A division bench of the Kerala High Court has held that the transfer of patent rights are subject to tax under the Central Sales Tax Act.
The issue before the division bench comprising Justice Vinod Chandran and Justice Ashok Menon was that where the situs of a sale is when the sale is of a trademark or patent, admittedly assessable to tax as a sale of intangible, incorporeal goods.
The assessee had transferred its patent rights on “Manjal Soap”, a bath-soap, to Marico Industries Ltd., having a registered office at Bombay. The assessee had a registered office within the State of Kerala at Alappuzha. The agreement of sale was executed at Pondicherry wherein the purchaser had a unit manufacturing soap for which the trademark registration was obtained. The department held that the patent rights transferred are subject to Central Sales Tax Act and the penalty was imposed along with demand.
On appeal, the Tribunal affirmed the order of the lower authorities.
The bench observed that there is no such provision with regard to intangible assets, such as trademarks, brands, logos, i.e., intellectual property rights. Therefore, the well-accepted principle of ‘mobilia sequuntur personam’ would have to be followed.
“The situs of the owner of an intangible asset would be the closest approximation of the situs of an intangible asset. This is an internationally accepted rule unless it is altered by local legislation. Since there is no such alteration in the Indian context, we would agree with the submissions made on behalf of the petitioner that the situs of the trademarks and intellectual property rights, which were assigned pursuant to the ISPA, would not be in India. This is so because the owner thereof was not located in India at the time of the transaction”, the bench said.
The bench also pointed out that an un-amended definition of “sale” in the CST Act was also specifically referred to and it was held that “the transfer is sine qua non for the right to use any goods”.
“The CST Act at that time did not include a fiction as to the right to transfer goods or the other transactions under Article 366(29A), being a sale of goods. We would also with emphasis, observe that here there is no transfer of the right to use. The transactions under Article 366(29A) were transactions which were deemed to be the sale of goods; which but for the 42nd amendment would not be termed as the sale of goods. The fiction only applies to the said transactions and cannot be imported into others. Here there is the transfer of property in goods and not a mere transfer of the right to use,” the bench added.
Relying on a plethora of judicial decisions, the bench sustained the order of assessment to the extent the transfer of patent right is assessed under the CST Act.
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