. Value Added Tax Act, 2008. The department challenged the order passed by the first appellate authority. The first appellate authority has concluded that M/S Pan Parag India Limited, the assessee-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.
It was contended by the respondent assessee 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. 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.
The department contended that in the franchise agreement which the respondent dealer had entered into with various parties, only a mere licence was given by the respondent for the use of his brand name. The franchise agreement grants only a representational right and not an exclusive right to the licensees to sell/manufacture goods. The 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.
Thus, the licence does not constitute a ‘transfer of right to use of goods’. The 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. No intention to evade tax on the part of the respondent can be inferred.
By the Finance Act, of 1994, the distinction between the transfer of the 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 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.
The two-member bench of Justice Shekhar B. Saraf has observed that the respondent-department had received royalty amount from various dealers under the franchise agreement and service tax has been duly paid by it on the same. If the payments have been subjected to service tax, they cannot be recharacterized as the sale of goods to levy VAT or sales tax.
It was observed that double taxation occurs when the same income or transaction is taxed more than once by different tax authorities or under different tax regimes. An activity once taxed as a service cannot be taxed again as a sale of goods. The principle is crucial for ensuring fairness in the tax system and avoiding undue tax burdens on taxpayers.
While upholding the view taken by the Commercial Tax Tribunal, the court held that a balanced approach that takes into account the economic substance of franchise transactions and the need to prevent tax arbitrage and avoidance will ensure the integrity and effectiveness of the tax system.
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