WHIRLPOOL INDIA LTD. BANGALORE vs. DEPUTY COMMNR.,COMMERCIAL TAXES

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..

http://JUDIS.NIC.IN SUPREME COURT OF INDIA 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 http://JUDIS.NIC.IN SUPREME COURT OF INDIA 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.