Brand-owner sales and job-worker manufacture: sixth proviso inapplicable, with first taxable sale falling on the brand owner.

Where a job-worker manufactures branded goods exclusively for the brand owner, and the job-worker is neither a registered user nor a licensee of the mark, the sale by the manufacturer is not treated as the first taxable sale under the sixth proviso to section 5(3)(a) of the Karnataka Sales Tax Act, 1957. The statutory scheme and the accompanying illustration indicate that, in such arrangements, the first taxable sale is the sale by the brand owner. The third proviso, not the sixth proviso read with Explanation III, governs the transaction, so the brand owner cannot claim deemed tax paid or set-off on the footing that tax was borne at the manufacturer's sale.

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Issues: Whether goods manufactured by a job-worker using the appellant's brand name and sold exclusively to the appellant fell under the third proviso to section 5(3)(a) of the Karnataka Sales Tax Act, 1957, or under the sixth proviso read with Explanation III, so as to entitle the appellant to reduction or set-off of tax.

Analysis: The goods were manufactured by another dealer using the appellant's trademark and were not raw materials, component parts, or packing materials. The manufacturer was neither a registered user nor a licensee of the trademark and was not selling as a trademark holder or as a person having rights as proprietor or otherwise to use the mark. On the statutory scheme, the sale by the manufacturer to the brand owner could not be treated as the first taxable sale under the sixth proviso. The illustration appended to the sixth proviso also supported the conclusion that, in such an arrangement, the first sale liable to tax is the sale by the brand owner and not by the manufacturer. The exemption enjoyed by the manufacturer did not attract Explanation III in favour of the appellant because the sixth proviso itself was inapplicable.

Conclusion: The transaction was governed by the third proviso and not by the sixth proviso read with Explanation III, and the appellant was not entitled to claim the benefit of deemed tax paid or set-off.

Ratio Decidendi: Where a manufacturer produces branded goods exclusively for the brand owner and is neither a trademark holder nor a person having rights as proprietor or otherwise to use the mark, the sale to the brand owner is not covered by the sixth proviso to section 5(3)(a), and the first taxable sale is the sale by the brand owner.

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