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2014 (9) TMI 31
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.... under the Companies Act, is engaged in the sale of consumer products, like toothpaste, moth repellents, etc., within the State. For the subject assessment years, the assessee classified its product "Odonil" as a moth repellent and claimed liability to tax at the rate of eight per cent being covered under entry 85 of the First Schedule to the Act. With regard to the sale of its products "Promise", "Meswak", "Odomos", etc., it claimed non-liability to tax being second sales conducted within the State. 3. The assessing officer issued notice alleging that the product "Odonil" is not covered under entry 85 of the First Schedule, but is exigible to tax at the rate of 20 per cent as the same is an "air freshener" and would be classified as a "perfumery" coming within entry 127 of the First Schedule to the Act. The claim of second sale was also objected to on the ground that the assessee being a trade/brand name owner, its sale is liable to be taxed under section 5(2) of the Act. The assessee contended that the products, the second sale of which was attempted to be levied tax, were all manufactured by another entity, by name "Besta Cosmetics Ltd.", under an agreement executed between t....
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....e classification attempted by the assessing officer with respect to the product "Odonil" was also objected to on the ground that essentially the product is a moth repellent and, hence, cannot be treated as a perfume. The assessing authority rejected both these contentions and held the sale by the assessee of products manufactured by another under the brand name owned by the assessee would be taxable under section 5(2) on its sale and though a second sale, the shifting of liability is sanctioned by the specific words employed in section 5(2). With respect to classification, it was noticed that the assessee itself had conceded considerable turnover on sale of Odonil at a higher rate being covered under entry 127 and, hence, would be taxable at the rate of 20 per cent as is applicable under the relevant assessment years. The assessee was before the first appellate authority, who found the issue of classification in favour of the Revenue, but reversed the issue under section 5(2) allowing the claim of second sale set up by the assessee. In such circumstance, both the assessee and the State were before the Tribunal against the findings of the first appellate authority on the respecti....
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....ars. The assessee was before the first appellate authority, who found the issue of classification in favour of the Revenue, but reversed the issue under section 5(2) allowing the claim of second sale set up by the assessee. In such circumstance, both the assessee and the State were before the Tribunal against the findings of the first appellate authority on the respective issues. The Tribunal dismissed the appeals of the State under section 5(2), confirming the orders of the first appellate authority and allowed the appeals of the assessee reversing the findings of the first appellate authority on the issue of classification of the product Odonil and held the same to be exigible to tax at the rate of eight per cent under entry 85 of the First Schedule to the Act. The State has filed the above appeals raising the following questions of law. The question of law regarding classification raised in S.T. Rev. Nos. 353 and 358 of 2006 is extracted hereunder: "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 e....
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....point tax is leviable under sub-section (1) or sub-section (2) of section 5 Sl. No. Description of goods Point of levy Rate of tax (per cent) (1) (2) (3) (4) ... ... ... 85 Mosquito repellants including electric or electronic mosquito repel-lants, gadgets and insects repellants. At the point of first sale in the State by a dealer who is liable to tax under section 5. 8 ... ... ... (ii) Is not the Tribunal as well as the lower appellate authority in error in holding that the sales of products under trademark/brand name by the assessee who is the registered trademark holder/brand name holder of the same, after purchase of the products from manufacturers who are permitted users of the aforesaid trademark/brand name, does not amount to sale under a brand name and consequently is inexigible to tax under section 5(2) of the KGST Act?" We have heard the learned Government Pleader appearing for the State and Senior Counsel Sri. A.K. Jayasankar Nambiar appearing for the assessee/respondent. The learned Government Pleader would contend that going by the use to which the product Odonil is put to....
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....and the meaning of a word from the meaning of the words employed together with it. One takes the colour from others. It is contended that entry 127 contains sandalwood oil and the same has been held to be not a perfumery by the High Court of Bombay in Commissioner of Sales Tax, Maharashtra State, Bombay v. Gordhandas Tokersey [1983] 52 STC 381 (Bom); and hence the particular entry is to be given a broader meaning. In the said case the decision was rendered on the context of the entry therein containing "perfumes, depilatories and cosmetics". True, entry 127 herein, is wider but still the expanded definition including certain base oils can only be taken as including active ingredients in the preparation of composite perfumes. However the extension of the definition should be restricted by the normal connotation given to perfumes and cosmetics. What we understand is that the 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, t....
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....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. Now, we come to the contention of the assessee claiming liability at the rate of eight per cent under section 85 of Schedule I. 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 pa....
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....e rate of eight per cent under section 85 of Schedule I. 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. The learned senior counsel would urge, in that context to distinguish an "insecticide" from a "repellent". On going through the records, we find that the 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....
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....o manufacture products under the trade name. The first appellate authority, however, found favour with the contentions advanced by the assessee. The first appellate authority found that M/s. Besta Cosmetics Limited is the user of the brand name or trade name during the relevant period and that it had the right to manufacture such products under trade name and effect sales of such branded items to prospective buyers other than the appellant-company. The right over the trademark or brand name being temporarily transferred for a specific period and for a licence fee; it was found that M/s. Besta Cosmetics Limited, the manufacturer, would be the trade/brand name holder and under section 5(2) the sale by such manufacturer to the assessee would be the sale liable to tax. The sale effected by the assessee then being the second sale, could not be brought to tax and assessed under the KGST Act. The Tribunal upheld the said findings of the first appellate authority. Before us, the learned Government Pleader would contend that the assessee being the registered trademark/brand name holder, the sale by the assessee would be deemed to be the first sale by virtue of section 5(2). The price at ....
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.... sale liable to tax. The sale effected by the assessee then being the second sale, could not be brought to tax and assessed under the KGST Act. The Tribunal upheld the said findings of the first appellate authority. Before us, the learned Government Pleader would contend that the assessee being the registered trademark/brand name holder, the sale by the assessee would be deemed to be the first sale by virtue of section 5(2). The price at which the assessee sells the product in the market is the real price of the product exigible to tax and section 5(2) has been brought in specifically to ensure collection of tax on such actual price and to prevent evasion of tax by ingenious methods. The learned Government Pleader would, based on a letter issued by the assessee to the Assistant Commissioner of Commercial Taxes available in the records, contend that the gross profit earned by the assessee by the sale of the products is at the rate of 43 per cent as against the gross profit at the rate of 35 per cent earned by the manufacturer. The fact-finding authorities also, it is submitted, has noticed this huge gross profit variation; but has failed to understand the real purport of section ....
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.... employed in the Karnataka Sales Tax Act, 1957 provided that in the case of any goods liable to tax under the Act being produced or manufactured by a dealer with the brand name or trademark of another dealer, then the subsequent sale by purchasing dealer manufacturer. The fact-finding authorities also, it is submitted, has noticed this huge gross profit variation; but has failed to understand the real purport of section 5(2). The learned Government Pleader also relies on a number of decisions of this court to contend that this court has upheld the assessing authority's action in bringing to tax the ultimate sale in the market under the brand name to assessment of tax. The learned Government Pleader relied on the Division Bench decisions in Bechu & Company v. Assistant Commissioner (Assessment) [2003] 132 STC 68 (Ker), Cryptom Confectioneries (I) Pvt. Ltd. v. State of Kerala [2007] 8 VST 21 (Ker), State of Kerala v. Maaks Cream Holdings (P) Ltd. [2009] 26 VST 443 (Ker), State of Kerala v. Nilkamal Plastics Limited [2010] 30 VST 510 (Ker), State of Kerala v. Kitchen Appliances India Ltd. [2011] 40 VST 191 (Ker), Elite Foods (P.) Ltd. v. State of Kerala [2012] 52 VST 241 (Ker) and....
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....rst sale liable to tax under section 5(1) and section 5(2), so proceeds the arguments for the assessee. In the teeth of the various Division Bench judgments of this court, we are of the opinion that the issue is no longer res integra. The Constitutional validity of section 5(2) has also been upheld by a Division Bench of this court in Bechu & Company [2003] 132 STC 68 (Ker). This court held that sub-section (2) of section 5 is not a separate charging section, but only deems a subsequent sale to be the first point sale in respect of goods specified therein. In a case where a dealer/manufacturer sells the product to a trademark holder, then the subsequent sale will be taxable under section 5(2) and the first seller, who is liable to tax under sub-section (1) of section 5, can be exonerated from the liability if he produces before the assessing authority a declaration in the prescribed form from the trademark/brand name holder under sub-section (2A) of section 5. However, in the case of a dealer who purchases the manufactured goods after paying tax at the first point sale and sells the same to a brand name/ trademark holder for sale under a brand name/trademark, then it was held....
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....-section (1) of section 5, can be exonerated from the liability if he produces before the assessing authority a declaration in the prescribed form from the trademark/brand name holder under sub-section (2A) of section 5. However, in the case of a dealer who purchases the manufactured goods after paying tax at the first point sale and sells the same to a brand name/ trademark holder for sale under a brand name/trademark, then it was held that there was no requirement for the second seller to produce the declaration as contemplated under section 5(2A). In such an event, this court found the third point sale effected by the trade mark/brand name holder not liable to tax. It was held that the effect of section 5(2) is to shift the taxable point from the first taxable point to the immediate next taxable point and not to any further point. We have our reservations about the said view expressed in Bechu & Company case [2003] 132 STC 68 (Ker); but the same does not arise here since in the instant case there are only two points of sale. It was also held that where the person liable under sub-section (2) of section 5 pays tax on his purchases, he is entitled to get deduction of the tax....
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....brand name. In the said case, a manufacturer, by the terms of the agreement, could not have sold the plastic moulded chairs to anyone else under the brand name "Nilkamal". The sale by the manufacturer, in such circumstances, was held to be not as a brand name holder, but as the producer of goods under agreement with the brand name holder, who alone is entitled to sell the same in the brand name. Kitchen Appliances India Ltd. [2011] 40 VST 191 (Ker) dealt with a 100 per cent subsidiary company marketing T.V. sets, washing machines, etc., under the brand name "Sansui"; which were manufactured under the brand name by the holding company. This court held that brand name has no relevance when the products are manufactured and sold by Videocon, a of augmenting the revenue by bringing to tax the value addition of the subsequent sale by the trademark owner, under the trademark. In Cryptom Confectioneries case [2007] 8 VST 21 (Ker), the assessee, engaged in the marketing of confectioneries, under the brand name "Cryptom", entered into an agreement with another company to manufacture goods under the said brand name. The agreement provided for a royalty payable by the manufacturer to th....
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.... The brand name, it was held, assumes significance when goods are marketed with publicity in the market. Since the subsidiary company also had a right to use the brand name, the issue was remanded to the assessing officer to examine whether the sale between the holding company and the subsidiary company, both having the right to use the brand name, was at a realistic price. The assessee in the said case though filed a special leave petition before the honourable Supreme Court, the same was withdrawn and a review was filed before this court, which was dismissed by the decision in Kail Ltd. case [2012] 52 VST 245 (Ker). On the direction of the court, the assessee filed an affidavit, which revealed that the holding company and the subsidiary were the part of a group company and the sale made between the two group companies was only to avoid sales tax payable under section 5(2) of the Act. The review, in fact, was dismissed with costs of Rs. 25,000. Elite Foods (P.) Ltd. [2012] 52 VST 241 (Ker) was concerned with the brand name "Elite", under which cakes and breads were manufactured and sold. The brand name was owned by seven individuals, one of whom was a director and another a sha....
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....d sales tax payable under section 5(2) of the Act. The review, in fact, was dismissed with costs of Rs. 25,000. Elite Foods (P.) Ltd. [2012] 52 VST 241 (Ker) was concerned with the brand name "Elite", under which cakes and breads were manufactured and sold. The brand name was owned by seven individuals, one of whom was a director and another a shareholder of the assessee-company. The assessee gave rights to sister companies for manufacture of products under the brand name and purchased such products and sold it in the markets. The manufacturer and the assessee being owned and controlled by the same group of persons, having ownership in the brand name, the sale by the assessee, being the marketing company, was held to be taxable under section 5(2). The contention of the learned senior counsel for the assessee is that the reasoning adopted in the said cases is wrong, in so much as the specific words employed in the section does not at all contemplate levy at a subsequent point of sale, wherein the court has assumed that the real price is reflected. There is no warrant for such assumption from the clear words employed in the section, is the contention. We are unable to agree wit....
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....ious Division Benches of this court has held that section 5(2), by the clear words employed, intended that the "real price" should be subjected to tax. Nilkamal Plastics case [2010] 30 VST 510 (Ker), held that the purpose for enacting section 5(2) is to ensure that tax is paid on the real price of the goods which gets collected only when the product is sold by the brand name holder in its brand name. Kitchen Appliances India Ltd. [2011] 40 VST 191 (Ker) held that brand name has no relevance when the sale is between two brand name holders. We notice that the Tribunal has extracted the findings of the first appellate authority that the right of M/s. Besta Cosmetics Limited to effect sale of the manufactured branded items is also to other buyers other than the assessee-company. We are unable to find any such material on record or any discussion of the relevant facts to support such a finding. It is clear that misconception would be in that the section merely postulates the levy to be when the sale is by a trade/brand name holder. In Cryptom Confectioneries case [2007] 8 VST 21 (Ker) another Division Bench of this court had held (page 25 in 8 VST): "In order to attract section....
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....he gross profit of the assessee in the sale of the products sold under trade/ brand name is 43 per cent. We, in this context refer to the letter of the assessee, addressed to the Assistant Commissioner of Commercial Taxes, Special Circle-III, Department of Commercial Taxes, Ernakulam, dated July 1, 2002, which is part of the records of the above case and specifically referred to by the learned Government Pleader. We extract the letter herein below: "Sir, Sub: KGST Assmt. 1998-99 Ref: 23050271/98-99 dated June 7, 2002. This has reference to the above. We have been asked to explain the reasons for the abnormal gross profit on the sale of goods purchased from Besta Cosmetics Ltd., (BCL). In this connection we wish to submit as follows: The gross profit of Balsara Hygiene Products Ltd. (BHPL) on the sale of goods purchased from BCL is worked out as under: SALES 1,64,18,424 Less: Cost of goods sold Opening stock 72,00,390 Purchases 27,18,895 ----------------- 99,19,285 -------------....
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....--------------------- It is submitted that all the receipts of BCL, Cochin are by way of stock transfer from its head office. The stock transfer price need not necessarily be the cost price of the goods. As such analysis of result on the basis of stock transfer price will not disclose the true position. As such the analysis should be made on the basis of the audited profit and loss account of the company. The trading profit of BCL for the year 1998-99 is as under: SALES 28,97,20,047 Less Cost of materials 20,37,35,014 (-) Increase in WIP & Finished goods 1,55,98,347 ----------------- 18,81,36,667 ----------------- Gross profit 10,15,83,380 ----------------- % of GP to Sales 35% It is submitted that we have been in this line of business for last 21 years are engaged in the manufacture and sale of various other home products like Odonil freshener, Odomos mosquito cream, sanifresh toilet cleaner, ace hair cream, etc. Further, in addition to the own manufacturer and also purchase from BC....
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....are the same, (i.e., Home products). As such we have a well knitted marketing network and the necessary infrastructure to make an effective marketing and distribution of various home products. Sales and distribution through our network will also reduce the distribution and related costs considerably. However the direct expenditure related to distribution and marketing are advertisement and business promotion, C&F agents commission, freight and bad debts. Since we incur these expenses they are not incurred by BCI. It is submitted that these expenses are incurred in every branches and more or less same for similar products. The scrutiny of our profit and loss account (Schedule 2.6) will reveal the following figures: Advertisement and business promotion 13,11,08,388 C&F agents commission 1,30,51,309 Freight 5,82,23,679 Bad debts written off 2,19,84,670 --------------------- Total 22,43,68,046 --------------------- Sales turnover of BHPL 1,27,76,41,421 --------------------- % of the above expenses to sales 18% It is submitted that the above expenditures being direct expenses in connection with marketing....
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.... that where the goods were sold in wholesale at a price statutorily fixed, then such price was deemed to be the "normal price". Under proviso (iii), where the goods were sold through a "related person" as defined under section 4(4)(c), the "normal price" was the price at which the goods were sold by the related person in the course of wholesale trade at the time of removal to the dealer. Drawing a distinction between "nature of duty" and "measure of duty", it was held that while the nature of excise duty was indicated by the fact that it was imposed in respect of the manufacture, the point at which it was collected was when the article left the factory gate of the related person. Therefore, it was held that "the article became an object of assessment when it was sold by the manufacturer" (sic); here the related person. It was held that under section 4(1)(a) it was clear that the Parliament opted for "price as the measure of tax without altering the nature of the levy". The implication of such a transaction where the manufacturer The assessee in unequivocal terms admits the gross profit at 43 per cent for the assessment year 1998-99. The assessee also volunteers the figures in th....
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....rson. Therefore, it was held that "the article became an object of assessment when it was sold by the manufacturer" (sic); here the related person. It was held that under section 4(1)(a) it was clear that the Parliament opted for "price as the measure of tax without altering the nature of the levy". The implication of such a transaction where the manufacturer and the buyer were related to each other was found to be that price charged to the related person was presumed to be understated and to dissuade such sales, the Legislature introduced such proviso as an antievasion measure. 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....