Kerala High Court has held that VAT is not applicable on transfer of goods but to the transfer of the right to use goods.

The respondent is an assessee on the rolls of the Commercial Tax Officer, Ernakulam. The assessing officer, on scrutiny of the audited statement of accounts and assessment records, noticed that the assessee had received an amount towards income from the copyright and royalty for the transfer of right to use ringtone for a specific period during the assessment years and, finding that the assessee 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. 

Aggrieved by the order of the assessing officer, appeals were preferred by the assessee, which were allowed in their favour. 

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 by Annexure-C order, which is challenged in these revisions.

The issue before the authorities was regarding the taxability of receipts towards royalty and the transfer of the right to use intangible property. According to the assessing authority, under Entry 68 of the III Schedule, intangible items such as copyright, patent, etc., are specifically included, and under Section 6(1)(c) of the KVAT Act, 2003, transfer of the right to use any good for any purpose for a specified period is taxable at 4%. 

The assessing officer held that courts had held that trademark is intangible goods, which can be the subject matter of transfer and royalty received by dealers from franchisees for the use of a trademark is liable to tax, and in the same analogy, royalty received from intangible goods like copyright, patent, etc. is also liable to be taxed as the consideration received for the transfer of the right to use goods under the KVAT Act. 

The State had challenged the orders of the Deputy Commissioner (Appeals), and all the appeals were heard and considered jointly by the Appellate Tribunal. The State essentially contended that under Entry 68 of the Third Schedule, intangible items like copyright, patent, etc., are specifically included, and under Section 6(1)(c) of the KVAT Act, transfer of right to use for any purpose, taxable at the rate of 5%. The State also contended that trademark is intangible goods that can be transferred, and the royalty received is liable to tax

The court held 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. In the instant case, 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. We hold that the Tribunal has clearly gone wrong in law while dismissing the appeals preferred by the State. The order of the Tribunal impugned before us is set aside.