As held by the Supreme Court in 20th Century Finance Corporation v State of Maharashtra, the situs or site of sale of intangible goods is the place where the agreement is executed or signed. Accordingly, if the agreement for sale of intangible goods is executed outside India, it will be a “sale outside India”.
For such sales, according to section 4 of the Central Sales Tax Act, 1956 (CST Act), no tax can be levied as it is located beyond the territorial jurisdiction of the country.
However, in Duphar Interfran Limited v The State of Maharashtra the Maharashtra Sales Tax Tribunal held that even sale agreements executed outside India are liable to tax in respect of sale of trademarks in the state of Maharashtra. Further, it has applied the criterion of location of goods where these goods are available for use after sale in order to determine whether it was local or interstate or export sale.
Background to the case
In this case the assessee, Duphar Interfran, sold its trademark Crocin to SmithKline Beecham (SKB) in London.
The question which arose for consideration was whether sale of trademark by Duphar Interfran to SKB was an export sale or local sale.
Duphar Interfran had contended that the sale of the trademark is an export sale and not local sale on the basis of the following arguments:
• The ownership of goods is transferred from a person in India to a person outside India;
• Since the agreement between the parties was executed in London, it will be an export sale in terms of the decision in 20th Century Finance Corporation.
The issues involved were:
• Whether a sale agreement executed outside India for sale of intangible goods is liable to tax in India.
• If the principles laid down in sections 3, 4 and 5 of the CST Act, which sets the criteria of the movement of goods for differentiating a interstate, local or export sale, can be applied to intangible goods.
• If the principle can be applied, the next question was how the movement of intangible goods from one state to another or to outside the country was to be determined. If it did not apply, the question was if the location of sale is relevant or if any other criteria should be used to determine whether a given sale of intangible goods is local, interstate or export.
Since a trademark is an intangible, the tribunal concluded that as the registration of a trademark creates property for the party registering it, its transfer involves the transfer of intangible goods.
The tribunal did not consider the issue of whether the given sale transaction is within or outside the purview of the CST Act to levy tax in India.
The tribunal concluded that while intangible goods have no existence and location, the rights therein have certain physical location in reference to the place where the business is carried on or where the particular rights exist and are enjoyed. In order to determine the nature of “sale”, one will have to apply the principles laid down in section 3, 4 and 5 of CST Act.
In the Duphar Interfran case, the rights in the trademark Crocin physically existed in Maharashtra, both before and after the sale.
Therefore, since the intangible goods in question have not moved from one state to another or from within the country to outside the country, the sale would be “local sale” in terms of the principles laid down by section 4 read with section 5 of the CST Act.
This decision of the tribunal is being challenged and is pending before Bombay High Court.
While the CST Act is silent the movement of intangible goods, the following may help in determining the taxability of intangible goods with respect to sales tax or value added tax (VAT):
1. If the agreement is executed outside India, then such sale cannot be subjected to sales tax or VAT in India in view of the decision in 20th Century Finance Corporation, read with section 4 of CST Act. However, the judgment of the tribunal has not considered this aspect of territorial jurisdiction to levy tax.
2. If the agreement is executed in India, then whether it is interstate or local or export may depend on the:
• Place of holding the right (if the ownership of goods after sale remains in India or outside India).
• Place where the intangible goods are available for use after their sale.
Economic Laws Practice is a full-service law firm headquartered in Mumbai with offices in New Delhi, Pune and Ahmedabad. Rahul Jain is an associate at the firm. He can be contacted at email@example.com.
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