Taxing the Transfer of right to use trademark

Transfer of right to use trademark03The famous case of taxing Tata Sons for the use of their brand name has been in the limelight for quite some time. It again hit the headlines recently when the apex court of the country refused to make the central government a party in a Tata Sons (petitioner) appeal related to the levy of around Rs. 300 crore sales taxes on use of the ‘Tata’ name by its subscribing companies. The Court refused to implead the Centre as a party on the grounds that such transactions cannot be subjected to both sales tax by the state governments and service tax by the central government.

In 1998 the petitioner had entered into a Tata Brand Equity and Business Promotion agreement, with various TATA companies (subsidiaries) granting permission to use the TATA trademark. This came under the scrutiny of Sales authorities which contented that such agreement by the petitioner would be taxed under the Maharashtra Sales Tax on the Transfer of Right to use any Goods for any Purpose Act, 1985 (hereinafter the Act). Being aggrieved by this decision of Sales authorities, the petitioner filed appeals which were dismissed by the Deputy Commissioner of Sales Tax (Appeals) and then by the Honourable Maharashtra Sales Tax Tribunal.

Leaving no stone unturned, the petitioner then filed a writ petition with the Bombay High Court challenging the levy of tax on the subscriptions received by it from subscribing companies.

The main issue to be decided by the High Court was whether the granting of the right to use the trademark amounts to a “transfer of right to use any purpose”. If affirmative, the agreement by the petitioner would attract liability to be taxed as the transaction would fall under the definition of sale under section 2(10) of the Act.

The petitioner contented that the agreement allowed multiple persons including the petitioner to use the trademark simultaneously. This cannot be termed as transfer since no legal right had been transferred to one person to the exclusion of the transferor. The trademarks were assigned to its group companies, which meant that there is no transfer within the meaning of the Act. The petitioner also paid reliance on the BSNL judgment wherein the court clarified as to what constitutes a transaction exigible to VAT. The petitioner also stated that no right was created and it was a mere permission for facilitating the use which would at best amount to a license.

It is pertinent to note here that there is a distinction between transfer of right to use a trade mark and assignment of a trade mark. “Assignment” of trade mark is taken to be a sale or transfer of the trade mark by the owner or proprietor thereof to a third party inter vivos. By assignment, the original owner or proprietor of trade mark is divested of his right, title or interest therein. But the same is not so divested by transfer of right to use. License to use a trade mark is different from assignment.

However the Bombay High Court rejected the contentions of the petitioner and held that transfer of rights to use goods of incorporeal or an intangible character such as trademarks, copyrights, patents, etc. is exigible to state value added tax and that there need not be any exclusive and unconditional transfer. The Court further stated that the transaction should attract tax even if there may be multiple transferees and the transferor continues to use goods. Further, it observed that the Supreme Court in the case of BSNL dealt with altogether different controversy, and hence its ruling cannot be applied to the present case. The BSNL case involved relationship between a telephone connection service provider and its customer which was essentially in the nature of service.

The court emphasized that the agreement between the petitioners and the subscribers is a transfer of right to use the goods which would include the Marks as well. Further, the Act does not give any indication that the right to use the incorporeal/intangible goods should be exclusively and unconditionally transferred in favour of the transferee.

We now have to wait till the Supreme Court adjudicates this matter. Only time will tell the future of TATA but this issue has certainly opened up debates regarding the meaning of transfer of the right to use goods and also the kind of transactions that could be covered within the purview of sales tax/VAT.

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