2006 (11) TMI 321 - SC - VAT and Sales Tax

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? Held that - Appeal dismissed. 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 wholesaler or any other dealer but are only sales of manufactured branded goods to the brand owner. Hence, the sixth proviso and Explanation III to section 5(3)(a) are clearly not applicable.

Summary

Issues:
Interpretation of provisions under the Karnataka Sales Tax Act, 1957 regarding tax liability on goods sold under a brand name by a manufacturer exempted from tax.

Analysis:
The appellant, a registered dealer under the Karnataka Sales Tax Act, entered into an agreement with a manufacturer, Applicomp, for the supply of electronic products under the brand name "Whirlpool." Applicomp was exempted from sales tax by the State Government for goods manufactured at its factory. The dispute arose regarding the tax liability on sales of these goods under the brand name. The appellant claimed that the transaction falls under the sixth proviso and Explanation III of section 5(3)(a) of the Act, entitling them to a tax credit. However, the Authority for Clarifications and Advance Rulings held that the third proviso applied, leading to the present appeal.

The Court analyzed the provisions of the Act and the agreement between the parties. It was observed that the goods were manufactured by Applicomp using the appellant's brand name, making the appellant the first dealer liable to tax under the Act. The illustration provided under the sixth proviso supported this interpretation, where the brand owner is considered the first seller for tax purposes. Additionally, the agreement clarified that Applicomp was neither a registered user nor a licensee of the brand name, disqualifying them from the tax exemption provided under the sixth proviso.

Furthermore, the Court emphasized that the sales were made directly to the brand owner, not to any intermediary like a marketing agent or distributor, as required by the sixth proviso. As a result, the provisions of the sixth proviso and Explanation III were deemed inapplicable to the present case. The Court upheld the view taken by the High Court, dismissing the appeal and ruling in favor of the tax liability falling on the appellant as the brand owner.