In my last post I reviewed and differed with the decision of the Bombay High Court in Tata Sons & Anr. v. The State of Maharashtra & Anr. wherein the central question was whether Tata Sons’ Agreement for use of the Tata trademark with its group companies resulted in transfer of right to use the mark to the latter. In this post, the idea is to enquire deeper into the concept of “transfer” so as to understand the distinction between a license to the use goods (including a trademark) and transfer of right to use the goods.
Let’s start by breaking down “transfer of right to use the goods” into its constituents. It cannot be denied that there is a clear distinction between “right to use the goods” and “transfer of right to use the goods”. “Right to use the goods” is perhaps synonymous with “permission to use the goods”, which is very different from “transfer of the right to use goods”. In the case of “transfer”, the common understanding of the term is that it results in conveyance of title in the property, or one of the bundle of rights in the property to a third party. Therefore, to equate transfer of right to use with a mere right to use would be erroneous. A mere right to use the property with the consent of the owner of the owner of the property is a license. However, if one of the rights in the property, say the right of possession, were to be transferred by the owner of the property to another party, it would result in transfer of the right of possession, even if such transfer is for a limited period of time. It must also be borne that transfer results in excluding the owner of the property as well from exercising the right so transferred. It is for this reason that an exclusive license (i.e. to the exclusion of the right owner and all third parties) for howsoever a limited period of time, could qualify as transfer of right to use.
The above interpretation finds support in Para 32 of the Supreme Court’s decision in Twentieth Century Finance Corporation v. The State of Maharashtra, which is extracted below:
“(32) Coming to the question that a transaction in question is in the nature of a contract of bailment, it is true that the High Court of Bombay in the judgment under appeal has taken the view that the transactions of the transfer of the right to use goods are in the nature of bailment. If such a view is taken then the State would not have the power to levy sales tax on such transactions. Unless such transaction is held to be a sale or deemed sale in law and it is only then the State legislature would be competent to enact law to levy tax under Entry 54 of List II of Seventh Schedule. The levy of tax is not on use of goods but on the transfer of right to use goods. The High Court proceeded on the footing that the transfer of right to use is different from sale or deemed sale without considering the legal fiction engrafted in clause (29A) of Article 366 of the Constitution. We are, therefore, of the view that the reasoning of the High Court in upholding the Explanation to Section 2(10) of the Act is not tenable in law.”
As the Court rightly notes, in understanding the import of the words “transfer of right to use goods”, it is important to understand the need for treating such transfer of right to use as deemed sale for the purposes of taxation. Extracted below is Clause (29A) of Article 366 of the Constitution, which enumerates transactions that are deemed sales and to which sales tax applies:
(29A). Tax on the sale or purchase of goods' includes –
(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.
It is evident from that above that Sub-clause (d) of Clause (29A) treats transfer of right to use goods as deemed sale. As I said in the last post, the purpose of the legal fiction created by the Constitution (or State legislations) to deem transfer of right to use goods as “sale”, is to tax transfer of divisible rights (even if such transfer is for a limited period) despite the title in the goods remaining with the transferor. This fiction helps to prevent mischief in instances where a transaction, which for all intents and purposes is a sale of a right (if not the good itself), is sought to be couched as a license. However, the concept of transfer remains unaltered i.e. the result of the transaction must be to the exclusion of the owner and all third parties for it to acquire the status of a transfer. Simply stated, exclusivity, for howsoever limited a period, is inherent in transfer of any kind. This view finds resonance in the following observations of the Supreme Court in Twentieth Century:
“64. A perusal of Sub-clause (d) shows that the tax, envisaged therein, is on the transfer of the right to use any goods for any purpose, the period of use may or may not be specified, the consideration whereof may be cash, deferred payment or any other valuable consideration (need not necessarily be cash consideration). As the tax is on the transfer of right to use any goods, we shall ascertain the meaning of the word 'transfer'.
65. In The New Shorter Oxford English Dictionary 1993 Edition, Volume 2, Page 3367, its meaning is given, inter alia, as follows: '(Law)-conveyance of property, especially of stock of shares, from one person to another.' In Black's Law Dictionary Sixth Edition, Page 1497, the word 'transfer' is defined to mean, inter alia, "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property...'. In Corpus Juris Secundum Volume 87, Page 892, it is defined to mean, "common use of the word 'transfer' is, to denote the passing of title in property or an interest therein from one person to another and in that sense the term means that the owner of the property delivers it to another person with the intent of passing the rights which he had in it to the latter."
66. Our endeavour here is to discern what transfer, in the context of Clause (d), means. Is it simply signing of a document that brings about a transfer of right to use any goods or is it also necessary to give control of the goods to complete the transfer with the Intent of passing the right to use the goods to the hirer? A combined reading of the first and the second limb of Clause (29A) suggests that mere execution of a document de hors passing the domain of the goods does not result in transfer of right to use any goods and will not constitute a 'deemed sale' within the meaning of Clause (29A), The 'deemed sale' envisaged in Sub-clause (d) involves not only a verbal or written transfer or right to use any goods but also an overt act by which the transferor places the goods at the disposal of the transferee to make their use possible. On this construction, it is explicit that the transfer of right to use any goods involves both passing of a right in as well as domain of the goods in which right to use is transferred.
72. Reverting to Sub-clause (d) of Clause (29A), a perusal of the Statement of Objects and Reasons appended to The Constitution (Forty-Sixth Amendment) Act, 1982, shows that the Parliament has taken note of the fact that the main right in regard to films relates to its exploitation and after exploitation for a certain period of time, in most cases, the film ceases to have any value, so instead of resorting to the outright sale of a film, only a lease or transfer of the right to exploit the film is made. The device by way of lease of films has been resulting in avoidance of sales tax so to curb that device, Sub-clause (d) is inserted in Clause (29A). Even so, Sub-clause (d) is wider import than a mere leasing of films. It applies to all kinds of leasing/hiring of goods, for example, leases of plants, machinery, computers, cars, planes, furniture etc,
73. A sale of any goods is complete when the property in the goods passes to the purchaser pursuant to a contract of sale of those goods. So also, a deemed sale of goods under Sub-clause (d), as has been pointed out above, will be complete when the control of the goods in which the right to use is transferred, passes to the transferee under the contract of transfer. Such a transfer of right to use any goods may be effected either by the execution of a written contract between the parties indicating the mode by which giving the control or domain of the goods to the hirer is contemplated or by an oral contract coupled with delivery of the goods to the hirer. There can be no oral contract with regard to unascertained goods because there can be no delivery of such goods. Where a written contract exists whether in regard to ascertained goods or unascertained goods, the intention of the parties, as evidenced by the terms of the contract to 'transfer of right to use the goods' is determinative of the fact as to when, how and where the right to use the goods is transferred. It is a well-settled principle of interpretation of contracts that the contract must be construed as a whole. When and where such a deemed sale, under Sub- clause (d), takes place is a question of fact which has to be decided on the facts and circumstance of each case, Including the terms and conditions of the contract evidencing the transaction.
74. It may also be pointed out that though the ingredients of a sale of the goods as defined in the Sales of Goods Act and a deemed sale of goods as defined in Clause (29A) of Article 366 are different there can be no difference in the incidence of tax and they cannot be treated differently for the purpose of levy of sales tax.”
These findings of the Court are consistent with Justice Lakshmanan’s enumeration of the ingredients of transfer of right to use goods in BSNL v. Union of India, which perhaps captures the spirit of the transaction best, as follows:
“To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods. Consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor. This is the necessary concomitant of the plain language of the statute viz. a "transfer of the right to use" and not merely a licence to use the goods;
e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”
From these decisions of the Supreme Court, it is clear that the legal fiction of “deemed sale” does not alter the character and ingredients of “transfer”. Therefore, grant of a non-exclusive right to use a trademark does not, in my opinion, amount to “transfer of right to use the mark”. One hopes the decision of the Bombay High Court in the Tata Sons case is set aside by the Supreme Court and the law relating to transfer of right to use incorporeal goods such as IP is laid down with clarity.