The Delhi bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service tax is not leviable on the right to use of trademark under the Trademark License Agreement as the same would clearly fall within the meaning of the phrase “transfer of right to use the goods” and would be covered by article 366 (29A) (d) of the Constitution.
The question before the Tribunal was whether the ‘right to use’ component of the Agreement, which is to the extent of 65 per cent and not on the Royalty component, which to the extent of 35 per cent, is liable to service tax or not.
The respondent-assessee, M/s Future Brands contended that on the ‘right to use’ component value, it has regularly paid VAT, as it would amount to a deemed sale under article 366 (29A) of the Constitution and, therefore, no service tax is leviable.
CESTAT President Justice Dilip Gupta, and Mr. P V Subba Rao, Member (Technical) held that under Sales Tax, there is transfer of possession and effective control in goods, while there is no such transfer of possession and effective control under Service Tax.
“A perusal of the terms of the Trademark License Agreement dated August 27, 2008 and the Retail License Agreement executed on October 01, 2007 would show that there is a noticeable difference between the two. In the case of the Retail License Agreement only a non-exclusive and non-transferrable license to use the trademark was granted by the respondent to Pantaloon. Pantaloon also agreed that the respondent would have the right to control the standard and quality of the products. There is also no restriction in granting the license to others during the license period. This agreement is clearly, therefore, outside the purview of article 366 (29A) (d) of the Constitution that defines tax on the sale or purchase of the goods. Service tax would, therefore, be chargeable,” the Tribunal said.
Quashing the service tax demand, the Tribunal held that “However, in the case of the Trademark License Agreement an exclusive license to use the trademark in any manner during the term of the agreement was granted. Such a license could not be granted to any other person during the period of the agreement. This would clearly fall within the meaning of the phrase “transfer of right to use the goods” and would be covered by article 366 (29A) (d) of the Constitution. Service Tax would, therefore, not be payable.”
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