65. 17/2004- Service Tax, dated 10-09-2004. [G.S.R.591(E) dated 10-09-2004] Service tax ! " #der $ i!

te##ect%a# &r &ert' ri("t E$$ective rate $ d%t' Exe)&ti ! &r vided %!der * ti$icati ! * . 14/2012 dt. 20.06.2012

We are sharing with you analysis of an important recent judgment of the Honble Kerala High Court in the case of Malabar Gold Pvt Ltd (hereinafter referred to as the Petitioner) Vs. Commercial Tax Officer !"#! (##) TM$ %!& ' ()*+L+ ,$G, CO-*T] on the following issues:Issue: Whether Trademark is !oods " Whether right to use of Trademark ta#able under $tate %&T &cts as sale of goods" Whether %&T or $er'ice Ta# applicable on right to use of Trademark" Facts: The (etitioner Company had entered into )ranchisee &greements with se'eral companies* situated inside and outside Kerala and also abroad* as per which* on mutually agreed terms and conditions* these companies were allowed to use the Trademark owned by the petitioner+ ,n return* it is recei'ing royalty* the rate of which is also specified in the agreement+ )ranchisee $er'ices* being an acti'ity attracting $er'ice Ta# under the )inance &ct* -../* the petitioner obtained registration under $ection 0. of the )inance &ct and is paying ser'ice ta#+ They were issued notice by the Kerala $tate %&T authorities stating that transfer of right to use any goods is ta#able under $ection 01-2 of under the Kerala %alue &dded Ta# &ct 1hereinafter referred to as the &ct 2 and that* 3oyalty recei'ed by the petitioner from its franchisees for use of its Trade 4ark would attract %&T under entry 05 of the third schedule to the &ct+ Then* the (etitioner Company has filed Writ (etitions against the

demand of %&T on 3oyalty recei'ed for use of its trademark and for sharing business know-how+ Held: The Kerala High Court ./held the demand of V+T b0 holdin1 that Trade Mar2 is 1oods and *o0alt0 received from franchisees for .se of its trademar2 and for sharin1 b.siness 2no3'ho3 is leviable to V+T. The Court held that as per &rticle 600 17.&2 of the Constitution of ,ndia* 4tax on the sale or /.rchase of 1oods4 incl.des a tax on the transfer of the ri1ht to .se an0 1oods for an0 /.r/ose (3hether or not for a s/ecified /eriod) for cash5 deferred /a0ment or other val.able consideration4 and 8!oods9 under $ection 71##2 of the &ct means that all kinds of mo'able property 1other than newspapers* actionable claims* electricity* stocks and shares and securities2 and includes li'estock* all materials* commodities and articles and e'ery kind of property 1whether as goods or in some other form2 in'ol'ed in the e#ecution of a works contract* and all growing crops* grass or things attached to* or forming part of the land which are agreed to be se'ered before sale or under the contract of sale+ The e#pression would mean all kinds of mo'able property* including li'estock* all materials* commodities and articles other than what are e#cluded in the section itself+ ta#managementindia+com 6ecision of the Co.rt on 3hether V+T or 7ervice Tax a//licable8 The (etitioner contended that the transaction in :uestion attracted ser'ice ta# and that in 'iew of the principles laid down in the $ma1ic Creative (P) Ltd. v. Commissioner of Commercial Taxes and others !""9 (#) TM$ ! ' 7-P*)M) CO-*T O: $;6$+ * payments of ser'ice ta# and %&T are mutually e#clusi'e and hence %&T is not payablesince the petitioner is paying ser'ice ta# on royalty recei'ed* the impugned demand for %&T and penalty are illegal+ The Court held that this Court is not called upon to decide the legality of the le'y of ser'ice ta# on the royalty recei'ed by the petitioner+ Therefore* if the petitioner has a case that levy of service tax is illegal for any reason, it is up to them to challenge the levy in appropriate proceedings. Paradigm Shift in Taxation of Service w.e.f 1st Jul ! "#1": <hether sim.ltaneo.s incl.sion of 6eclared 7ervice and then excl.sion of 6eemed 7ale .nder +rticle =>> (!%+) from the definition of 7ervice is not leadin1 to anomal0 ? conf.sion for Trade@

&s you are aware of that temporary transfer or permitting the use or enjoyment of any intellectual property right * is a one of declared ser'ice under $ection 00;1c2 of the )inance &ct and $er'ice ta# is applicable" The term $er'ice is defined under $ection 0<= 1//2 of the )inance &ct* which is reproduced here in below: "Service" means any activity carried out by a person for another for consideration, and incl.des a declared service, but shall not incl.de (a) an activity hich constitutes merely,! ay of sale, (i) a transfer of title in goods or immovable property, by gift or in any other manner" or

(ii) s.ch transfer5 deliver0 or s.//l0 of an0 1oods 3hich is deemed to be sale 3ithin the meanin1 of cla.se (!%+) of article =>> of the Constit.tionA or (iii) a transaction in money or actionable claim".. $onclusion: Cant be ha'e simplicity in our ta# systems as they broadly reflect the philosophy of the e#isting ta# rules+ These principles can be summari>ed as follows:

%eutralit : Ta#ation should seek to be neutral and e:uitable between forms of commerce+ =usiness decisions should be moti'ated by economic rather than ta# considerations+ =usinesses in similar situations carrying out similar transactions should be subject to similar le'els of ta#ation? &fficienc : Compliance costs for businesses and administrati'e costs for the ta# authorities should be minimi>ed as far as possible? $ertaint and sim'licit : The ta# rules should be clear and simple to understand so that businesses can anticipate the ta# conse:uences of a transaction* including knowing when* where and how the ta# is to be accounted? &ffectiveness and fairness: Ta#ation should produce the right amount of ta# at the right time+ The potential for ta# e'asion and a'oidance should be minimi>ed while keeping counter-acting+ Flexi(ilit : The systems for ta#ation should be fle#ible and dynamic to ensure that they keep pace with technological and commercial de'elopments+

Food for Thought: )oods and Services Tax *)ST+ is the need of the hour* which is ,ndias most ambitious indirect ta# reform that would replace e#isting $tate and Central ta#es such as e#cise duty* ser'ice ta# and 'alueadded ta# and purchase ta#* etc+ ,t is a consumption based ta# that will create a seamless pan-,ndia market and also bring down the total incidence of ta#es on goods and ser'ices by eliminating double ta#ation@ cascading of ta#es* etc+ =y lowering business costs* it will boost economic growth and increase e#ports and bring ,ndia in line with practices followed in many de'eloped countries+