Full Judgment Text
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CASE NO.:
Appeal (civil) 5150 of 2006
PETITIONER:
Whirlpool of India Ltd.. Bangalore
RESPONDENT:
The Deputy Commissioner of Commercial Taxes,Bangalore
DATE OF JUDGMENT: 22/11/2006
BENCH:
S. B. Sinha & Markandey Katju
JUDGMENT:
J U DG M E N T
(Arising out of Special Leave Petition (Civil) No. 15138/2004)
MARKANDEY KATJU, J.
Leave granted.
This appeal has been file against the judgment of a Division Bench of
the Karnataka High Court dated 20.1.2004 in STA No.70 of 2003, by which
the appeal was dismissed.
Heard learned counsel for the parties and perused the record.
The appellant is a registered dealer under the Karnataka Sales Tax
Act, 1957 ("KST Act" for short). The appellant is the Licensee and
registered user of the trade mark "Whirlpool" in terms of the Trade Mark &
Trade Name Licence Agreement dated 24.2.1995 executed between M/s.
Whirlpool Corporation, USA, which is stated to be the proprietor and owner
of the said trade mark and the Appellant. The licence granted to the
appellant to use the trade mark is non-transferable.
On 4.2.2003, the appellant entered into an agreement with M/s.
Applicomp India Limited (for short "Applicomp" or the "Manufacturer")
under which Applicomp agreed to manufacture and supply electronic
products and electrical appliances such as Refrigerators, Washing Machines,
Air Conditioner, etc., to the appellant on Original Equipment Manufacture
basis, as per the specifications of the appellant. Relevant portions of clauses
4, 5 and 6 of the agreement are extracted below :
"\005\005\005\005The manufacturer is exempted from payment
of Sales Tax for the goods manufactured at its factory at
Hosur Road, Attibele\005\005..
4. The buyer hereby warrants that the Buyer is the
owner of all rights in the trade mark "Whirlpool" and has
the exclusive right to use the said trade mark in India.
Buyer hereby authorizes the manufacturer to use and
affix the said trade mark to the products which are sold to
the buyer in accordance with the specifications of the
Buyer.
5. Manufacturer acknowledges that this agreement
does not include any license of buyer’s trade marks.
Manufacturer shall not affix trade mark to any products
manufactured and/or sold to any third party other than
that to the party of the second part in respect of the
manufactured products.
6. Buyer has the right to inspect samples of the
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products to verify that the use of the trade mark conforms
to buyer’s specifications and also inspect/audit the
quality of the products manufactured\005\005\005"
Applicomp is neither a registered user nor a licensee in respect of the trade
mark "Whirlpool". The agreement just enables Applicomp to affix the trade
mark of the appellant to the products which are manufactured by it to the
specifications of the appellant, and which are exclusively to be supplied to
the appellant, and not to any other product of Applicomp.
The State Government, by notification dated 20.7.2000 issued in
exercise of power under Section 19C of the KST Act, exempted the tax
payable under the said Act by Applicomp on the sale of furnished goods
manufactured by it, for a period of 10 years from the commencement of
commercial production subject to the restrictions and conditions stated in the
said notification. Hence the sales by Applicomp to appellant are exempt
from payment of any tax under the KST Act.
Section 5(3)(a) of the KST Act provides that tax shall be levied under
the Act "in the case of sale of any of the goods mentioned in column (2) of
the Second Schedule, by the first or the earliest of successive dealers in the
State who is liable to tax under that Section, a tax at the rate specified in the
corresponding entry of column (3) of the said Schedule, on the taxable turn
over of sales of such dealer in each year relating to such goods."
Refrigerators fall under Entry (6) of Part-R of the Second Schedule, the rate
of tax being 20% from 1.4.2002, and washing machines as Electrical Goods,
falls under Entry-2(V) of Part-E of the Second Schedule, the rate of tax
being 16% from 1.6.2003. The third proviso and the sixth proviso to Section
5(3) as also Explanation III thereto, which are relevant to this case are
extracted below :
"Third Proviso to Section 5(3)(a) \026 Provided further that
where any goods liable to tax under this Act are produced
or manufactured by a dealer with the brand name or trade
mark of any other dealer and which are not used by the
latter as raw materials, component parts or packing
materials, as defined under the explanation to Section 5-
A, the sale of such goods by the dealer who has produced
or manufactured to the dealer who is the brand name or
trade mark holder, shall not be deemed to be, but the
subsequent sale of such goods by the dealer having the
right either as proprietor or otherwise to use the said
name or the trade mark, either directly or through
another, on his own account or on account of others shall
be deemed to be the sale by the first dealer liable to tax
under this Section.
Illustration - ‘A’ has registered a trade mark for
manufacture of certain goods. He gets the said goods
manufactured by ‘B’ under the said trade mark. The sale
by ‘B’ to ‘A’ of the said goods is not the first sale but the
sale by ‘A’ or by any other person on his account is the
first sale.
Sixth Proviso to Section 5(3)(a) \026 Provided also that
where goods are sold, under a brand name by the trade
mark holder or the brand name holder or any other dealer
having the right as proprietor or otherwise to use the said
name or trade mark either directly or through another on
his own account or on account of others, exclusively to a
marketing agent or distributor or wholeseller or any other
dealer, subsequent sale of such goods by the latter shall
also be liable to tax under this Section and the tax so
payable shall be reduced by the amount of tax already
paid on the sale of such goods by the former.
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Explanation III \026 For the purpose of the sixth proviso to
clause (a), where goods are sold under a brand name by
the trade mark holder or the brand name holder or any
other dealer having the right as proprietor or otherwise to
use the said name or trade mark either directly or through
another on his own account or on account of others, who
is exempt from tax by any notification issued under
Section 8-A or Section 19-C, the expression "tax already
paid" means the tax payable under this Section on such
sale if the sale had been effected by any other dealer."
It was submitted by Shri Harish Salve, learned senior counsel for the
appellant, that the transaction between the Applicomp and the appellant falls
under the Sixth Proviso read with Explanation III to the Section 5(3)(a),
whereas the learned counsel for the revenue submitted that the transaction is
squarely covered by the Third Proviso. In view of this difference in the
stands taken by the appellant and the respondent, the appellant filed an
application for confirmation of its view before the Authority for
Clarifications and Advance Rulings under Section 4 of the Act by posing the
following question :
"Whether the brand owner who is an exclusive
purchaser of goods manufactured, using its brand name,
by a manufacturer who is exempted under Section 8A or
19C is entitled to claim set off on the deemed tax paid on
the purchases made from such manufacturer and is
required to pay tax under Section 5(3)(a), only on the
value addition thereof."
The Authority by its order dated 27.10.2003 has given its clarification
holding that the transactions between Applicomp and the appellant are
governed by the Third Proviso to Section 5(3)(a) and not by the Sixth
Proviso and Explanation III to that Section.
Aggrieved, the appellant filed an appeal to the High Court, which was
dismissed and hence this appeal.
In our opinion, there is no merit in this appeal and we agree with the
view taken by the High Court.
Learned counsel for the appellant submitted that by virtue of the Sixth
Proviso read with Explanation III under Section 5(3)(a) of the Act, credit has
to be given to the appellant in respect of sales tax that would have been paid
by Applicomp in respect of the branded goods sold by it to the appellant. It
is submitted that Applicomp as a matter of fact has not paid the sales tax as
it is exempt from such payment.
In our opinion this argument is clearly untenable. In our opinion it is
the Third Proviso and not the Sixth Proviso which applies in this case
because the goods are manufactured by the dealer (Applicomp) using the
branded name of another dealer (appellant). These goods are not used as
raw materials, components or packing materials. Hence the sale by
Applicomp to the appellant cannot be deemed to be the sale by the first
dealer liable to tax under this Section, but it is the subsequent sale of such
goods by the dealer having the right either as proprietor or otherwise
(appellant) which has to be deemed to be the first sale liable to tax under this
Section. This submission is further supported by the illustration to the Sixth
Proviso which states :
"Illustration - ‘A’ has registered a trade mark for
manufacture of certain goods. He gets the said goods
manufactured by ‘B’ under the said trade mark. The sale
by ‘B’ to ‘A’ of the said goods is not the first sale but the
sale by ‘A’ or by any other person on his account is the
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first sale."
Applying the above illustration to the facts of the present case, ‘A’
would be the appellant and ‘B’ would be Applicomp. The incidence of tax
on the first sale would be on the appellant and not on Applicomp.
Moreover, a reading of clauses 4 and 5 of the agreement dated
4.2.2003 between the appellant and Applicomp makes it clear that
Applicomp is neither a registered user nor a licensee of the trade mark. Thus
it is not selling the goods as either a trade mark holder or as one having any
rights as the proprietor of the trade mark or otherwise. Hence the Sixth
Proviso clearly does not apply and any sale by Applicomp to the appellant
does not give the benefit of any reduction in tax to the appellant.
In the present case, the appellant is the owner of the brand name
‘Whirlpool’ registered under the Trade and Merchandise Act, 1958. Under
the agreement between the parties, the refrigerators and other consumer
goods are got manufactured by M/s. Applicomp India Ltd. and as per the
agreement M/s. Applicomp have to manufacture the products under the
brand name ‘Whirlpool’ and sell them exclusively to the appellant. M/s.
Applicomp is not the registered user of the brand name ‘Whirlpool’.
Moreover, the sales made by M/s. Applicomp to the appellant, are not sales
to the exclusive marketing agent or distributor or wholeseller or any other
dealer but are only sales of manufactured branded goods to the brand owner.
Hence in our opinion the Sixth Proviso and Explanation III to Section
5(3)(a) is clearly not applicable.
Thus, there is no force in this appeal. The appeal is accordingly
dismissed. There shall be no order as to costs.