We are happy to bring to you a two-part Guest Post by Ashwini Vaidialingam, a V Year Student at NLSIU, Bangalore who is interested in Taxation and IP Law. She analyses the recent development in the law surrounding taxation of right to use intangible goods, its validity and implications for IP Transactions.
The Commissioner of Sales Tax, Mumbai issued a Trade Circular on 13th July, 2015 (available here) declaring that Maharashtra VAT is leviable on transactions involving the transfer of right to use intangible goods (including trademarks and copyright), even if the rights are transferred to more than one person.
In Part I of this two part blog post, I examine the unique position on “transfers of right to use” IP that has emerged in Maharashtra on the basis of this circular. In Part II, I will look at the applicable indirect taxes in the case of such transfers, and the unconstitutional double levy currently being imposed.
Tata Sons v. State of Maharashtra
The Trade circular is based on the Bombay HC decision in Tata Sons v. State of Maharashtra (here) decided on 20th January, 2015. The Tata group of companies had entered into a Tata Brand Equity and Business Promotion agreement, which granted the subsidiaries in the group permission to use the TATA trademark. This was picked up by the Sales tax authorities under the Maharashtra Sales Tax on the Transfer of Right to use any Goods for any Purpose Act, 1985 (“the 1985 Act”), and eventually made its way, after the first and second appeals failed, to the Bombay HC. The issue before the Bombay HC was whether the granting of the right to use of the trademark amounted to a “transfer of right to use any goods for any purpose”. If yes, that would bring the transaction under the definition of sale under S. 2(10) of the 1985 Act, exposing Tata Sons to sales tax.
Tata Sons contended there had been no transfer of right to use, as no legal right had been transferred to one person to the exclusion of the transferor. On the contrary, multiple persons, including the transferor, were being permitted to use the trademark simultaneously. This argument hinged on the test for “transfer of right to use” laid down by the Supreme Court in the landmark decision of BSNL v. Union of India.
As analysed in great detail by J. Sai Deepak in this post, the Bombay HC confuses the point. Swayed by the department’s argument on the absence of words “exclusive” and “unconditional” in S. 2(10) of the 1985 Act, it holds that under the 1985 Act, the right to use goods can be transferred to multiple persons. It holds the BSNL test for transfer inapplicable on the grounds that the Supreme Court was only concerned with composite contracts concerning the telecommunications sector, and that it is inextensible to the facts of the case. This ruling clearly blurs the line between transfers of right to use and mere grants of right to use, where title over the goods does not pass. Consequently, transfers of right to use have become indistinguishable from transactions involving mere use of IPs by third parties (such as say, licensees).
The fall out
Tata Sons has appealed this decision to the Supreme Court, where it will hopefully be set aside. However, with the issuance of the Trade Circular dt. 13th July 2015, the effects of the decision are going to be immediately felt in Maharashtra. The sales tax department of Maharashtra has declared that the law laid down in Tata Sons, which was specific to the 1985 Act, is equally applicable in the case of VAT. Admittedly, given the parallels between the 1985 Act and MVAT, this is legitimately extendable. From a commercial perspective, however, it is dismaying: it is a clear indication that applying the (clearly bad) law laid down in Tata Sons, the sales tax department intends to move against all persons engaging in IP transactions involving transfers of right to use. It is highly possible that their sweep will include the unsuspecting licensor receiving royalty for granting the right to use IPs. Given the Indian taxman’s trigger-happy tendencies, I wouldn’t be surprised.
