2004 (1) TMI 646 - HC - VAT and Sales Tax

Issues Involved:
1. Applicability of the third proviso to section 5(3)(a) of the Karnataka Sales Tax Act, 1957.
2. Applicability of the sixth proviso and Explanation III to section 5(3)(a) of the Karnataka Sales Tax Act, 1957.
3. Entitlement of the appellant to claim set-off on deemed tax paid on purchases from an exempted manufacturer.

Issue-wise Detailed Analysis:

1. Applicability of the third proviso to section 5(3)(a) of the Karnataka Sales Tax Act, 1957:

The appellant, a registered dealer under the Karnataka Sales Tax Act, 1957 ("the KST Act"), entered into an agreement with M/s. Applicomp India Limited ("Applicomp") to manufacture and supply electronic products and electrical appliances under the trademark "Whirlpool." The State Government exempted Applicomp from tax on the sale of finished goods manufactured by it, for a period of 10 years from the commencement of commercial production.

The third proviso to section 5(3)(a) states that where goods are manufactured by a dealer with the trademark of another dealer and are not used as raw materials, component parts, or packing materials, the sale of such goods by the manufacturer to the trademark holder shall not be deemed to be the first sale. Instead, the subsequent sale by the trademark holder shall be deemed to be the first sale liable to tax.

The court found that the transaction between Applicomp and the appellant falls under the third proviso. Applicomp manufactured goods with the "Whirlpool" trademark and sold them exclusively to the appellant. The court held that the sale by Applicomp to the appellant is not liable to tax under section 5(3)(a) due to the third proviso. Instead, the subsequent sale by the appellant is liable to tax.

2. Applicability of the sixth proviso and Explanation III to section 5(3)(a) of the Karnataka Sales Tax Act, 1957:

The appellant contended that the transaction falls under the sixth proviso (read with Explanation III) to section 5(3)(a). The sixth proviso states that where goods are sold under a brand name by the trademark holder or any other dealer having the right to use the trademark, the subsequent sale by the buyer shall also be liable to tax, with the tax payable reduced by the amount of tax already paid on the initial sale.

The court determined that the sixth proviso does not apply to the transaction. The sale by Applicomp to the appellant was not considered a sale under a brand name because Applicomp did not have the right to use the "Whirlpool" trademark independently. Applicomp was merely manufacturing goods to the appellant's specifications, including affixing the trademark. Therefore, the sale by Applicomp to the appellant cannot be considered a sale under a brand name, and the sixth proviso is inapplicable.

3. Entitlement of the appellant to claim set-off on deemed tax paid on purchases from an exempted manufacturer:

The appellant argued that it is entitled to pay tax on its sales after deducting the amount of tax that would have been payable by Applicomp if it were not exempted. The appellant based this argument on Explanation III to the sixth proviso, which creates a legal fiction that the tax payable under section 5(3)(a) on sales by an exempted manufacturer can be set off against the tax payable by the appellant.

The court rejected this contention, affirming the authority's clarification that the transaction is governed by the third proviso, not the sixth proviso. Consequently, the appellant is not entitled to claim set-off on the deemed tax paid on purchases from Applicomp.

Conclusion:

The court affirmed the authority's clarification and dismissed the appeal. The sale by Applicomp to the appellant falls under the third proviso to section 5(3)(a), making the subsequent sale by the appellant liable to tax. The sixth proviso and Explanation III do not apply to the transaction, and the appellant is not entitled to claim set-off on deemed tax paid on purchases from Applicomp.

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