By TIOL News Service

ERNAKULAM, DEC 20, 2018:THE issue at hand before the bench is whether place of existence of a trademark, would be the business place from where the owner of such mark exercises right to sell specified goods under such trademark, or from where the owner exercises patent rights. Thus it also held that sale of trademark thus classifies as an inter-State sale u/s 3 of the CST Act if such intangible goods are moved to another state in which the transferee is located. It was also clarified that transfer of trademark is a transfer of property of the form of goods & does not entail transfer of right to use and that such transfer of goods vests complete rights with the transferee & does not leave the transferor with any subsisting right.

Facts of the case

In the proceedings, it was stated that the assessee had sold its trade mark Chandrika, obtained for bath-soaps, to Wipro Chandrika Ltd and the agreement was executed in the AY 2004-05. Further, a sale agreement was executed which was treated as a sale within the State of Gujarat and sales tax was paid with the tax enactment applicable to that State at 4% on the volition of the assessee. However, the sales tax authorities initiated penalty proceedings and imposed penalty at twice the amount of tax sought to be evaded. Consequently, the AO completed the assessment for AY 2004-05. As per the assessment order, the assessee based on an agreement entered into with the purchase of trade mark, under the Kerala General Sales Tax Act. However, the AO levied tax, as inter-State sale on the sale of Good-Will, of trade mark, by the assessee for which transaction penalty was earlier levied. Hence, the sale of good-will was treated as inter-state under the Central Sales Tax Act.

Further, another assessee as Oriental Extraction (P)Ltd., likewise, was proceeded against for the AY 2005-06 under the CST Act on a similar transaction, as a sale of patent. It was mentioned that the assessee had transferred its patent rights on Manjal Soap, again a bath-soap, to Marico Industries Ltd., at Bombay. Further, an agreement of sale was executed at Pondicherry wherein the purchaser had a unit manufacturing soaps for which the trade mark registration was obtained. Thereafter, a penalty proceedings were initiated against the assessee. Eventually, the Tribunal affirmed the evasion of tax, modified the penalty to actual tax evaded. Thus, in the case of the assessee the assessment was completed, under the Kerala Value Added Tax Act.

In writ, the High Court held that,

++ the situs of the owner of an intangible asset, would be the closest approximation of the situs of an intangible asset. Thus, it held that the exercise of the right to a trademark or a patent right which has been obtained by the assessees, is exercised from the principal place of business. When transferring their rights obtained under a statute, to another entity having its place of business in another State; from where the transferee intends to exercise such rights thereafter, postulates a movement of the intangible, corporeal goods from one State to another and, hence, would be an inter-State sale assessable to tax under the CST Act. The transferor's principal place of business being within the State of Kerala, the sale would be an inter-State sale. The Court, reiterate that the transfer is not a transfer of right to use, but a transfer of property in goods, vesting the complete rights with the transferee and the transferor having no subsisting right thereafter;

++ also, it is to be observed that the fee is paid by the transferor to the transferee, in pursuance to an agreement by which the assessee manufactures the goods under trade mark, which right has already been transferred. There is no sale of goods in the said transaction and it has to be reiterated that the fees are paid by the purchaser outside the State and to the assessee within the State. If the assessee has any other issue, not decided, to be agitated in statutory appeal, if not already filed, the same shall be taken up within 30 days from the receipt of the certified copy of this judgment and then it will be treated as filed within time. The levy though is not debatable, the assessee was led to follow the course it took, on a misunderstanding which was bonafide, hence there is no cause for penalty;

++ considering the decision in the case of CUB PTY Limited, the Court concurs with the decision rendered therein that the situs of the owner of an intangible asset, would be the closest approximation of the situs of an intangible asset. Thus, it has to be held that the exercise of the right to a trademark or a patent right; which has been obtained by the assessees, who had their principal places of business in the State of Kerala, is exercised from the principal place of business. When transferring their rights obtained under a statute, to another entity having its place of business in another State; from where the transferee intends to exercise such rights thereafter, postulates a movement of the intangible, corporeal goods from one State to another and, hence, would be an inter-State sale assessable to tax under the CST Act. The transferor's principal place of business being within the State of Kerala, the sale would be an inter-State sale. Hence it is reiterated that the transfer is not a transfer of right to use, but a transfer of property in goods, vesting the complete rights with the transferee and the transferor having no subsisting right thereafter;

++ section 3 of the CST Act, applies on all agreement of transfer of the intangible, incorporeal rights; goods, occasions the movement of the such goods from Kerala to that other State where the transferee has their principal place of business. The agreement executed in Gujarat and Puducherry does not make the sale within that State or Union Territory, as Section 4 of the CST Act provides that sale of goods is deemed to take place in a State, only when the goods are within the State. Otherwise any goods could be taken by the seller to another State and delivered to the purchaser making it an intra-State sale.

(See 2018-TIOL-2639-HC-KERALA-VAT)