Bombay High Court
Mahyco Monsanto Biotech (India) ... vs The Union Of India Through The ... on 11 August, 2016
Bench: S.C. Dharmadhikari
Mayhco Monsanto Biotech (India) Pvt Ltd | Subway Systems (I) Pvt Ltd
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MP-RB-GP
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
WRIT PETITION NO. 9175 OF 2015
MAHYCO MONSANTO BIOTECH (INDIA)
PVT. LTD.,
(formerly known as Mahyco Monsanto Biotech
(India) Ltd), a company duly registered under the
Companies Act, 1956 having its registered office at
5th Floor, Ahura Centre, 96, Mahakali Caves
Road, Andheri (East), Mumbai 400 093. ...Petitioner
versus
1. THE UNION OF INDIA
through the Secretary, Ministry of Finance,
Department of Revenue, North Block, New
Delhi 110 001
2. THE STATE OF MAHARASHTRA
Through the Government Pleader, High
Court, Mumbai
3. THE PRINCIPAL COMMISSIONER OF
SERVICE TAX,
Mumbai IV, 4th Floor, New Central Excise
Building, 115, Maharshi Karve Road,
Churchgate, Mumbai 400 020.
4. THE COMMISSIONER OF SALES
TAX,
8th Floor, Vikrikar Bhavan, Mazgaon,
Mumbai 400 010 ...Respondents
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ALONG WITH
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 497 OF 2015
1. SUBWAY SYSTEMS INDIA PVT LTD
Having its registered office at Level 2,
Elegance, Mathura Road, Jasola, New Delhi
110 025.
2. JAGANATH RAO,
Director, having his office at Level 2,
Elegance, Mathura Road, Jasola, New Delhi
110 025.
3. RAVINDRA PAL SINGH,
Partner, Suresh Surana & Associates LLP,
having his office at 3rd Floor, Tower-B,
Sector-1, Noida, 201 301, New Delhi NCR ...Petitioners
versus
1. THE STATE OF MAHARASHTRA
Through the Government Pleader, pwd
Building, High Court, Mumbai
2. UNION OF INDIA
Aaykar Bhavan, Maharshi Karve Road,
Churchgate, Mumbai 400 021.
3. COMMISSIONER OF SERVICE TAX,
Division-II, Range-XI, New Delhi
4. ASSISTANT COMMISSIONER OF
SALES TAX,
MUM-INV-D-039, INV-B, having her office
at Cabin No. D-8, 2nd Floor, Old Building,
Vikrikar Bhavan, Mazgaon, Mumbai 400 010 ...Respondents
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A PPEARANCES
IN WRIT PETITION NO. 9175 OF 2015 | MAHYCO MONSANTO
BIOTECH (INDIA) PVT LTD V UNION OF INDIA & ORS.
FOR THE PETITIONER Mr. N. Venkatraman, Senior Counsel,
(Monsanto) with Mr. Arun Jain, Mr. Jas Sanghvi
and Ms. Shilip Jain, i/b M/s. PDS
Legal.
FOR RESPONDENTS Mr. V. A. Sonpal, Special Counsel.
NOS. 2 AND 4
(State of Maharashtra &
Commrr of Sales Tax)
FOR RESPONDENTS Mr. Pradeep S. Jetly, with Mr. Jitendra B.
NOS. 1 & 3 Mishra.
(Union Of India &Principal
Commr Of Service Tax)
IN OS WRIT PETITION NO. 497 OF 2015 | SUBWAY SYSTEMS (INDIA)
PVT LTD V STATE OF MAHARASHTRA & ORS.
FOR THE PETITIONER Mr. D. B. Shroff, Senior Counsel, with
(Subway Systems) Mr. Hormazd Daruwalla, i/b M/s.
Khaitan & Co.
FOR RESPONDENTS Mr. V.A. Sonpal, Special Counsel, with Ms.
NOS. 1 AND 4 Anjali Helekar, AGP.
(State of Maharashtra &
Asst Commr of Sales Tax)
FOR RESPONDENTS Mr. Pradeep S. Jetly, with Mr. Jitendra B.
NOS. 2 AND 3 Mishra.
(Union of India & Commr
of Service Tax)
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CORAM : S.C. Dharmadhikari
& G.S.Patel, J.J.
JUDGMENT RESERVED ON : 4th March 2016
JUDGMENT PRONOUNCED ON : 11th August 2016
JUDGMENT (per G.S. Patel J):
TABLE OF CONTENTS
I. Introduction........................................................................ 4
II. Constitutional & Legislative Framework ........................... 8
III. Facts in the Monsanto Petition ..........................................14
IV. Submissions & Findings in Monsanto ............................... 20
V. Facts in the Subway Petition ............................................. 50
VI. Submissions & Findings in SubwaY ...................................53
VII. Conclusion.........................................................................65
I. INTRODUCTION
1. These two Writ Petitions came to be tagged together
presumably because they both raise issues of whether, in respect of
the transactions that arise in each, the Petitioners are liable to a levy
of service tax or sales tax. As it turns out, the facts are materially
distinct; and as the following judgment shows, the two cases seem to
us to be mirror images of each other: if one fails, on a parity of
reasoning, the other must succeed.
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2. We have heard Mr. Venkatraman for the Petitioners, Mr.
Sonpal for Respondents Nos. 2 and 4, and Mr. Jetly for Respondent
Nos. 1 and 3 in Writ Petition No. 9175 of 2015 ("the Monsanto
Petition"). In Writ Petition No. 497 of 2015 ("the Subway
Petition"), we have heard Mr. Shroff for the Petitioners, Mr. Jetly
for Respondents Nos. 2 and 3 and Mr. Sonpal for Respondent Nos. 1
and 4. We have carefully considered the submissions of all the
counsels and the material they have placed before us. Mr. Jetly has
broadly adopted the arguments of Mr. Venkatraman and Mr. Shroff.
3. Mr. Venkatraman's submissions are intricately structured. We
will turn to these presently. It seems to us necessary, however, to at
least attempt to distill the essence of the arguments in his Petition
and, therefore, in the companion Petition. In doing so, we leave
aside for the present all questions of legislative competence.
(a) If we may be permitted a small latitude, the kernel (or
'seed', as it were) of Mr. Venkatraman's case is this:
Mahyco Monsanto Biotech (India) Pvt. Ltd.
("Monsanto India") supplies to third parties a certain
type of hybrid cotton seed. This seed is impregnated
with a proprietary technology that protects it against
the boll-weevil, a known menace to cotton crops. From
those hybrid seeds, these third parties then generate
large quantities of sowable seeds, which they then sell
to cotton farmers. Monsanto India itself sells nothing to
the end-user. These end-product seeds have the benefit
of the boll-weevil protection technology; and the third
party purchasers from Monsanto India are thus able to
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commercialize the technology to produce hybrid seeds
for sale to cotton growers. From a small seed do mighty
cotton plantations grow. Monsanto India says that what
it provides when it gives the third party purchasers the
parent, impregnated seed is a service, and this is liable
to be taxed under the relevant provisions of the Finance
Act as amended, read with the Rules that pertain to
service tax. This is a central levy. The transaction
between Monsanto India and the third party with
whom it deals is not, and cannot be, a sale assessable
under the Maharashtra Value Added Tax Act, 2002
("the MVAT Act"). Mr. Venkatraman insists that the
transaction in question involves no transfer of a chattel
qua chattel; no transfer of the right to use; and
therefore, by necessary elimination, it must be a service
and must be construed as such. He says that what is
being offered is the technology; the container,
receptacle or form in which it is transmitted is entirely
irrelevant. What the third party pays for is the
technology, not the container; and since this has none
of the qualities that define a sale or a deemed sale (viz.,
a transfer of the right to use), it must be held to be a
service. Central to this argument is the aspect of non-
exclusivity: Monsanto India passes no 'property' or
'estate' in the technology itself to the third party
developer. It merely licenses it. Monsanto India may
issue innumerable such technology licenses to various
third party developers. Those developers in turn
cannot further sub-license the technology. They can
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only use it to produce a hybrid, sowable seed.
Therefore, the third party developers obtain only a
right to use the technology; and there is no transfer of
that right. The argument against this seems to us to be
straightforward: that the only way for Monsanto India
to effect this so-called technology transfer is by selling
to the developer a seed duly imbued or impregnated
with the protective technology. In other words, it is
simply not possible for Monsanto India to divorce the
container from the technology; without the seed
container, the technology is in itself useless. Once this
is seen, it becomes apparent that all the qualities that
Monsanto India describes as applicable to a sale apply
exactly to the third party developers' acquisition of that
impregnated seed. That third party developer may
further sell it as is or do what he wishes with it. There
is clearly not only a transfer of a right to use (as there
would be in a deemed sale), but there is in fact a direct
sale of the impregnated seed; this is in no way a
service.
(b) The Subway Petition is, as we have said, an almost
exact mirror image. Here, the transaction is a franchise
agreement. Subway holds considerable intellectual
property in the form of trade marks, copyright and so
on. The franchisee in question is in Mumbai, though
the agreement is stated to have been executed in Delhi.
The situs argument is subsidiary. What Subway says is
that the franchise agreement is purely a service. Its
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franchisee has a mere right to display Subway's marks.
It cannot sub-license the intellectual property further
downstream to sub-franchisees; it cannot sell or
alienate that intellectual property; it enjoys no estate or
title in any of the marks. This is, therefore, not a sale or
even a deemed sale; it is purely a service. The State
Government argues that these submissions are
irrelevant. The franchisee has acquired a right to use
the marks, and there is, therefore, a transfer of the right
to use those marks. In any case, certain amendments to
the MVAT Act make all this moot: trade mark
assignments and franchise agreements are both now
brought into the sweep of the local sales tax law.
4. Having closely considered the submissions, we are of the view
that the Monsanto Petition must fail, and the Subway Petition must
succeed. Our reasons follow.
II. CONSTITUTIONAL AND LEGISLATIVE FRAMEWORK
5. Article 366(29A) reads as follows:
"366. In this Constitution, unless the context
otherwise requires, the following expressions have
the meanings hereby respectively assigned to them,
that is to say--
(29A) "tax on the sale or purchase of goods"
includes--
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(a) a tax on the transfer, otherwise than in
pursuance of a contract, of property in
any goods for cash, deferred payment or
other valuable consideration;
(b) a tax on the transfer of property in
goods (whether as goods or in some
other form) involved in the execution of a
works contract;
(c) a tax on the delivery of goods on hire-
purchase or any system of payment by
ig instalments;
(d) a tax on the 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;
(e) a tax on the supply of goods by any
unincorporated association or body of
persons to a member thereof for cash,
deferred payment or other valuable
consideration;
(f) a tax on the supply, by way of or as
part of any service or in any other
manner whatsoever, of goods, being food
or any other article for human
consumption or any drink (whether or not
intoxicating), where such supply or
service, is for cash, deferred payment or
other valuable consideration,
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and such transfer, delivery or supply of any goods
shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and
a purchase of those goods by the person to whom
such transfer, delivery or supply is made;"
6. The incidence of tax in sub-clause (a) is on the transfer of
property in goods; in sub-clause (b), too, it is on the transfer of
property in goods, but in the context of a works contract; in sub-
clause (c), it is on the delivery of goods; in sub-clause (d), it is on the
transfer of a right to use any goods; in sub-clause (e), it is on the
supply of goods as part of a service; and in sub-clause (f ), it is on the
supply of services. It is sub-clause (d) that falls for consideration in
these Writ Petitions.
7. The relevant provisions of The Maharashtra Value Added
Tax, 2002 read thus:
"2. Definitions.-- In this Act, unless the context
otherwise requires,-
(24) "sale" means a sale of goods made within
the State for cash or deferred payment or other
valuable consideration but does not include a
mortgage, hypothecation, charge or pledge; and
the words "sell", "buy" and "purchase", with all
their grammatical variations and cognate
expressions, shall be construed accordingly;
Explanation.-- For the purposes of this
clause,--
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(a) ...
(b)(i) the transfer of property in any goods,
otherwise than in pursuance of a contract,
for cash, deferred payment or other
valuable consideration;
(ii) the transfer of property in goods
(whether as goods or in some other form)
involved in the execution of a works
contract including, an agreement for
carrying out for cash, deferred payment or
other valuable consideration, the building,
construction, manufacture, processing,
fabrication, erection, installation, fitting
out, improvement, modification, repair or
commissioning of any movable or
immovable property;
(iii) a delivery of goods on hire-purchase
or any system of payment by instalments;
(iv) the 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;
(v) the supply of goods by any association
or body of persons incorporated or not, to
a member thereof for cash, deferred
payment or other valuable consideration;
(vi) the supply, by way of or as part of any
service or in any other manner whatsoever,
of goods, being food or any other article
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for human consumption or any drink
(whether or not intoxicating), where such
supply or service is made or given for
cash, deferred payment or other valuable
consideration;
shall be deemed to be a sale."
"Schedule
Sr. Name of Conditions Rate Date of
No. Commodity and of Effect
exceptions Tax
39 Goods of 4% 1-4-2005 to
intangible or 31-2-2010
incorporeal
nature as may be
notified from time
to time by the
State
Government in
the Official
Gazette.
39 Goods of 5% 1-4-2010 to
intangible or date
incorporeal
nature as may be
notified from time
to time by the
State
Government in
the Official
Gazette.
8. The relevant provisions of the Finance Act, 1994 are set out
below.
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65. Definitions.-- In this Chapter, unless the context
otherwise requires,
"(55a) "intellectual property right" means any right
to intangible property, namely, trade marks,
designs, patents or any other similar intangible
property, under any law for the time being in force,
but does not include copyright;"
"(55b) "intellectual property service" means, -- (a)
transferring, temporarily; or (b) permitting the use
or enjoyment of any intellectual property right;"
"(105) "taxable service" means any service provided
or to be provided,-
(zzr) to any person, by the holder of
intellectual property right, in relation to
intellectual property service;"
66E. Declared Services:- The following shall constitute
declared services, namely:--
(c) temporary transfer or permitting the use or
enjoyment of any intellectual property right;
(Emphasis added throughout)
9. Mr. Venkatraman relies on a number of judgments to
elucidate the meaning and requirements of Article 366(29A)(d).
These, he says, must always be present for a transaction to fall
within the ambit of this Article. Mr. Shroff too has adopted his
formulation of the law. Although these are considered in detail later
in this judgment, a summary of these legal submissions on this
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aspect would be helpful. Briefly, Mr. Venkatraman's argument is
that for a transaction to qualify as a transfer of the right to use goods
-- a deemed sale -- the following requirements must be met : (a)
there must be a transfer goods; (b) 'transfer' requires divesting in
one and vesting in another of the same rights or goods; (c) the
effective control over the goods must pass to the transferee; (d) the
original owner must be temporarily excluded from using the right
himself and, besides the conveyance of title, every other right
should accrue absolutely in the hands of the transferee -- the right
cannot exist simultaneously in the hands of both the transferor and
the transferee; (e) the original owner must not be able to effect a
further transfer of the same rights to others, during the period they
are vested in the transferee; and (f ) the concept of transfer is the
same for both tangible and intangible goods.
10. We have not found this summation of the law to be entirely
accurate. We do not think that points (c), (d) and (e) must always be
satisfied. The judgments cited in support were in a certain factual
background and, in our opinion, were given not as a general
proposition of law, but within the confines of their respective factual
matrices. In any case, even on Mr. Venkatraman's formulation of the
law we have found against him. For precisely the reasons we rule
against Monsanto India, we find for Subway.
III. FACTS IN THE MONSANTO PETITION
11. The Petitioner in Writ Petition No. 9175 of 2015, Monsanto
India, is a joint venture company of Monsanto Investment India
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Private Limited ("MIIPL") and the Maharashtra Hybrid Seeds Co.
Monsanto India develops and commercializes insect-resistant
hybrid cottonseeds using a proprietary "Bollgard technology", one
that is licensed to Monsanto India by Monsanto USA through its
wholly-owned subsidiary, Monsanto Holdings Private Limited
("MHPL"). This technology is further sub-licensed by Monsanto
India to various seed companies on a non-exclusive and non-
transferable basis to use, test, produce and sell genetically modified
hybrid cotton planting seeds. In return for this technology,
Monsanto India receives trait fees based on the number of packets of
seeds sold by the sub-licensees. These sub-licensing agreements,
with almost 40 seed companies, are the transactions in question.
Respondent Nos.1 and 2 in the Monsanto Writ Petition are the
Union of India and the State of Maharashtra respectively.
Respondent No.3 is the Principal Commissioner of Service Tax.
Respondent No. 4 is the Commissioner of Sales Tax.
12. The Monsanto Petition, filed under Article 226 of the
Constitution of India, brings a challenge to Entry 39 of Schedule
to the Maharashtra Value Added Tax Act, 2002 ("the MVAT
Act"); the definitions under Sections 65(105)(zzr), 65(55a) and
65(55b) of the Finance Act, 1994; and sub-clause (c) of Section 66E
of the Finance Act, 1994. The challenge is on two grounds. First,
that these are ultra vires Articles 14, 19(1)(g) and 265 of the
Constitution of India. Second, that the exercise of power of the
Respondent No.1 under Entry 54 in List II of the Constitution is
ultra vires; it encroaches on the power vested exclusively in the
Union under Entry 97 in List I.
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13. The principal question of this dispute is whether these
agreements whereby the 'Monsanto technology' is granted by the
Petitioner to the seed companies amounts to mere permissive use
and, therefore, a service under Section 65(B)(44) of the Finance
Act, 1994 ( "Finance Act") read with Entry 97 List I of the
Constitution, or whether it is a "deemed sale" in the nature of
"transfer of right to use goods" under clause (b)(iv) of the
Explanation to Section 2(24) of the MVAT Act read with Article
366(29A)(d) and Entry 54 List II of the Constitution.
14. A brief background of the Monsanto technology and business
structure is necessary. Bacillus Thuringlensis ("BT") is a naturally
occurring bacterium that produces proteins that kill specific insects.
Using biotechnology, Monsanto USA introduces a specific BT gene
into the cotton genome. This produces a toxin protein in the
cottonseed sufficient to kill specific insects, viz., boll weevils or
bollworms. These 'Bollgard' cottonseeds, called the 'donor seeds',
containing the BT gene were initially imported by MHPL in India
from Monsanto USA. MHPL also uses these seeds to produce more
donor seeds in its facilities, and licenses the technology to Monsanto
India in return for a 16.5% royalty on the latter's turnover. The
process thereafter is as follows. Monsanto India enters into sub-
licensing agreements with other seed companies through which it
claims to grant permissive use of the technology via donor seeds. A
sample of such sub-licensing agreement is annexed.1 Monsanto India
delivers fifty sample BT 'donor seeds' to the seed companies for BT
cotton hybrid production, along with the standard operating
1. Monsanto Petition, Exhibit "D", pp. 44-69.
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procedure (SOP) manual prepared by Monsanto USA. The seed
companies produce or generate additional donor seeds from these
given seeds. Monsanto India provides initial training to the seed
companies to assist them in using the donor seeds and developing
foundation seeds, which will enable them to eventually produce BT
cotton hybrids. Monsanto India thereafter provides training to the
seed companies to carry out the zygosity test, which tests the
execution of the breeding plan. The sub-licensees, at the end of this
process, are required to undertake regulatory trials to obtain the
relevant approvals from the various institutes such as the
Institutional Biosafety
ig Committee of the Department of
Biotechnology, Ministry of Science and Technology, Ministry of
Environment, Genetic Engineering Advisory Committee (GEAC)
and others responsible. These approvals need certificates of
validation and test reports, which are provided by Monsanto India.
Once such approval is obtained from the GEAC, each sub-licensee
can produce BT cotton hybrid seeds. These BT cotton hybrid seeds
are then sold to farmers.
15. At present, the technologies licensed are Bollgard I ("BG I")
and Bollgard II ("BG II"). The agreement provides for a few
restrictions on the seed companies: the technology is non-
transferable, non-exclusive, and cannot be assigned except in the
manner provided in the agreement. The seed companies cannot
grant further sub-licenses, and the sub-licensee is not permitted to
reverse engineer, modify or use the BT gene without the prior
consent of Monsanto India. Under the agreement, Monsanto India
has also to provide training to produce hybrids at various stages,
apart from assisting the seed companies in obtaining the required
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approvals and conducting zygosity tests. This training includes
classroom training and sharing of protocols. Under the sub-licensing
agreement, Monsanto India receives consideration from the seed
companies in the form of a one-time fixed fee and a recurring
variable based on the sale of the genetically modified seeds; in
essence, a trait fee.
16. Prior to the introduction of the VAT system in Maharashtra,
tax on transfer of right to use goods was governed by the
Maharashtra Sales Tax on Transfer of Right to Use any Goods Act,
1985 ("Lease Tax Act"). Under this legislation, Monsanto India
was not liable to pay any sales tax because the exhaustive entry
concerning intangible goods did not cover technical know-how. Vide
an application of Determination of Disputed Question ("DDQ"),
Monsanto India applied to the Commissioner of Sales Tax to
determine the applicability of the Lease Tax Act.2 The order
provided that Monsanto India would be expected to pay a 4% sales
tax on the sub-licensing transaction.3 Aggrieved by this order,
Monsanto India appealed to the Maharashtra Sales Tax Tribunal.
The appeal succeeded.4
17. From 1st April 2005, the VAT regime replaced the sales tax
regime, and this covers lease transactions, attracting a tax of 4%
(increased to 5% since April, 2010) on the basis of the rate specified
under the Schedule. This entry expressly includes technical know-
2. Monsanto Petition, Exhibit "F", pp. 71-78.
3 Monsanto Petition, Exhibit "G", pp. 79-91.
4. Monsanto Petition, Exhibit "H", pp. 92--110.
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how. However, Section 96(1)(f ) of the MVAT Act provides that this
would only apply to transactions after April 1st 2005; prior
transactions were covered by the Lease Tax Act and, therefore,
attracted no tax. So even under the VAT regime, no tax was paid on
the trait fees. However, all amended agreements attracted VAT. In
order to determine the applicability of the Supreme Court judgment
in the case of Bharat Sanchar Nigam Ltd v Union of India,5 Monsanto
India made another DDQ application.6 However, there is no order
against this DDQ application. By its letter dated 4th February,
Monsanto India requested the Commissioner of Sales Tax,
Maharashtra to pass an order against this application.7 There, too,
no order has been passed till date.
18. Monsanto India is a registered Service Tax assessee with the
registration certificate no. AABCM0176BST001, and is also listed
with the Principal Commissioner of Service Tax.8 Monsanto India's
agreement also came within the ambit of the definition of 'service',
provided in the Finance Act, and was liable be taxed in the category
of "Intellectual Property Services". Several show cause notices were
issued by the Service Tax Commissioner demanding service tax
under the category of "Franchisee Service" for the trait fees
received for BG I. One of these is annexed.9 Monsanto India was
initially engaged in licensing the BG I technology, but this did not
come under the ambit of "Intellectual Property Services" because it
5. 2006 (2) STR 161 (SC).
6. Monsanto Petition, Exhibit "K", pp. 116-123.
7. Monsanto Petition, Exhibit "L", p. 124
8. Monsanto Petition, Exhibit "C", pp. 42-43.
9. Monsanto Petition, Exhibit "N", pp. 131-142.
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was not patented. Monsanto India, in 2007, started to license the
technology in BG II, which, being patented, required it to remit
service tax. Monsanto India has been paying service tax since 2007.
19. Monsanto India submits that while under Section 66E of the
Finance Act, a temporary transfer or permissive use or enjoyment of
any intellectual property is considered to be a declared service,
liable to service charge, the issuance of the Trade Circular also
brought its sub-licensing agreement under the ambit of VAT.
Currently, therefore, it is subject to a double levy, as both a service
and a sale. This is impermissible in law.
IV. SUBMISSIONS & FINDINGS IN MONSANTO
20. The crux of Mr. Venkatraman's case is that Monsanto India's
agreements fall within the ambit of a permissive use rather than a
transfer of a right to use. It is, therefore, a service and not a deemed
sale within the meaning of Article 366(29A)(d) of the Constitution
of India. The transaction, he says, is a single composite transaction
and cannot be taxed as both a sale and a service. Sales tax and
service tax are mutually exclusive and this, he says, is well-settled:
BSNL,10 Imagic Creative Private Limited v CTO11 and Association of
Leasing and Finance Companies v UOI.12 Paragraph 28 of Imagic
Creative, which followed the law in BSNL, reads:
10. 2006 (2) STR 161 (SC).
11. 2008 (9) STR 337.
12. 2010 (20) STR 417.
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"Payments of service tax as also the VAT are mutually
exclusive. Therefore, they should be held to be
applicable having regard to the respective parameters
of service tax and the sales tax as envisaged in a
composite contract as contradistinguished from an
indivisible contract. It may consist of different elements
providing for attracting different nature of levy. It is,
therefore, difficult to hold that in a case of this nature,
sales tax would be payable on the value of the entire
contract; irrespective of the element of service
provided. The approach of this assessing authority, to
us, thus, appears to be correct."
21.
The expression 'transfer of a right to use' under Article
366(29A) of the Constitution, Mr. Venkatraman says, was first
considered by a Constitution Bench of the Supreme Court in 20th
Century Finance Corporation Limited v State of Maharashtra.13 The
Court held that the taxable event under Article 366(29A)(d) was the
transfer of the right to use goods, and a distinction was set out
between a transfer of a right to use goods and a mere permissive use
of goods. Paragraphs 26 and 27 of the judgment read:
"26. Next question that arises for consideration
is, where is the taxable event on the transfer of
the right to use any goods. Article 366(29A)(d)
empowers the State legislature to enact law
imposing sales tax on the transfer of the right to
use goods. The various sub-clauses of Clause
(29A) of Article 366 permit the imposition of tax
thus: Sub-clause (a) on transfer of property in
goods; Sub-clause (b) on transfer of property in
goods; Sub-clause (c) on delivery of goods; Sub-
13 (2000) 6 SCC 12
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clause (d) on transfer of the right to use goods;
Sub-clause (e) on supply of goods; and Sub-
clause (f) on supply of services. The words "and
such transfer, delivery or supply..." In the latter
portion of Clause (29A), therefore, refer to the
words transfer, delivery and supply, as applicable,
used in the various sub-clauses. Thus, the
transfer of goods will be a deemed sale in the
cases of sub-clauses (a) and (b), the delivery of
goods will be a deemed sale in case of Sub-
clause (c), the supply of goods and services
respectively will be deemed sales in the cases of
sub-clauses (e) and (f) and the transfer of the
right to use any goods will be a deemed sale in
the case of Sub-clause (d). Clause (29A) cannot,
in our view, be read as implying that the tax
under Sub-clause (d) is to be imposed not on
the transfer of the right to use goods but on the
delivery of the goods for use. Nor, in our view,
can a transfer of the right to use goods in Sub-
clause (d) of Clause (29A) be equated with the
third sort of bailment referred to in "Bailment"
by Palmer, 1979 edition, page 88. The third sort
referred to there is when goods are left with the
bailee to be used by him for hire, which implies
the transfer of the goods to the bailee. In the
case of Sub-clause (d), the goods are not
required to be left with the transferee. All that is
required is that there is a transfer of the right to
use the goods. In our view, therefore, on a plain
construction of Sub-clause (d) of Clause (29A),
the taxable event is the transfer of the right to
use the goods regardless of when or whether
the goods are delivered for use. What is
required is that the goods should be in existence
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so that they may be used. And further contract in
respect thereof is also required to be executed.
Given that, the locus of the deemed sale is the
place where the right to use the goods is
transferred. Where the goods are when the right
to use them is transferred is of no relevance to
the locus of the deemed sale. Also of no
relevance to the deemed sale is where the goods
are delivered for use pursuant to the transfer of
the right to use them, though it may be that in
the case of an oral or implied transfer of the right
to use goods, it is effected by the delivery of the
goods.
27. Article 366(29A)(d) further shows that levy of
tax is not on use of goods but on the transfer of
the right to use goods. The right to use goods
accrues only on account of the transfer of right.
In other words, right to use arises only on the
transfer of such a right and unless there is
transfer of right, the right to use does not arise.
Therefore, it is the transfer which is sine qua
non for the right to use any goods."
(Emphasis added)
22. The expression 'transfer', Mr. Venkatraman says, is neither
novel nor recent. It is jurisprudentially well-established. The
essence of a 'transfer', he submits, is the acquisition of a right by the
transferee, and the corresponding loss of it by the transferor. When
applied to goods, it would mean the the passing of the goods from
the hands of the transferor to the hands of the transferee. He relies
on Salmond on Jurisprudence, Corpus Juris Secundum and the
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judgment of the Andhra Pradesh High Court in Rashtriya Ispat
Nigam Limited v Commercial Tax Officer,14 in support.
23. Salmond defines the expression 'transfer of a right' as
follows:15
The transfer of a right is an event which has a double
aspect. It is the acquisition of a right by the transferee,
and loss of it by the transferor. The vestitive fact, if
considered with reference to the transferee is a
derivative title, while from the point of view of the
transferor it is an alienative fact.
24. Corpus Juris Secundum defines 'transfer' as follows:16
"The common use of the word 'transfer' is to denote the
passing of title in property, or an interest therein, from
one person to another, and in this sense the term
means that the owner of property delivers it to another
person with the intent of passing the right which he had
it to the later."
25. In Rashtriya Ispat Nigam Limited v Commercial Tax Officer,17
the High Court of Andhra Pradesh, relying on Salmond and Corpus
Juris Secundum, explained the expression 'transfer', in the context of
the transfer of the right to use in paragraph 9 of its judgment in
these words:
14. (1990) 77 STC 182.
15. 12th Edition, pp. 332 and 333.
16. Volume 87, p. 892.
17. (1990) 77 STC 182.
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"the essence of transfer is passage of control over the
economic benefits of property which results in
terminating rights and other relations in one entity and
creating them in another."
26. Mr. Venkatraman further states that the question of whether
or not a particular transaction amounts to a transfer of the right to
use goods depends on who, i.e., the transferor or transferee, has
effective control over the goods. If the effective control over the
goods is given to the transferee, then, he says, it would be a transfer
of the right to use goods. If, on the other hand, the transferor retains
effective control, then it would be a case of a mere permissive use or
license to use. The term 'effective control' is used in contrast to
mere physical control. It is the power to exercise those rights that
arise out of ownership, as opposed to, say, a bailment. For this, he
relies on the judgments of the Supreme Court in Aggarwal Brothers v
State of Haryana18 and State of Andhra Pradesh v Rashtriya Ispat
Nigam Limited.19
27. Mr. Venkatraman concludes his summation of the law on the
transfer of the right to use goods by relying on the Supreme Court
decision in Bharat Sanchar Nigam Limited v Union of India.20 In his
separate but concurrent judgment, Lakshmanan J listed the five
attributes that must be present for a transaction to qualify as a
transfer of the right use goods. Most pertinent, Mr. Venkatraman
18. (1999) 9 SCC 182.
19. (2002) 3 SCC 314.
20.2006 (2) STR 161 (SC).
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says, are attributes 4 and 5. He refers to these two collectively as the
'BSNL twin test'. Paragraph 91 lists these attributes as follows:
91. 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
ig -- consequently all legal
consequences of such use including any
permissions or licenses required therefore 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."
(Emphasis added)
28. Mr. Venkatraman then submits that although the law on the
concept of 'transfer' in the context of the transfer of the right to use
goods, as seen above, has been laid down in the context of tangible
goods, it applies equally to intangible goods as well. The reason, he
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says, is that the expression 'goods' includes both tangibles and
intangibles. The Constitution of India, under Article 366(12),
defines 'goods' to include all materials, commodities and articles.
We have no difficulty in accepting this proposition. The Supreme
Court, in a number of judgments, has held that the expression
'goods' includes both tangibles and intangibles. The Constitution
Bench in Tata Consultancy Services v State of Andhra Pradesh21 held
that as long as intangible goods remained in an intangible form, they
could be treated differently. However, once such intangibles are
captured in some media, which is a tangible form, the intangibles,
too, become goods. Similarly, in Sunrise Associates v Government of
NCT of Delhi22 and Yasha Overseas v Commisioner of Sales Tax23 the
Supreme Court held that a right, tangible or intangible, that is
capable of being bought and sold independently for consideration
becomes goods.
29. Therefore, Mr. Venkatraman says, there is no distinction in
law between tangible and intangible goods. Neither Article 366(12)
nor 366(29A)(d) of the Constitution prescribe separate parameters
for a 'transfer' of tangible goods and a 'transfer' of intangible goods.
Neither expression, i.e. 'goods' or 'transfer', has any artificial or
deeming fictions for intangible goods. The expression 'transfer' in
Article 366(29A)(d), therefore, has the same meaning with respect
to both tangible goods and intangibles.
21. (2005) 1 SCC 30.
22. (2006) 5 SCC 603.
23. (2008) 8 SCC 681.
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30. For a transaction to qualify as a transfer of the right to use
goods, in Mr. Venkatraman's formulation, the following tests must
be met: (a) there must be a transfer goods; (b) such a 'transfer'
requires divesting in one and vesting in another of the same rights or
goods; (c) the effective control over the goods must pass to the
transferee; (d) the original owner must be temporarily excluded
from using the right himself and besides the conveyance of title,
every other right should accrue absolutely in the hands of the
transferee --the right cannot exist simultaneously in the hands of
both the transferor and the transferee; (e) the original owner must
not be able to effect a further transfer of the same rights to others,
during the period they are vested in the transferee; (f ) the concept
of transfer is the same for both tangible and intangible goods. If
these criteria are not met, then, he says, the transaction does not
constitute a 'deemed sale' within the meaning of Article
366(29A)(d). For this reason, he contends that the decisions of this
Court in Commissioner of Sales Tax v Duke and Sons24 and Tata Sons
Limited v State of Maharashtra,25 and that of the Andhra Pradesh
High Court in Nutrine Confectionary Company Private Limited v State
of Andhra Pradesh26 do not represent the correct position in law.
31. Mr. Venkatraman urges us to hold the decision of this Court
in Duke & Sons was per incuriam because substantially relevant law
had not been considered; or, at any rate, it is no longer good law. At
the time when Duke & Sons was decided, there was no judgment of
the Supreme Court interpreting Article 366(29A)(d). According to
24. (1999) 1 Mah LJ 26
25. 2012 SCC OnLine Bom 697; (2015) 80 VST 173 (Bom).
26. (2011) 40 VST 327 (AP).
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Mr. Venkatraman, Duke & Sons held that control and possession are
not essential for a transfer of right to use, and that the mere
authorization to use is sufficient for the transaction to qualify as a
transfer. In fact, even without effective control, permissive use and
license would fall within the meaning of transfer of right to use.
However in 2000, the Supreme Court held in 20th Century Finance
Corporation that mere use would not constitute a deemed sale, and
that transfer is the sine qua non of any sale. Even Salmond on
Jurisprudence and Corpus Juris Secundum say that transfer is an
acquisition of right on the part of the transferee and loss of that right
by the transferor. The decisions of the Supreme Court in Aggarwal
Brothers and in Rashtriya Ispat Nigam Limited also hold that effective
control is a sine qua non for transfer of right to use. Mr. Venkatraman
therefore submits that the finding in Duke & Sons that there is no
need for effective control and that mere permission or license would
be sufficient to constitute a deemed sale cannot be good law. This is
especially so in light of the decision in BSNL, where the Supreme
Court laid down a two-pronged test, viz., i) temporary exclusion of
transferor and ii) loss of effective control, for a transaction to qualify
as a transfer of the right to use making it a 'deemed sale'. Mr.
Venkatraman submits that the holding in Duke & Sons that the
decision of the Andhra Pradesh High Court in Rashtriya Inspat
Nigam Limited does not apply to trade marks is not the correct
position in law today. This is so, he submits, because the Supreme
Court has clarified time and again, right from 20th Century to
BSNL, that there must be an vesting in the hands of the transferee
and a concomittant divesting from the hands of the transferor.
There is also nothing in the law, he submits, to distinguish between
tangible and intangible goods. This, he says, also cannot be done in
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view of the judgment of the Constitutional Bench in Tata
Consultancy Service, which held that goods include both tangible and
intangible. Thus, the same considerations will apply to transactions
regarding intangible goods as well.
32. He also contends that the judgment of this Court in Tata Sons
was also decided per incuriam (or is incorrect) since certain crucial
aspects directly affecting the issue in question were not brought to
the Court's notice. To begin with, he says, Tata Sons followed the
ratio in Duke & Sons, which, as stated earlier, is not the correct
position in law in light of subsequent judgments of the Supreme
Court. These were not placed before the Court. Further, during the
period in question, i.e., 1998 to 2002, only the transfer of a right to
use goods was taxable under Article 366(29A)(d), and a mere
permissive or license to use was not liable to service tax under the
Finance Act, 1994. Sections 65(55a) and 65(105)(zzr) of the Finance
Act, 1994, under which permissive use of intellectual property is
liable to service tax, came into force only on 10th September 2004.
The service tax authorities were not parties to the proceedings. The
Court, therefore, did not have the opportunity to consider rival
submissions on the question of whether the transaction was a
deemed sale under Article 366(29A)(d) or a mere permissive use. In
fact, in paragraph 58 the Court expressly stated that it did not
express any opinion as to the propriety of the Maharashtra Sales Tax
Tribunal's decisions in M/s. Smokin' Joe's Pizza Pvt. Ltd. v State of
Maharashtra27 and Diageo India Pvt. Ltd. v State of Maharashtra,28 as
27. (2009) 39 MTJ 266; Appeal No. 25 of 2004; decided on 25th November
2008.
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separate proceedings in that regard were pending. These were cases
where the issue of sale versus service had been raised, but on which
the Tata Sons court expressed no opinion. Lastly, Mr. Venkatraman
says that the Court placed reliance on three decisions of the Kerala
High Court in Kreem Foods Private Limited v State of Kerala,29 Jojo
Frozen Foods Private Limited v State of Kerala30 and Mechanical
Assembly Systems (India) Private Limited v State of Kerala,31 all of
which had concurred with the view taken in Duke and Sons. These
three decisions had subsequently been distinguished by the Kerala
High Court itself in Malabar Gold Private Limited v CTO.32 This was
not pointed out to the Court.
33. Mr. Venkatraman submits that the decision of the Andhra
Pradesh High Court in Nutrine Confectionary Co Pvt Ltd v State of
Andhra Pradesh33 does not correctly interpret the test laid down in
BSNL. In Nutrine, the Court held that in BSNL, the goods in
question were mobile telephone connections, which are anyway
invariably limited to the licensee. This cannot be said to be true of a
trade mark or logo. The fact that the appellant still continued to
hold the mark NUTRINE for itself and transacted business in such
name even after licensing it to others, the Court held, cannot be
reason to exclude it from being a sale. This is because a trade mark is
28. (2009) 40 MTJ 285; Second Appeal Nos. 1432 to 1438 of 2006 decided
on 12th February 2009.
29. (2009) 24 VST 333.
30. (2009) 24 VST 327.
31. (2006) 144 STC 536.
32. (2013) 32 STR 3.
33. (2011) 40 VST 327 (AP).
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inherently capable of being assigned for either an exclusive use or a
limited use to multiple licensees. Mr. Venkatraman urges that the
decision in Nutrine did not apply the BSNL "twin test" that was
expressly laid down by the Supreme Court. Without appreciating
that Nutrine Confectionary Company was not divesting effective
control or retaining exclusivity, the Bench held it to be a transfer of
right to use. This is contrary, Mr. Venkatraman says, to BSNL.
34. The Finance Act tells us that a service is a transaction
without a sale. This means, Mr. Venkatraman says, that any
transaction that is not a sale (or a deemed sale within the meaning of
Article 366(29A) of the Constitution of India) is a service, barring of
course, those transactions specifically excluded from the definition.
Permissive use is one such transaction: it is a service. Therefore, he
submits, the transaction in question is a service, and not amenable
to any form of sales tax levy.
35. Mr. Venkatraman says that in the present case, the 'goods' in
question is the 'Bollgard Technology'. This is a pure intangible. The
seeds, he says, are merely the media. They are immaterial while
considering the question of whether this transaction is a sale or a
service, and should be ignored. The licensee is merely permitted to
use the Bollgard Technology and nothing further. How it acquires
that permission to use is of no consequence. Clause 2.1 of the sub-
licence agreement explicitly states that the grant to the sub-licensee
is of a non-exclusive and non-transferable sub-license to use the
Bollgard technology. The expression "non-exclusive", he says, has
important implications. First, Monsanto India can continue to use
the technology during the period of the agreement; and second, it
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can further sub-license the same technology to as many others as it
pleases. Therefore, this agreement fails the BSNL twin test. At no
point is Monsanto India divested of the technology. The
simultaneous availability of the same right in the hands of both the
transferor and the transferee, Mr. Venkatraman argues, nullifies the
presumption of a transfer. Effective control over the goods, i.e., the
intangible technology, remains with Monsanto India. Therefore, this
is a case of mere permissive use. Had the right to use the technology
been granted exclusively to the sub-licensee, then, he says, it would
have been a case of transfer of the right to use.
36.
He explains this using the following illustrations:
(a) A is the owner of an intangible right. A transfers this
right to use the intangibles to B temporarily, to A's
exclusion. This case, he says, would fall under Article
366(29A)(d) as the transfer is of a right to use goods,
since the BSNL twin tests of exclusion of the right and
incapability of further transfer are both satisfied.
(b) In the second scenario, A grants the right to use the
intangibles to B in Maharashtra, to C in Karnataka and
to D in Tamil Nadu. This agreement, he says, would
reflect two aspects. First, the transfer is exclusive to the
respective parties in their jurisdictions. It also excludes
the transferor from using the intangible right in any of
these States, thus rendering temporarily numb the
transferor's right to use. In this case, too, he says, the
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BSNL twin tests would apply. The question that arises
here is whether the second aspect of the BSNL twin
test (incapacity of the transferor to make further
transfers) is satisfied, given that A has transferred the
right to three different individuals. Had the goods in
question been tangibles, the test of incapacity to make
further transfers would mean that once the goods are
transferred to B, the first transferor, A could not then
transfer these to C, D and so on. The reason this is not
so is because of the nature of intangible rights. A
tangible right is limited to the physical property
involved, but this is not the case with intangible rights.
One can wheel out as many transactions as possible and
simultaneously too, in terms of place, person, period
etc. But the test of transfer must remain the same as
seen above, i.e., an extinction of the right temporarily
in the hands of the transferor and the inability to
transfer it again to somebody else. When, therefore, A
makes a temporary transfer to B in Maharashtra, he
agrees that it is to his exclusion. This precludes A from
further transferring it to B2, B3 or B4 in Maharashtra.
This makes the transfer to B in Maharashtra, and
likewise to C and D in Karnataka and Tamil Nadu
respectively, exclusive and to the exclusion of A.
Therefore, he says, the BSNL twin test is satisfied.
(c) Lastly, A grants a license to use the right to B, C and D
either for the whole of India or specified territories to
each party. The agreement does not exclude the right
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temporarily in the hands of A. He can grant the same
rights to others, either for the whole of India or some
specified territories. This transaction, he says, does not
satisfy the BSNL twin test for two reasons: first, A is
not temporarily excluded from the right, and second,
he can further grant the same rights to others.
Therefore, this is a case of permissive use or license to
use goods but not a case of a transfer of the right to use.
He submits that Monsanto India's case falls under this
third scenario.
37.
We have considered most carefully this submission. It is
indeed sophisticated in its construction, and, at first blush, appears
most appealing. On reflection and a closer examination, we find
ourselves unable to subscribe to the interpretation Mr. Venkatraman
so eloquently commends, viz., that his transaction is one of a merely
permissive use. We find this interpretation not to be supported by
law, and we have the most serious reservations about the universal
applicability of his propositions, which seem to us to be overbroad
and to cast the net too widely. The first question is whether there is
a 'transfer' within the meaning of Article 366(29A)(d). We believe
there is. It is true that the essence of a 'transfer' is the divesting of a
right or goods from transferor and the investing of the same in the
transferee, and this is what Salmond on Jurisprudence and Corpus
Juris Secundum both say. In our opinion, the seeds embedded with
the technology are, in fact, transferred. Monsanto India is divested
of that portion of the technology embedded in these fifty seeds and
these are fully vested in the sub-licensee. Mr. Venkatraman is not
correct when he says that the effective control of the 'goods' is with
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Monsanto India. In RINL, the Supreme Court concluded that the
contractor (transferee) did not have effective control over the
machinery, despite the fact that he was using it, since he could not
make such use of it as he liked. He could not use the machinery for
any project other than that of the transferor's, nor could he move it
out during the period of the project. We do not see how we can draw
a parallel from that case to the one at hand. The effective control
over the seeds, and, therefore that portion of the technology that is
embedded in the seeds, is entirely with the sub-licensee. That sub-
licensee is not bound to use the seeds (and the embedded
technology) in accordance with Monsanto India's wishes. Monsanto
India cannot further dictate to the sub-licensee what he or it may do
with these technology-infused seeds. The sub-licensee can do as it
wishes with them. It may not use them at all. It may even destroy
the seeds. Once the transaction is complete, i.e., once possession of
the technology-imbued seeds is effected, and those seeds are
delivered, Monsanto India has nothing at all to do with the
technology embedded in those fifty seeds given to the sub-licensee.
At no point does Monsanto India have access to this portion of the
technology. In other words, the transfer is to the exclusion of
Monsanto India. This clearly satisfies the so-called BSNL "twin
test" that Mr. Venkatraman is at pains to propound. Mr.
Venkatraman's argument that the seeds are "merely the media" and
therefore irrelevant is, in our opinion, erroneous. They are relevant
for the simple reason that the technology could not have been given
to the sub-licensee without them; and there is no other method
demonstrated anywhere of effecting any such transfer.
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38. We must note that Mr. Venkatraman's submission that the
BSNL test must always be present in each and every case for a
transaction to be considered a transfer of the right to use goods is
overbroad. We do not think that in BSNL the Supreme Court
intended to prescribe a test of global or universal application without
regard to individual circumstances. The judgment of the Supreme
Court (in paragraph 90) notes the factual aspects. There, the entire
infrastructure, instruments, appliances and exchange remained in
the physical control and possession of the petitioner at all times and
there was neither any physical transfer of such goods nor any
transfer of the right to use such equipment or apparatuses. One of
the issues that arose for consideration was whether there was any
transfer of the right to use goods by providing access or a telephone
connection by the telephone service provider to a subscriber. This
BSNL test, was, therefore, set out in these circumstances. The
Court had no occasion to consider its applicability to intangible
property like intellectual property. This is how BSNL has been
interpreted by us in Tata Sons. We think that this interpretation is
correct. In any case, it binds us. The Kerala High Court in Malabar
Gold, in paragraph 35, took a contrary view. It took the BSNL twin
test to be applicable as a general proposition, i.e., one that admits of
no variance. As discussed above, we do not think this can ever be
the a correct reading of BSNL.
39. Similarly, we do not think the test of 'effective control' in the
sense laid down in RINL was intended to be one that demanded
satisfaction in every case. The goods in RINL were machinery. It is
in that context that the Supreme Court, upholding the decision of
the Andhra Pradesh High Court, held that for a transaction to
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qualify as a transfer of the right to use goods, 'effective control'
must be transferred to the transferee. This Court, in Duke and Sons,
held that this test would not be applicable in the case of trade marks.
It was held that for the transfer of a trade mark it was not necessary
to 'hand over' the trade mark to the transferee or give control or
possession of trade mark such transferee. We think that this
represents the correct position in law. Indeed, when it comes to
trade and service marks, there are several intermediate positions
that are possible: there may be a mere right to display the mark, for
instance; or, there may be an assignment of the mark in its entirety;
or there may be a limited or hybrid arrangement that lies in between.
Many examples abound: large retail stores routinely carry goods of
various brands, i.e., goods with marks that identify their source. A
fabric or textile retailer, for instance, or one dealing in electronics,
may have multiple brands on sale. This is not a case of a transfer;
the right to the retailer is a mere right to display, and there is no
transfer of the right to use those marks. There is a mere permission
to display goods bearing the mark. An agreement that allows for a
mere right to display would be purely a service, and never a sale. At
the end of the agreement, the retailer would have to cease all display
of the mark; any continued use would be an infringement. The fact
that the retailer vends goods bearing those marks does not in any
sense confer on him ownership of those marks, nor does it divest the
proprietor of those marks of any of the incidents of proprietorship.
40. We are, therefore, in complete agreement with Mr. Sonpal
when he says that this is a case of a transfer of the right to use goods.
He points out certain clauses in the Monsanto India's sub-license
agreement which, in our opinion, further substantiate this. Clause
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1.1 defines "Cotton Proprietary Germplasm" to mean proprietary
hybrid cotton parent lines developed or owned by the sub-licensee
during the term of the agreement. The word 'owned' implies that a
sale has taken place. The term of the agreement, as provided under
clause 9.1, is for an initial period of ten years and is further
renewable in increments of five years by mutual consent of both
parties, unless it is otherwise terminated earlier. What happens after
the expiry or termination of the agreement is most interesting.
Under clause 9.4, the sub-licensee is not bound to return to
Monsanto India any portion of the initial fifty seeds given under the
agreement, nor any additional donor seeds the sub-licensee may
have produced. The control (and ownership) of the Bollgard
Technology contained in those initial fifty donor seeds, as also in the
additional donor seeds produced by the sub-licensee is with the sub-
licensee. Monsanto India has nothing whatsoever to do with this
portion of the technology. The only restriction appears to be on the
sale of the GMO cotton planting seeds. The sub-licensee is given a
two-year window to sell or otherwise dispose of any remaining
GMO planting seeds. After this period, Monsanto India has the
option of requiring the sub-licensee to sell these planting seeds to
Monsanto India itself or to dispose them for non-planting purposes.
This clause makes it evident that the ownership of even the planting
seeds is with the sub-licensee. Clause 2.5(d) then provides that
Monsanto India can further sublicense the Bollgard Technology to a
maximum of three other companies in the same territory as that the
of the original sub-licensee. For additional transfers, Monsanto
India would have to first consult the sub-licensee. Mr. Sonpal rightly
states that this suggests that a transfer of the right has, in fact, taken
place; and, even on Mr. Venkatraman's own illustrations, this case
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would not fall within the third illustration, but within the second and
perhaps even the first. The degree of territorial exclusion is surely
irrelevant; the question is whether or not there is any exclusivity. If
it were mere permissive use, there would be no question of the
Monsato India having to first consult the sub-licensee before
effecting further transfers. Further, under clause 7.1 the sub-licensee
can assign the agreement and its rights and obligations under it to its
wholly-owned subsidiaries without Monsanto India's permission.
Mr. Sonpal rightly says that this can never happen in a case of a
permissive use. In law, a wholly-owned subsidiary is a distinct legal
entity. In a case of service or permissive use, a person can never
assign the goods or rights to a third person.
41. At this stage, we find that a parallel to practical, every-day
examples would be useful. Take, for instance, the example of when
one buys a book from Amazon for their Kindle device. In this case,
Amazon can transfer the intellectual property of the book to
multiple other users simultaneously, but each single transaction
would still be a sale. This would also be true of the example of a
music CD. The CD is the 'medium' by which the intellectual
property, viz. the songs, passes to the buyer. The manufacturer can
sell it to an end-user or to an intermediate retailer. The same song
can be put on countless CDs. This too is a sale. When one buys a
car, one buys the technology that is contained in the body of the car;
the body is just the medium. On ITunes, when one buys a song, the
song is transferred into a format which is accessible to the buyer, a
proprietory format that needs a special device or software. Yet it is a
sale. Limitless ITunes users can buy the song simultaneously. This
is a sale to each of them. In the case of CD containing software, say
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for example Microsoft Word, the medium would again be the CD
holding the intellectual property, which would be the software
technology. This would also be a sale, despite the fact that this same
software technology could be put on unlimited number of CDs and
sold to multiple users simultaneously. Effective control of that
particular software on that one CD is passed to the buyer. The buyer
could use it, alienate it, destroy it, and do anything at all that he likes
with it. If he made illicit copies of it, this would constitute
infringement; and that in itself would not make the transfer of the
software on a CD a service. Even if the buyer transferred this non-
transferable software, it would amount to a breach of contract
provided in the CD package, just as it would under Monsanto
India's sub-licensing agreement. However, this does not do anything
to disqualify the transaction itself from being a sale. These are all
sales.
42. In our opinion, the most fundamental aspect of permissive
use of goods is that at the end of the period for which the use is
granted, the goods must be returned to the transferor. Let us
consider this in the context of a car hire service, a book library
service, Amazon Kindle Unlimited and ITunes Radio. When a car is
taken on hire, a fee is paid and the car can be used for a certain
period of time. During this time, the person renting the car can only
use it. He cannot part with it and certainly cannot destroy it. Once
the period of hire comes to an end, the car must be returned to the
transferor. Therefore, the effective control over the car remains with
the transferor. Likewise, in the case of a book library, the books must
be returned to the library. With the Kindle Unlimited, one must pay
a subscription fee to gain access to an unlimited number of books in
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the proprietory AZW format. When the subscription expires, all the
books are repossessed. ITunes Radio too is a similar concept. A
subscription fee is paid, which allows access to music. Once this
expires, access to the music is denied. These, in our opinion, are
cases of permissive use. The Monsanto India sub-licensing
transaction could only be a service in one circumstance, i.e., if the
seed companies gave Monsanto India a bag of seeds to mutate and
improve with the Bollgard Technology which would, thereafter, be
returned to the seed companies. That might perhaps be a service.
43. Mr. Sonpal relies on a great many authorities, not all of them
apposite. In a case like this, we will not be detained by his
submission that Monsanto India's petition is not maintainable
because it is a company and therefore disentitled to a high
prerogative discretionary remedy under Article 226 of the
Constitution of India for a violation of Article 14.34 The questions
raised cannot be countered in so facile a manner. In any case, the
Petition was admitted on 15th December 2015, and we do not
understand how we can now, at this late stage, dismiss the Petitions
on this ground. Similarly, Mr. Sonpal's invocation of the well-settled
principle that every precedent must be considered in its factual
context is one we cannot appreciate. This does not mean that no
judgment has any precedential weight, or that a judgment is a
precedent only if the facts are an exact match. This is against every
canon of the principle of stare decisis. Besides, in making such a
submission, Mr. Sonpal might well be, as the Bard famously put it,
34. State Trading Corporation of India v Commercial Tax Officer, AIR 1963 SC
1811.
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hoist by his own petard; for then the very judgments he cites35
would have to be held to be restricted to the facts in each. It is also,
in our view, not only incorrect but also improper to trivialize Mr.
Venkatraman's submissions, the product of much industry and
ingenuity, by saying that they are based on nothing more than 'stray'
observations of this or that Court. We perhaps lack Mr. Sonpal's
dauntlessness, but we are not prepared to agree with him when he
says that observations of the Supreme Court do not bind us. They
do.
44. Mr. Sonpal's reliance on the decision of the Andhra Pradesh
High Court in G.S. Lamba & Sons v State of Andhra Pradesh36 is,
however, well-founded. The facts of that case are that one G
manufactured ready mix concrete to its customers' specifications.
Dealers entered into contracts with G to provide a transportation
service for ready-made concrete by hiring transit mixers. G was
given access to a dedicated fleet of such mixers, coloured and sized
to its specifications, and could decide the delivery schedule of these
mixers. The Additional Commissioner levied sales tax. The dealers
contended that this was a contract of transportation service. A
Division Bench set out the essential requirements of transfer of right
to use, taking into account all the previous decisions in the field. It
held that the essentials are: (i) not a transfer of property in goods,
but the right to use property in goods; (ii) Article 366(29A)(d) read
with the latter part of the clause (29A) would show that the tax is
35. Deepak Bhandari v Himachal Pradesh State Industrial Development
Corporation Ltd, AIR 2014 SC 961; Jitendra Nath Singh v Official Liquidator,
(2013) 1 SCC 462.
36. (2011) 43 VST 323.
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not on the delivery of goods used, but on the transfer of the right to
use goods regardless of when or whether the goods are delivered for
use, subject to the condition that the goods should be in use forever;
(iii) in a transaction for the transfer of right to use, the delivery of
goods is not a condition precedent but one of the elements of the
transaction; (iv) the effective or general control does not always
mean physical control and even if the manner, method, modalities
and the time of the use of goods is decided by the lessee or the
customer, it would be under the effective or general control over the
goods; (v) the approvals, concessions, licenses and permits in
relation to the goods would also be available to the user of the goods
even if such licenses or permits are in the name of the owner or
transferor of the goods; and (vi) during the period of contract,
exclusive right to use the goods along with permits, licenses, etc.,
vests in the lessee. The Court also reiterated the well-settled
principle of law that a document or transaction must be taken as a
whole and then scrutinized. This is essential to understand the very
nature of the transaction and to understand the intention of the
parties while contracting. Courts cannot rely only on the wording of
the transaction. This is often of no help and could suggest an
entirely different nature. After testing the transaction with the facts
of the case, the Bench held that the transaction between G and the
dealers was a transfer of right to use.
45. Requirement (iv) of the decision in Lamba is vital to Mr.
Sonpal's argument on effective control. This is especially so because
Mr. Venkataraman has extensively argued that effective control is
essential to transfer of right to use. On testing Monsanto India's
sub-licensing agreement against the requirements laid down in
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decision, we believe this decision sufficiently supports Mr. Sonpal in
his argument that the sub-licensing actually amounts to passage of
effective control as well of the Bollgard Technology embedded in
the seeds.
46. In fact, we believe that this sub-licensing of the Bollgard
technology may possibly even be an outright sale. For a transaction
to qualify for a sale, there must be a transfer of the property in the
goods. In legal usage, the word "property" is a generic term, of
broad and extensive application; perhaps, the most comprehensive
of all terms which can be used.37 Property embraces everything
which is or which may be subject to ownership of any kind at all, and
is legally understood to include every class of acquisitions that a
man can own or in which he can have an interest. The rights that
transfer of property cover are the right of acquisition, possession,
use, enjoyment and disposition.
47. We pause here momentarily to consider the nature of these
intangible goods. We believe this is necessary, because this is
perhaps a case where the law is yet evolving to keep abreast of
technology. If what Mr. Venkatraman suggests is correct, then every
sale of software as we currently know it is never a sale but only a
service. In his formulation, the 'medium' (CD, pen drive, etc) is
irrelevant. Surely this cannot be correct. Software may be
downloaded too, without any 'physical medium' intervening -- the
medium is as intangible as the goods. It is impossible, we think, and
does not stand to reason to suggest that unless, say, Microsoft or
37. Corpus Juris Secundum, Volume 73, p. 135.
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Adobe wholly cede all control over their software products there is
no sale, and when they allow a user to download and use their
software they are only providing a service. Indeed, this is
demonstrably incorrect. Microsoft and Adobe both have alternative
distributions models. One may 'purchase' a license to Microsoft
Office or Adobe Photoshop. This may be a one-off, standalone
product, delivered either by download or on physical media. That is
for the user to keep and do with it what he wishes (except, of course,
attempting to decompile it). He does not have to use it all; he can
destroy the media and all personal copies of it. The same software is
also available nowadays for a subscription -- for an annual or
monthly fee, the software can be downloaded and used; if the
subscription ends, at the very least updates end and very possibly
the software will not function optimally. The latter may be a service,
very like car rental or book borrowing from a library. The former is
clearly a sale. The difficulty with Mr. Venkatraman's argument is
that it tries to draw a completely unnecessary distinction between
the technology and the medium in which it is delivered. Neither is
the subject of the levy. The subject of the levy is not the technology
nor the medium. It is the license; and the terms of that license are
determinative. Where a license is purchased, it is still a sale, although
what the user has 'purchased' is the right to use the software. Every
license has a unique key and every sale is therefore uniquely
identified. The purchase is therefore a transfer of the right to use
that particular, identified software. The proprietory rights to the
software do not have to be 'sold' or 'transferred'. Microsoft and
Adobe retain all those rights, and all intellectual property continues
to vest in them. This is, therefore, a transfer of the right to use that
software, and to that extent, the intangible (the software) is sold; but
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the terms of that license allow the software vendor to retain
complete seizin and dominion over all intellectual property rights.
The transfer is not of those intellectual property rights, but of the
right to use an identified and identifiable version of that software. In
the subscription distribution model, where the software usage is
dependent on payment of a periodic fee, there is no such transfer,
and there is a mere right to use, without any transfer of that right to
use even that particular download. So long as the fee is paid, the
software may be used; when the fee payment stops, so does the right
to use. This exactly parallels car or book rentals. The determinant in
such a case must, therefore, be whether the license is such that the
licensed intangible is with the licensee in perpetuity or whether the
licensor has the right to terminate and repossess and deny further
access to that intangible. In a software sale, there is no question of
termination or repossession. It is for the licensee to use forever. This
is clearly a sale or a deemed sale and it is in respect of not the
medium or the intellectual property (the marks, copyright, patents,
etc), but is the transfer of the right to use that software subject to
those marks, patents, copyright, etc. Monsanto India's case is no
different. Its sub-licensee do not acquire any proprietory intellectual
property rights over the Bollard Technology; Monsanto India's and
its parents' patents, copyright, marks and other intellectual property
rights are preserved intact, unaffected by the sub-licensing. But the
identified technology, the one infused in the fifty seeds given to the
sub-licensee, is for the sub-licensee to use as he wishes. Viewed
from this perspective, Mr. Venkatraman's clients' underlying fears
are, we believe, unfounded.
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48. Mr. Venkatraman, in the alternative and without prejudice,
argues that the seeds themselves are exempt from being taxed under
Entry 41 of Schedule A of the MVAT Act, 2002, even if the
transaction in question is held to be a sale. Entry 41 of Schedule A
reads thus:
"SCHEDULE A
LIST OF GOODS FOR WHICH THE RATE OF TAX IS NIL%
41. Seeds of all types excluding oil seeds and seeds
to which any other entry of this Schedule or of
Schedule C applies."
The donor seeds are coker seeds in nature and therefore he argues
that they do not fall under the category of oil seeds. To support this
contention he relies on the definitions of 'oil seeds' from several
dictionaries.
49. Since the seeds in question are purely donor seeds, the
question of the scope of the entry relating to seeds, Mr.
Venkatraman submits, does not arise. Trade Circular 12 T of 2005
bearing No. VAT-2005/Act/VD-1 dated 7th July 2005 has clarified
this.38 Para 2 of the Circular reads as follows:-
"Queries have been raised about the scope and
limits of this entry. It is accordingly clarified that all
types of sowing seeds are covered by the scope of
the entry A-41 and such sowing seeds will
accordingly stand exempted from tax. This would
38. Monsanto's Compilation, Volume II, p. 445.
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include sowing seeds for cereals, pulses as well as
sowing seeds for oil seeds. In addition to sowing
seeds, which includes certified seeds and truthfully
labeled seeds, nuclear seeds, foundation seeds and
breeder seeds, of all types would also be covered
by the scope of this entry."
50. Mr. Venkatraman submits that this circular applies to all
sowing seeds: donor, breeding, foundation and nuclear seeds.
Therefore, Monsanto India's donor seeds would not be liable to
VAT.
51.
Mr. Venkatraman goes a step further. He submits that even if
cotton seeds are considered to be oil seeds, Entry 68 of Schedule
of the MVAT Act provides that these oil seeds would be liable to pay
a rate of only 5%. Therefore, even in the worst-case scenario,
Monsanto India is not liable to pay more than 5% sales tax.
52. Given our previous discussion, we do not think it is necessary
to go into this question at all, for what is being taxed is not the seed
itself but the license that transfers a right to use the seed. Therefore,
in our opinion, it makes no difference if the seeds are coker seeds or
oil seeds.
53. Mr. Venkatraman makes one more without prejudice
argument, in case neither of his previous arguments succeed. He
submits that even if the agreement in question is held to be a
transfer of the right to use (deemed sale) and that it does not fall
under the exemption for seeds in the MVAT Act, then the levy and
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collection of Service Tax by the Union of India would be without the
authority of law since VAT can only be levied and collected by the
States. As argued earlier, the same transaction cannot be taxed as
both a sale and a service. Monsanto India has already paid service
tax for the entire period at a rate significantly higher than what is
provided under the MVAT Act and therefore he says that it is not
liable to pay further tax. For the period between May 2007 and
February 2009, it has paid service tax at a rate of 12.36%, for March
2009 to March 2012 at a rate of 10.3%, for April 2012 to May 2015 at
12.36%, and for the period beginning June 2015 at a rate of 14%.
Under Entry 39 of Schedule C of the MVAT Act, the applicable rate
of sales tax is only 5% since April 2010, prior to which it was 4%. He
therefore seeks a Writ of Mandamus directing Union of India to
transfer the amount paid as service tax from the Consolidated Fund
of India to the Consolidated Fund of State of Maharashtra. He
argues that such a transfer would not amount to unjust enrichment.
We decline to enter into this debate. We leave it to Monsanto India
to adopt suitable proceedings in this behalf, and leave their
contentions open to the necessary extent.
V. FACTS IN THE SUBWAY PETITION
54. In Writ Petition No. 497 of 2015, Subway is a private limited
company of which Petitioner No. 2 is a full time director. Subway
operates and franchises sandwich shops in India. It is part of an
international chain. Petitioner No.3 is an executive of the
outsourced agency that maintains Subway's account books.
Respondent Nos. 1 and 2 are the State of Maharashtra and the
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Union of India respectively. Respondent No. 3 is the Commissioner
of Service Tax, an officer of Respondent No. 2, while Respondent
No. 4 is the Assistant Commissioner of Sales Tax, an officer of
Respondent No. 1. This Writ Petition under Article 226 of the
Constitution of India, challenges Item (12) under the Notification
No. VAT-1505/CR-114/Taxation-1 dated 1st June 2005 as being
ultra vires Section 6 of the MVAT Act and Article 246 of the
Constitution.
55. A brief description of Subway's business is this. Subway was
granted a non-exclusive sub-license by Subway International B.V.
("SIBV"), a Dutch limited liability corporation to establish, operate
and franchise others to operate SUBWAY-branded restaurants in
India. This non-exclusive license was granted to SIBV itself by
Subway Systems International Ansalt, which in turn was granted
such a license by Doctor's Associates Inc., an entity that owns the
proprietary system for setting up and operating these restaurants.
These restaurants serve sandwiches and salads under the service
mark SUBWAY. The agreement includes not only the trade mark
SUBWAY, but also associated confidential information and
goodwill, such as policies, forms, recipes, trade secrets and the like.
Typically, Subway enters into franchise agreements with third
parties, under which it provides specified services to the franchisee.
In return, the franchisee undertakes to carry on the business of
operating sandwich shops in Subway's name. The agreement only
provides for a very limited representational or display right, and the
franchisee cannot transfer or assign these exclusive rights to any
third person. Subway also reserves the right to compete with these
franchisees in the agreement. Under this agreement, Subway
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receives two kinds of consideration, one being a one-time franchisee
fee which is paid when the agreement is signed; and the second is a
royalty fee paid weekly by the franchisee on the basis of its weekly
turnover. A sample franchise agreement is annexed.39 Under these
agreements, the franchisees have no more than a right to display
Subway's intellectual property in the form of marks and logos, and a
mere right to use such confidential information as Subway discloses
and as prescribed by the franchise agreement.
56. Since September 2003, Subway has been paying service tax to
the Union of India on the consideration received by it from the
franchisees. In November 2014, Respondent No. 4 sought
information from Subway under the MVAT Act, which Subway
provided. Respondent No. 4 took the view that this consideration
should be subject to VAT; on 21st November 2014, Respondent No.
4 issued a notice to this effect.40 Subway received several notices
asking it to show cause why the consideration it received should not
be assessed to sales tax, and why no penalty should be imposed on
the whole time director and the executive of the agency that
maintained Subway's books of accounts.41 The cumulative penalty
for the period between 2006 and 2009 amounted to approximately
Rs. 5.3 crores. The interest under Section 30(1) of the MVAT Act
for same period amounted to approximately Rs.19 lakhs. There was
much correspondence exchanged between Subway and Respondent
No.4. Each side cited judgments. On 26th March 2015, Subway
wrote to the 4th Respondent requesting it not assess tax till a
39. Subway Petition, Exhibit "A", pp. 30-49.
40. Subway Petition, Exhibit "D", pp. 59-70.
41. Subway Petition, Exhibit "G", pp. 92-98; Exhibit "H", p. 99.
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decision was arrived at in the present writ proceedings, which it had
by then already filed.42 Respondent No. 4 did not accept this request
but passed an ex parte assessment order, including interest and
penalties Rs.17,98,988/-43 in view of the decision of this Court in
Tata Sons Limited v State of Maharashtra.44 On 31st March 2015, the
4th Respondent issued a Notice of Demand in this amount.45
VI. SUBMISSIONS AND FINDINGS IN SUBWAY
57. Mr. Shroff's argument on behalf of Subway is that the
franchise agreement is not one for sale or transfer of right to use but
merely permits the franchisee to display certain marks and to use
certain technologies and methods in preparing the salads and
sandwiches for sale. Therefore, he submits, it is liable to be taxed as
a service, which Subway has been paying in any case. He adopts
virtually all of Mr. Venkatraman's arguments. Mr. Shroff also refers
to the cases of Tata Sons. He relies on these cases to urge that in
Subway's case, all that is granted is a permissive use. The franchisee
under the agreement obtains a mere permission to display the name
'Subway' in a particular fashion, along with other services.
58. Mr. Shroff formulates his case on several distinct grounds.
First, the franchisee is entitled to display the name 'Subway' only
for a limited period of time as stipulated in the agreement. After the
42. Subway Petition, Exhibit "I", pp. 100-102; Exhibit "J", pp. 103-107.
43. Subway Petition, Exhibit "L", p. 109-118.
44. 2012 SCC OnLine Bom 697.
45. Subway Petition, Exhibit "M", p. 119.
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expiry of this period of time, as provided in Clauses 8 and 8(g) of
the Franchise Agreement, Mr. Shroff submits, and we agree with
him, all the rights of the franchisee are terminated. A breach of the
agreement also results in potential termination at the option of
Subway. Second, Mr. Shroff argues that the franchisee cannot sub-
franchise the mere permission it obtains under the agreement on
account of the prohibition in Clause 9(a) of the agreement. Third,
there is no territorial restriction or competition restriction of any
kind placed on Subway. It is entitled to enter into as many or as few
franchisee agreements as it wants, even simultaneously, and it can
on its own directly compete with its franchisees too.
59. Mr. Shroff submits that in light of the decisions of the
Supreme Court on various composite contracts, Article 366(29A)
was amended in 1983 to introduce a legal fiction by which six
instances of transactions, enlisted as the clauses of the Article, were
to be considered as deemed sales. The Amendment allows certain
specific composite contracts to be divisible; those in which the sale
component could be isolated and separately taxed -- for instance
works contracts,46 hire-purchase contracts47 and catering contracts.48
Works contracts and catering contracts can be split under sub-
clauses (b) and (f ) of clause (29A) of Article 366. Besides these, no
other composite contracts can be split under Article 366(29A) itself.
The State would not have any power to separate the agreement to
sell from the agreement to render service and therefore would not
be permitted to impose a tax on the sale component. This, Mr.
46. Article 366(29A) (b).
47. Article 366(29A) (c).
48. Article 366(29A)(d).
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Shroff submits, is of course subject to the exception that the
transaction does not represent two distinct contracts. He contends
that Subway's agreement comes within the ambit of sub-clause (d)
and therefore cannot be split in light of the Constitutional
provisions. Here, the transaction does not involve two distinct
agreements. There is no intention of separate agreements and the
sale is not distinctly discernible. Mr. Shroff says that even if this
were true of Subway's agreement, though it is not, the State would
not have the power to encroach upon the Union's List and levy a
sales tax on the service component as well.
60.
In furtherance of his argument, Mr. Shroff relies on the
decision in Asian Oilfield Services v State of Tripura49 and BSNL.50
He also cites the decision of the Supreme Court in Imagic Creative,51
which follows BSNL. The thrust of these decisions is that it is not
permissible for the State to tax composite contracts comprising of
both sale and service components. The contracts cannot be
artificially split to enable the sale element to be taxed, and neither
can the whole agreement be taxed as a sale. The State in doing this
would be entrenching on the legislative power of the Union.
61. Mr. Shroff, in the alternative and without prejudice to the
preceding argument, submits that even if the transaction does
amount to a transfer of right to use, the situs of such sales tax
payable, if any, would be in Delhi and not Maharashtra. Subway is
49. 2015 SCC OnLine Tri 483.
50. Supra.
51. Supra.
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located in Delhi and has no place of business in Mumbai. Merely
because its franchisees are in Mumbai, the situs cannot be said to be
in Maharashtra. Subway is operating its business in Delhi, with no
office at all in Mumbai. The franchise agreements are all signed in
Delhi. Mr. Shroff contends that given the nature of the intangible
goods, there is no physical transfer at all. The limited license, he
says, is embodied in an agreement from Subway to its franchisees in
Delhi. Therefore, Mr. Shroff contends, to determine the situs, the
movement of goods, location of the goods, the place where the
license is made available, and the place where such agreement is
executed will be considered as the key factors. He submits that in
this case, that place is Delhi. Therefore, even if the transaction were
considered to be a sale, the State of Mahrashtra would have no right
to impose a levy of sales tax. It would be the authorities in Delhi who
would be entitled to levy sales tax.
62. For the most part, Mr. Sonpal adopts his arguments in
Monsanto for this Writ as well. But, he argues, there is a vital
difference between the two. He urges that "franchises" and "trade
marks", are expressly covered under the MVAT Act since 2005. The
Government of Maharashtra, under the powers conferred by Entry
39 of Schedule C of the MVAT Act, issued a Notification (No. VAT-
1505/CR-114/Taxation-1), dated 1st June 2005, in which trade
marks and franchises were included as "goods" for the purpose of
Entry 39. In light of this express provision of law, Mr. Sonpal
submits that Subway's franchise agreements are liable to be assessed
to VAT. The Notification reads:
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Serial Name of the goods of intangible or
No. incorporeal nature
(1) (2)
1 Patents
2 Trade marks
3 Import licenses including exim scrips,
special import licenses and duty free
advance licenses.
4 Export Permit or license or quota
5 Software packages
6 Credit of Duty Entitlement Pass Book
7 Technical know-how
8 Goodwill
9 Copyright
Designs registered under the Designs
Act, 1911.
SIM cards used in Mobile Phones.
12 Franchise, that is to say, an agreement
by which the franchisee is granted
representational right to sell or
manufacture goods or to provide
service or undertake any process
identified or associated with the
franchisor, whether or not a trade mark,
service mark, trade name or logo or any
symbol, as the case maybe, is involved.
(Emphasis added)
63. Mr. Sonpal relies on the decision of the Supreme Court in
Vikas Sales Corporation v Commissioner of Commercial Taxes52 and
Tata Consultancy Services v State of Andhra Pradesh53 in support of
his argument that incorporeal rights can also be considered as goods
for the purpose of sales tax. Therefore, he says, that purely because
52. (1996) 102 STC 106.
53. (2004) 24 PHT 581.
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the agreement involves incorporeal rights, it cannot be exempted
from sales tax. He refutes Mr. Shroff's argument on exclusivity and
says that it is irrelevant that Subway can enter into multiple such
agreements by giving franchises to multiple users. There is no such
exception carved out in law, especially when the subject is a bundle
of rights.
64. With regard to situs, Mr. Sonpal argues that merely because
the agreements are executed in Delhi, the State of Mahrashtra
would not be precluded from imposing VAT. Being an incorporeal
right and not a tangible one, it exists at the place where it is being
used. Therefore, he urges, despite the execution being Delhi, the
use is in Maharashtra and this entitles the State of Maharashtra to
levy VAT on the transaction.
65. Mr. Sonpal submits that the State cannot decide the eligibility
of service tax of a transaction, but it can determine whether the
transaction has to be taxed under the MVAT Act. This is, he urges,
within its powers. The whole amount of the agreement can be liable
to both sales and service tax as provided by Article 366 (29A) read
with Item 54 of List II.
66. Mr. Sonpal's reliance on Vikas Sales and Tata Consultancy is
of no avail to him. The fact that incorporeal rights are also
considered to be "goods" is an undisputed proposition of law.
These decisions do not assist him in showing that Subway's
franchise agreement involves a transfer of right to use. This is what
he needs to show. This he is unable to do.
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67. We cannot accept Mr. Sonpal's argument that the eligibility
of VAT is to be determined by the State, and therefore it could levy
a sales tax on a transaction which already attracts service tax. The
decisions in BSNL, Imagic Creative, and Associated Lease Finance are
exactly on this; service and sales tax are mutually exclusive of each
other.
68. We have the greatest difficulty in accepting Mr. Sonpal's
argument that Article 366(29A) allows a split of even a single
composite agreement, where this is not the intention of the parties
to the agreement. In our opinion, Mr. Shroff's reliance on the cases
of Asian Oilfield and BSNL in support of his argument that
Subway's transaction cannot be split into two distinct or severable
components is correct. The State cannot tax the entire transaction
as a sale either. This is well-settled law, and if a State was to be
permitted to tax the whole transaction, it would amount to nothing
less than entrenching upon the powers exclusively available to the
Centre under the Union List. As has been repeatedly held by this
Court, this just cannot be done.
69. We believe that Mr. Shroff is correct when he says that the
agreement between Subway and its franchisees is not a sale, but is in
fact a bare permission to use. It is, therefore, subject only to service
tax. In our opinion, the fact that the agreement between Subway and
its franchisee is limited to the precise period of time stipulated in
the agreement is vital to Subway's case. At the end of the period of
the agreement, or before in case there was any breach of its terms,
the right of the franchisee to display the mark 'Subway' and its trade
dress, and all other permissions would also end. This is what sets
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this agreement apart from the case of Monsanto and its sub-
licensee. There, the seed companies could do as they pleased with
the seeds; they could alienate or even destroy them. In Subway's
case, there are set terms provided by the agreement which have to
be followed. A breach of these would result in termination of the
agreement. We believe that there is no passage of any kind of control
or exclusivity to the franchisees. In fact, this agreement is a classic
example of permissive use. It can be nothing else. For all the reasons
in law and fact that the sub-licensing of technology in Monsanto is
held to be a transfer of right to use, this franchising agreement must
be held to be permissive use.
70. We do not mean to suggest that every franchise agreement
will necessarily fall outside the purview of the amended MVAT Act.
There is conceivably a class of franchise agreements that would have
all the incidents of a 'sale' or a 'deemed sale' (i.e., a transfer of the
right to use). Black's Law Dictionary defines a franchise, in the
context of a commercial transaction as:54
The sole right granted by the owner of a trade mark or
a trade name to engage in business or to sell a good or
service in a certain area.
71. Chambers' Dictionary55 too describes it as a
a commercial concession by which a retailer is granted
by a company the exclusive right of retailing its goods
in a specified area ...
54. Black's Law Dictionary, 8th Ed.
55. Chambers' Dictionary, 1983 Ed.
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72. We find, on facts, that the Subway franchise does not meet
these tests. There is no such exclusivity. The agreement itself says
that Subway may itself open and operate its own outlets in direct
competition with the franchisee.56 The agreements themselves
expressly contemplate that Subway may create further franchisees in
the very area in which these franchisees operate.57 The franchisee
cannot unilaterally sub-franchise;58 if it could do without Subway's
prior permission or leave, then the consideration might be wholly
different and it may then be possible to say that there is a transfer of
the right to use. We find that the right of transferrability is extremely
restricted and is impossible without Subway control throughout.
Similarly, if there is no requirement of having to cease display and
use,59 or return the intangible property at the end of the franchise
agreement's term,60 then the transaction might arguably be a sale.
Exercises in co-branding or sub-branding, where one party
franchises its mark on a territorially-restricted basis and allows the
franchisee to combine it with its own or other marks may also well
have an element of sale. Similarly, where a dealership for, say,
automobiles, has a territorial exclusivity, then it may amount to a
franchise. The Subway franchise model has none of these elements.
The so-called 'system' is controlled by Subway and it is exclusive to
Subway. At the end of the franchise term, it cannot be used. Some
(though not all) of the ingredients -- breads, salad dressings and
other 'key' items -- are to be sourced from Subway or Subway-
56. Subway Petition, Clause 11(l) of the Agreement, p. 46.
57. Subway Petition, Clause 11(l) of the Agreement, p. 46.
58. Subway Petition, Clause 9 of the Agreement, p. 42.
59. Subway Petition, Clause 8(e) of the Agreement, p. 41.
60. Subway Petition, Clauses 8(e) and (j) of the Agreement, p. 41.
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authorised vendors and nowhere else. This gives Subway deep and
pervasive control and dominion over the franchisee's daily
operations, without, at the same time, ceding to the franchisee the
slightest hint or latitude in what it may do with the permitted marks
and technology. This is, therefore, diametrically opposed to the
Monsanto model, for Monsanto India has no control whatever in
what its licensee does with the BT-infused donor seeds; that
licensee may choose not to use them at all. There is also no question
of any 'return' or 'cessation' to Monsanto India. Thus, viewed from
any perspective, and on the facts of the case, we are unable to hold
that the Subway franchise agreements have any of the necessary
elements of a sale or a deemed sale.
73. We clarify that we limit ourselves to the franchise agreements
in question and we express no opinion on any other form of
franchise agreement or on any broader question of whether all
franchise agreements falls outside the MVAT despite the
amendment. We only say that this franchise agreement does not, on
the facts of this case, constitute a sale to bring it within the purview
of that Act. Equally, we reject any general proposition to the effect
that anything that is nothing but a service can be artificially
converted into or treated as a sale merely by the insertion of an
omnibus clause in a state-level taxing statute. To accept this
argument, we would have to accept that the State Legislature can
encroach upon the legislative powers of the Union in respect of
items in the Union List simply by inserting such amendments that
would by some process of fiscal and legal alchemy convert a pure
service into a sale. The introduction of the word 'franchise' in the
amended MVAT by notification will have to be read to mean those
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franchises that can reasonably and plausibly be construed to have
the effect of a sale; it cannot be widened to include agreements
styled as 'franchise' agreements simply because of the
nomenclature. Indeed, it seems to us clear that if we accept that a
franchise agreement is, by definition, one that requires territorial
exclusivity, then the Subway agreements are not franchise
agreements at all, but purely licensing agreements.
74. In our opinion, the mere inclusion of 'franchises' under the
MVAT Act would not automatically make all franchise agreements
liable to sales tax. What must be looked at is the real nature of the
transaction and the actual intention of the parties. The agreement
must be considered holistically, and effect must be given to the
contracting parties' intentions. The label or description of the
document is irrelevant. An agreement styled as a franchise might, on
a proper examination, turn out to be nothing more than a mere
license (as in Subway's case). On the other hand, an agreement that
calls itself a license might actually be a franchise. If, in a given case,
a franchise agreement is effectively nothing more than a mere
permissive use, it cannot be made liable to VAT. It would be a
service, and hence liable to service tax. When interpreting a taxing
statute, or for that matter any statute, full effect must be given to the
words used by the Legislature. This, however, does not mean that
this principle must be stretched to a point which leads to an absurd
result, or one that was not contemplated by the Legislature. The
Legislature is presumed to know the law and to have acted in
accordance with it. We, therefore, do not think that the Legislature
intended for this Notification to have such a sweeping effect as to
bring all franchise agreements within the ambit of the MVAT Act.
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Presumably, what the Legislature intended was to included only
those franchise agreements that involved a transfer of the right to
use or some other aspect of a deemed sale as defined under Article
366(29A) of the Constitution. As discussed above, we find that
Subway's franchise agreement grants to the franchisee nothing more
than mere permissive use of defined intangible rights. It is therefore
a service, and is not amenable to VAT. We also hasten to clarify that
we are not determining whether any particular kind of arrangement
is or is not a franchise. Any examples we have given are merely
illustrative, and not binding or final findings.
75.
Once we arrive at this conclusion, then the argument on situs,
which is really one of jurisdiction, is entirely irrelevant. If the
franchise agreement is not liable to sales tax, then it is not liable to
sales tax by any state agency anywhere, irrespective of location.
Sales tax is under the purview of the State List, while service tax
comes under the ambit of the Central List. Since this transaction is
held to be a service, the service tax levied will be assessed and
payable to the Central Government. Therefore, a detailed discussion
of situs is unnecessary. In any event, had it fallen for decision, we
would have been inclined to accept Mr. Shroff's submission that the
situs for such agreements executed in Delhi would not be in
Maharashtra, but in Delhi. While considering tangible assets, there
is no doubt as to where their situs is. It is where the goods are
physically located. But, an intangible asset does not have any
physical form or existence in any physical location. The legislature
could have, by some appropriate deeming fiction, expressly provided
for the situs of an intangible asset. This it has not done, so far as
intellectual property is concerned. It has, however, specifically so
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provided for shares.61 Therefore, where the legislature thought it
necessary to make express provisions for intangible assets, it has
done so. In this legislative vacuum, the internationally accepted
principle of mobilia sequuntur personam would apply, i.e., the situs of
the owner of an intangible asset would be the closest approximation
of the situs of his intangible asset. This is the principle widely used,
unless there is a local legislation to the contrary; there is not. This is
also the thrust of the Delhi High Court's decision in Cub Pty Limited
v Union of India & Others.62 Therefore, the situs of Subway's
agreement, as Mr. Shroff rightly says, would be Delhi.
VII. CONCLUSION
76. For the reasons set out above, Rule is discharged in Writ
Petition 9175 of 2015, but with no order as to costs.
77. In Writ Petition 497 of 2015, Rule is made absolute in terms of
prayer clauses (b) and (c). These are as follows:
"(b) for a declaration that the provisions of the MVAT
Act are not applicable in respect of the
franchisee given by the 1st Petitioner or in
respect of the franchise fee or royalty received
by it from the franchisees.
61. Explanation 5, Section 9(1)(i) of the Income Tax Act, 1961.
62. Writ Petition(Civil) 6902 of 2008, judgment delivered on 25th July
2016.
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(c) for a writ of certiorari or a writ in the nature of
certiorari or any other writ direction or order
under Article 226 of the Constitution of India,
calling pertaining to the show cause Notices
dated 21 November, 2014 and 20 March 2015
(Exhibits D, G and H hereto) as also the
assessment order dated 30 March 2015 and the
notice of demand dated 31 March 2015 (Exhibits
L and M hereto) and after considering the same
quashing and/or setting aside the same."
78. Both petitions are disposed of in these terms. It only remains
for us to thank appearing Counsel for their assistance and
considerable industry in these matters.
(S.C. DHARMADHIKARI, J.)
(G.S. PATEL, J.)
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