2014 (9) TMI 31 - HC - VAT and Sales Tax

Classification of goods - Whether the Tribunal is justified in classifying Odonil sold by the assessee as an item falling under entry 85 of the First Schedule as against the stand of the Department that the commodity would fall only under entry 127 of the First Schedule to the Kerala General Sales Tax Act - Held that - Items so specifically mentioned are all relating to items which are used on the human body for beautification, grooming and having cosmetic qualities or properties. The product Odonil which is admittedly a room/cup-board freshener, cannot be brought under the description of perfumery in entry 127. Obviously, the product will not answer the description of any of the items listed in the entry; nor can it be said to be perfumery or cosmetic, more so when it is not an item used on the human body. Just as words take colour from each other, when used in conjunction; they should be understood in the common analogous sense and not in a general sense. Construing entry 127 and the words employed therein, we are unable to agree with the assessing officer; applying the rules of ejusdem generis and noscitur a sociis . The contention of the State that the product would fall under the said entry hence, according to us, cannot be sustained. Liability at the rate of eight per cent under section 85 of Schedule I - Held that - Entry 85 of Schedule I specifically refers to mosquito repellents and insect repellents. The expansive definition is not relevant, since this product is not an electric or electronic gadget. The contention of the assessee is that the vital component being para-dicholoro benzene, the composition of which in the product, is more than 99 per cent., the same is an insecticide. True, the chemical paradicholoro benzene is an insecticide under the Insecticides Act. However, a query regarding licence obtained under the Insecticides Act was answered in the negative by the assessee. Product Odonil has been consistently put forth as a moth repellent and the sweet fragrance is said to be an additional quality to mask the bad odour of the chemical. The wrapper of the product indicates that it is an air freshener and also a moth repellent. The predominant function is not discernible from the records. There is also no warrant for assumption that the product is only used for its repellent qualities. The assessee too has understood it as an air freshener and also a moth repellent. The fragrance provided is projected as masking the bad odour of the chemical and also for avoiding bad odour in rooms/covered space. In such circumstances, it cannot be said that the dominant use of the product is that of a moth repellent and the same would fall under entry 85 of Schedule I. In that view of the matter, we hold that the product Odonil is liable to tax under the residuary entry, at the rates specified for the residuary entry under the First Schedule to the Act. The exigibility under section 5(2) - Held that - assessee is trade/brand name holder of certain products, more specifically tooth paste and tooth brush sold in the trade name Promise and Meswak . The assessing officer found that the claim of second sale was not admissible by virtue of section 5(2) of the KGST Act, since the sale by the assessee would be deemed to be the first sale exigible to tax under the Act. The assessing officer, however, granted deduction for the tax paid on the purchase of the said products from the manufacturer. The assessing officer rejected the contention of the assessee that the manufacture was by another entity, by name M/s. Besta Cosmetics Limited, with which the assessee had an agreement and the said manufacturer was also granted licence to manufacture products under the trade name. Section 5(2) is also an anti-evasion measure and it contemplates the liability to be at that point of sale in the case of sale of manufactured goods other than tea, within the State, (i) made under a trademark/brand name (ii) by a trademark/brand name holder. The sale, hence, should be not only by a trademark/brand name holder, but it should also be under trade/brand name. In the instant case, the sale between the manufacturer and the assessee being between two trade/brand name holders, it cannot be said to be a sale under a trade/brand name. Section 5(2) applies with its full force in such a transaction and deems liability to be, to that sale made by the assessee. The first sale by the manufacturer to the assessee, latter of whom is also a trade/brand name holder is of course sale by a trade/brand name holder, but not a sale under trade/brand name. Hence, the second sale effected by the assessee being again a sale by a trademark/brand name holder and also a sale under trade/brand name, is liable to tax under section 5(2). We respectfully follow the Division Bench judgments cited above with the additional reasons enumerated in the above discussion. We are unable to sustain the order of the Tribunal confirming the order of the first appellate authority. Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Classification of the product "Odonil" under the Kerala General Sales Tax Act, 1963.
2. Exigibility of the second sale conducted by the assessee within the State under section 5(2) of the Kerala General Sales Tax Act, 1963.

Detailed Analysis:

1. Classification of "Odonil":
The primary issue is whether "Odonil" should be classified under entry 85 of the First Schedule as a moth repellent (taxable at 8%) or under entry 127 as a perfumery (taxable at 20%). The assessee argued that "Odonil" is a moth repellent, primarily composed of para-dichlorobenzene, an aromatic hydrocarbon with insecticidal properties. Conversely, the State contended that "Odonil" is an air freshener and should be classified as a perfumery.

The court examined the relevant entries under the KGST Act:
- Entry 85: Mosquito repellents including electric or electronic mosquito repellents, gadgets, and insect repellents.
- Entry 127: Shampoo, talcum powder including medicated talcum powder, sandalwood oil, remachom oil, cinnamon oil, other perfumeries, and cosmetics not falling under any other entry in this Schedule.

Applying the principles of "ejusdem generis" and "noscitur a sociis," the court concluded that entry 127 pertains to items used on the human body for beautification or grooming. Since "Odonil" is a room/cupboard freshener and not used on the human body, it does not fit under entry 127. The court also noted that "Odonil" is marketed as both an air freshener and a moth repellent, but its predominant use is not clearly discernible from the records.

The court decided that "Odonil" does not fit under entry 85 either, as it is not an electric or electronic gadget. Consequently, "Odonil" should be classified under the residuary entry, taxable at the rates specified for the residuary entry under the First Schedule to the Act.

2. Exigibility of Second Sale under Section 5(2):
The second issue pertains to whether the sales by the assessee, a brand name holder, should be considered the first sale under section 5(2) of the KGST Act. The assessee claimed that the products were manufactured by "Besta Cosmetics Ltd." under a licensing agreement, making the sale by Besta the first sale and the subsequent sale by the assessee a second sale.

Section 5(2) of the KGST Act states:
> "Notwithstanding anything contained in this Act, in respect of goods, other than tea sold in auction in the State, which are sold under a trade mark or brand name, the sale by the brand name holder or the trademark holder within the State shall be the first sale for the purposes of this Act."

The court examined the relationship between the assessee and Besta Cosmetics Ltd., noting that both are subsidiaries of Dabur India Limited. The court found that the sale between the manufacturer and the assessee, both being trade/brand name holders, cannot be considered a sale under a trade/brand name. Hence, the second sale by the assessee is deemed the first sale liable to tax under section 5(2).

The court referenced several precedents, including:
- Bechu & Company v. Assistant Commissioner (Assessment): Upheld the assessing authority's action in bringing the ultimate sale in the market under the brand name to assessment of tax.
- Cryptom Confectioneries (I) Pvt. Ltd. v. State of Kerala: Held that the sale by the assessee was covered under section 5(2).
- State of Kerala v. Maaks Cream Holdings (P) Ltd.: Found that the Legislature intended to prevent tax evasion by ensuring tax is paid on the real price of goods.
- Whirlpool of India Ltd. v. Deputy Commissioner of Commercial Taxes: Emphasized the anti-evasion purpose of similar provisions in the Karnataka Sales Tax Act.

The court concluded that section 5(2) applies with full force in such transactions, and the sale by the assessee is liable to tax. The Tribunal's order was overturned, and the questions of law raised by the State were answered in favor of the Revenue.

Conclusion:
The court held that "Odonil" should be classified under the residuary entry and not under entries 85 or 127. Additionally, the sale by the assessee, being a trade/brand name holder, is deemed the first sale liable to tax under section 5(2) of the KGST Act. The appeals by the State were allowed, and the Tribunal's order was set aside.