Activity of transfer of right to use goods, is exigible to sales tax

While setting aside the impugned order of the Tribunal, the Kerala High Court held that the Tribunal had clearly gone wrong in law while dismissing the appeals preferred by the State, and therefore, ruled that in a contract for the transfer of the right to use the goods, the taxable event is the execution of the contract for delivery of the goods, and if that has taken place, it was immaterial whether the transfer was exclusively or to the exclusion of all others.

A Division Judge Bench of Justice A. K. Jayasankaran Nambiar and Justice Mohammed Nias C. P. observed that “the transferee obtained a legal right to use the goods for the period during which he had such legal rights, which had to be to the exclusion of the transferor.”

Advocate Mohamed Rafiq appeared for the Petitioner whereas Advocate K. V. Vimal appeared for the Respondent.  

The brief facts of the case were that the respondent is a Commercial Tax Officer. The Assessing officer (AO) found that the respondent had received an amount of Rs.3,68,97,749.05/- towards income from the copyright and royalty for the transfer of the right to use ringtone for a specific period. It was also found that the respondent had not declared the said turnover in their monthly/annual return, reopened, and completed the assessments under Section 25 (1) of the Kerala Value Added Tax Act, 2003 (KVAT, 2003). The respondent appealed against the AO which were allowed in their Favor. The State filed a second appeal before the Tribunal challenging the order of the Appellate Assistant Commissioner, and the same was dismissed by the Appellate Tribunal.

After considering the submission, the Bench noted that the State is entitled to succeed in said revision.

Referring to the judgment in Quick Heal Technologies, the Bench reiterated that “the approvals, concessions, licenses, and permits in relation to goods would also be available to the user of goods, even if such licenses or permits are in the name of the owner (transferor) of the goods.”

The Bench further added that” the issue is not whether there is a transfer of property in goods but if there is a transfer of the right to use the property in goods.”

The Bench found that the first Appellate Authority and the Tribunal essentially held that there is no exclusive transfer of the goods.

However, it cannot be held that it is a requirement of law that there should be a transfer of the entire right to the exclusion of the transferor for there to be a transfer of the right to use, added the Bench.

The Bench elaborated that the transfer of the right to use goods is distinct and separate from the transfer of goods, and the Tribunal has clearly erred in considering the question as to whether there is a transfer of the property in goods, and it has misdirected itself in not finding out whether there has been a transfer of the right to use goods, and if it is answered in the affirmative, surely the activity is exigible to sales tax.

The Bench also referred to the case Associated Cement Companies Ltd. v. Commissioner of Customs [(2001) 4 SCC 593] and stated that in a contract for the transfer of the right to use the goods, the taxable event is the execution of the contract for delivery of the goods, and if that has taken place, it was immaterial whether the transfer was exclusively or to the exclusion of all others.

Accordingly, the Bench set aside the impugned order of the Tribunal and remitted OTR 23/2019 back to the assessing officer to consider the question afresh and pass a speaking order dealing with the contentions of the assessee.

Cause Title: State of Kerala Vs. M/S. Sathyam Audios [OT.REV NO. 23 OF 2019 / 2023-Enterslice-4-HC-Ker-Misc]

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