Writ Petition No. 9175 of 2015 with W.P. No. 497 of 2015. Case: Mahyco Monsanto Biotech (India) Pvt. Ltd. Vs Union of India. High Court of Bombay (India)
| Case Number | Writ Petition No. 9175 of 2015 with W.P. No. 497 of 2015 |
| Counsel | For Appellant: Shri N. Venkatraman and D.B. Shroff, Sr. Counsels with Arun Jain, Jas Sanghvi, Ms. Shilip Jain, i/b M/s. PDS Legal and Hormazd Daruwalla, i/b M/s. Khaitan & Co. and For Respondents: Shri V.A. Sonpal, Spl. Counsel, Ms. Anjali Helekar, AGP, Pradeep S. Jetly with Jitendra B. Mishra |
| Judges | S.C. Dharmadhikari and G.S. Patel, JJ. |
| Issue | Constitution of India - Article 226 |
| Citation | 2016 (44) STR 161 (Bom.) |
| Judgement Date | August 11, 2016 |
| Court | High Court of Bombay (India) |
Judgment:
G.S. Patel, J
| TABLE OF CONTENTS |
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| I. | Introduction...............................................................168 |
| II. | Constitutional & Legislative Framework...........................170 |
| III. | Facts in the Monsanto Petition........................................172 |
| IV. | Submissions & Findings in Monsanto...............................175 |
| V. | Facts in the Subway Petition...........................................188 |
| VI. | Submissions & Findings in Subway..................................189 |
| VII. | Conclusion.......................................................................195 |
I. INTRODUCTION:
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These two Writ Petitions came to be tagged together presumably because they both raise issues of whether, in respect of the transactions that arise in each, the Petitioners are liable to a levy of service tax or sales tax. As it turns out, the facts are materially distinct; and as the following judgment shows, the two cases seem to us to be mirror images of each other: if one fails, on a parity of reasoning, the other must succeed.
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We have heard Mr. Venkatraman for the Petitioners, Mr. Sonpal for Respondent Nos. 2 and 4, and Mr. Jetly for Respondent Nos. 1 and 3 in Writ Petition No. 9175 of 2015 ("the Monsanto Petition"). In Writ Petition No. 497 of 2015 ("the Subway Petition"), we have heard Mr. Shroff for the Petitioners, Mr. Jetly for Respondent Nos. 2 and 3 and Mr. Sonpal for Respondent Nos. 1 and 4. We have carefully considered the submissions of all the counsels and the material they have placed before us. Mr. Jetly has broadly adopted the arguments of Mr. Venkatraman and Mr. Shroff.
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Mr. Venkatraman''s submissions are intricately structured. We will turn to these presently. It seems to us necessary, however, to at least attempt to distill the essence of the arguments in his Petition and, therefore, in the companion Petition. In doing so, we leave aside for the present all questions of legislative competence.
(a) If we may be permitted a small latitude, the kernel (or ''seed'', as it were) of Mr. Venkatraman''s case is this: Mahyco Monsanto Biotech (India) Pvt. Ltd. ("Monsanto India") supplies to third parties a certain type of hybrid cotton seed. This seed is impregnated with a proprietary technology that protects it against the boll-weevil, a known menace to cotton crops. From those hybrid seeds, these third parties then generate large quantities of sowable seeds, which they then sell to cotton farmers. Monsanto India itself sells nothing to the end-user. These end-product seeds have the benefit of the boll-weevil protection technology; and the third party purchasers from Monsanto India are thus able to commercialize the technology to produce hybrid seeds for sale to cotton growers. From a small seed do mighty cotton plantations grow. Monsanto India says that what it provides when it gives the third party purchasers the parent, impregnated seed is a service, and this is liable to be taxed under the relevant provisions of the Finance Act as amended, read with the Rules that pertain to service tax. This is a central levy. The transaction between Monsanto India and the third party with whom it deals is not, and cannot be, a sale assessable under the Maharashtra Value Added Tax Act, 2002 ("the MVAT Act"). Mr. Venkatraman insists that the transaction in question involves no transfer of a chattel qua chattel; no transfer of the right to use; and therefore, by necessary elimination, it must be a service and must be construed as such. He says that what is being offered is the technology; the container, receptacle or form in which it is transmitted is entirely irrelevant. What the third party pays for is the technology, not the container; and since this has none of the qualities that define a sale or a deemed sale (viz., a transfer of the right to use), it must be held to be a service. Central to this argument is the aspect of non-exclusivity: Monsanto India passes no ''property'' or ''estate'' in the technology itself to the third party developer. It merely licences it. Monsanto India may issue innumerable such technology licences to various third party developers. Those developers in turn cannot further sub-license the technology. They can only use it to produce a hybrid, sowable seed. Therefore, the third party developers obtain only a right to use the technology; and there is no transfer of that right. The argument against this seems to us to be straightforward: that the only way for Monsanto India to effect this so-called technology transfer is by selling to the developer a seed duly imbued or impregnated with the protective technology. In other words, it is simply not possible for Monsanto India to divorce the container from the technology; without the seed container, the technology is in itself useless. Once this is seen, it becomes apparent that all the qualities that Monsanto India describes as applicable to a sale apply exactly to the third party developers'' acquisition of that impregnated seed. That third party developer may further sell it as is or do what he wishes with it. There is clearly not only a transfer of a right to use (as there would be in a deemed sale), but there is in fact a direct sale of the impregnated seed; this is in no way a service.
(b) The Subway Petition is, as we have said, an almost exact mirror image. Here, the transaction is a franchise agreement. Subway holds considerable intellectual property in the form of trade marks, copyright and so on. The franchisee in question is in Mumbai, though the agreement is stated to have been executed in Delhi. The situs argument is subsidiary. What Subway says is that the franchise agreement is purely a service. Its franchisee has a mere right to display Subway''s marks. It cannot sub-licence the intellectual property further downstream to sub-franchisees; it cannot sell or alienate that intellectual property; it enjoys no estate or title in any of the marks. This is, therefore, not a sale or even a deemed sale; it is purely a service. The State Government argues that these submissions are irrelevant. The franchisee has acquired a right to use the marks, and there is, therefore, a transfer of the right to use those marks. In any case, certain amendments to the MVAT Act make all this moot: trade mark assignments and franchise agreements are both now brought into the sweep of the local sales tax law.
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Having closely considered the submissions, we are of the view that the Monsanto Petition must fail, and the Subway Petition must succeed. Our reasons follow.
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CONSTITUTIONAL AND LEGISLATIVE FRAMEWORK:
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Article 366(29A) reads as follows:
"366. In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say -
"tax on the sale or purchase of goods" includes (29A) -
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;"
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The incidence of tax in sub-clause (a) is on the transfer of property in goods; in sub-clause (b), too, it is on the transfer of property in goods, but in the context of a works contract; in sub-clause (c), it is on the delivery of goods; in sub-clause (d), it is on the transfer of a right to use any goods; in sub-clause (e), it is on the supply of goods as part of a service; and in sub-clause (f), it is on the supply of services. It is sub-clause (d) that falls for consideration in these Writ Petitions.
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The relevant provisions of the Maharashtra Value Added Tax Act, 2002 read thus:
"2. Definitions. - In this Act, unless the context otherwise requires, -
"sale" means a sale of goods made within the State for cash (24) or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words "sell", "buy" and "purchase", with all their grammatical variations and cognate expressions, shall be construed accordingly;
Explanation. - For the purposes of this clause, -
(a)...
(b)(i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;
(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;
(iii) a delivery of goods on hire-purchase or any system of payment by instalments;
(iv) the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash...
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