Non-Compete Fees not taxable under GST

In a recent judgement given by Kerala High Court in cases pertaining to pre-GST regime relating to transfer of trademark & patent rights by companies registered in the state of Kerala to transferees registered in the state of Karnataka and Maharashtra respectively and payment of Non-compete fees has upheld the decisions of AO w.r.t to transfer of intangible goods but has considered Non-compete fees paid to Kerala Companies as non-taxable under GST.

Facts of the case:

• The assessee, namely, ‘L’ having registered office in the State of Kerala had sold its trademark to one ‘W’ having registered office at Bangalore (Karnataka) and the agreement was executed at Ahemabad (Gujarat).
• The other assessee, namely, ‘E’ having registered office in the State of Kerala had sold its patent rights to one ‘M’ having registered office at Bombay and the agreement was executed at Puducherry.
• The Assessing Authority of the Kerala Sales Tax Department in the case of the assessee ‘L’ assessed the non-competition fee received by it from ‘W’ as local sale.
• He further treated the sale of goodwill, i.e., the sale of trademark as inter-State sale under section 3 of the Central Tax Act, 1956 (CST Act) and levied the tax accordingly.

Conclusion:

As to the assessment of non-competition fee, at the hands of the assessee, it is to be observed that the fee is paid by the transferee to the transferor, in pursuance to an agreement by which the transferee manufactures the goods under trademark, which right has already been transferred. There is no sale of goods in the said transaction and it has to be reiterated that the fees are paid by the purchaser outside the State to the assessee within the State.

Hence, the non-competition fee received by the assessee ‘L’ from purchaser of trademark was not assessable to tax. However, the sale of trademark or goodwill and patent rights were rightly assessed under the CST Act.

Source: [2019] 101 taxmann.com 229 (Kerala)