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CASE NO.: Appeal (civil)  5150 of 2006

PETITIONER: Whirlpool of India Ltd.. Bangalore

RESPONDENT: The Deputy Commissioner of Commercial Taxes,Bangalore

DATE OF JUDGMENT: 22/11/2006

BENCH: S. B. Sinha & Markandey Katju

JUDGMENT: J U DG M E N T (Arising out of Special Leave Petition (Civil) No. 15138/2004)

MARKANDEY KATJU, J.

       Leave granted.         This appeal has been file against the judgment of a Division Bench of  the Karnataka High Court dated 20.1.2004 in STA No.70 of 2003, by which  the appeal was dismissed.

       Heard learned counsel for the parties and perused the record.

       The appellant is a registered dealer under the Karnataka Sales Tax  Act, 1957 ("KST Act" for short).  The appellant is the Licensee and  registered user of the trade mark "Whirlpool" in terms of the Trade Mark &  Trade Name Licence Agreement dated 24.2.1995 executed between M/s.  Whirlpool Corporation, USA, which is stated to be the proprietor and owner  of the said trade mark and the Appellant.  The licence granted to the  appellant to use the trade mark is non-transferable.

       On 4.2.2003, the appellant entered into an agreement with M/s.  Applicomp India Limited (for short "Applicomp" or the "Manufacturer")  under which Applicomp agreed to manufacture and supply electronic  products and electrical appliances such as Refrigerators, Washing Machines,  Air Conditioner, etc., to the appellant on Original Equipment Manufacture  basis, as per the specifications of the appellant.  Relevant portions of clauses  4, 5 and 6 of the agreement are extracted below :          "\005\005\005\005The manufacturer is exempted from payment  of Sales Tax for the goods manufactured at its factory at  Hosur Road, Attibele\005\005..

4.      The buyer hereby warrants that the Buyer is the  owner of all rights in the trade mark "Whirlpool" and has  the exclusive right to use the said trade mark in India.   Buyer hereby authorizes the manufacturer to use and  affix the said trade mark to the products which are sold to  the buyer in accordance with the specifications of the  Buyer.

5.      Manufacturer acknowledges that this agreement  does not include any license of buyer’s trade marks.   Manufacturer shall not affix trade mark to any products  manufactured and/or sold to any third party other than  that to the party of the second part in respect of the  manufactured products.

6.      Buyer has the right to inspect samples of the

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products to verify that the use of the trade mark conforms  to buyer’s specifications and also inspect/audit the  quality of the products manufactured\005\005\005"   

Applicomp is neither a registered user nor a licensee in respect of the trade  mark "Whirlpool".  The agreement just enables Applicomp to affix the trade  mark of the appellant to the products which are manufactured by it to the  specifications of the appellant, and which are exclusively to be supplied to  the appellant, and not to any other product of Applicomp.

       The State Government, by notification dated 20.7.2000 issued in  exercise of power under Section 19C of the KST Act, exempted the tax  payable under the said Act by Applicomp on the sale of furnished goods  manufactured by it, for a period of 10 years from the commencement of  commercial production subject to the restrictions and conditions stated in the  said notification.  Hence the sales by Applicomp to appellant are exempt  from payment of any tax under the KST Act.

       Section 5(3)(a) of the KST Act provides that tax shall be levied under  the Act "in the case of sale of any of the goods mentioned in column (2) of  the Second Schedule, by the first or the earliest of successive dealers in the  State who is liable to tax under that Section, a tax at the rate specified in the  corresponding entry of column (3) of the said Schedule, on the taxable turn  over of sales of such dealer in each year relating to such goods."   Refrigerators fall under Entry (6) of Part-R of the Second Schedule, the rate  of tax being 20% from 1.4.2002, and washing machines as Electrical Goods,  falls under Entry-2(V) of Part-E of the Second Schedule, the rate of tax  being 16% from 1.6.2003.  The third proviso and the sixth proviso to Section  5(3) as also Explanation III thereto, which are relevant to this case are  extracted below :

"Third Proviso to Section 5(3)(a) \026 Provided further that  where any goods liable to tax under this Act are produced  or manufactured by a dealer with the brand name or trade  mark of any other dealer and which are not used by the  latter as raw materials, component parts or packing  materials, as defined under the explanation to Section 5- A, the sale of such goods by the dealer who has produced  or manufactured to the dealer who is the brand name or  trade mark holder, shall not be deemed to be, but the  subsequent sale of such goods by the dealer having the  right either as proprietor or otherwise to use the said  name or the trade mark, either directly or through  another, on his own account or on account of others shall  be deemed to be the sale by the first dealer liable to tax  under this Section.

Illustration - ‘A’ has registered a trade mark for  manufacture of certain goods.  He gets the said goods  manufactured by ‘B’ under the said trade mark.  The sale  by ‘B’ to ‘A’ of the said goods is not the first sale but the  sale by ‘A’ or by any other person on his account is the  first sale.        

Sixth Proviso to Section 5(3)(a) \026 Provided also that  where goods are sold, under a brand name by the trade  mark holder or the brand name holder or any other dealer  having the right as proprietor or otherwise to use the said  name or trade mark either directly or through another on  his own account or on account of others, exclusively to a  marketing agent or distributor or wholeseller or any other  dealer, subsequent sale of such goods by the latter shall  also be liable to tax under this Section and the tax so  payable shall be reduced by the amount of tax already  paid on the sale of such goods by the former.

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Explanation III \026 For the purpose of the sixth proviso to  clause (a), where goods are sold under a brand name by  the trade mark holder or the brand name holder or any  other dealer having the right as proprietor or otherwise to  use the said name or trade mark either directly or through  another on his own account or on account of others, who  is exempt from tax by any notification issued under  Section 8-A or Section 19-C, the expression "tax already  paid" means the tax payable under this Section on such  sale if the sale had been effected by any other dealer."   

       It was submitted by Shri Harish Salve, learned senior counsel for the  appellant, that the transaction between the Applicomp and the appellant falls  under the Sixth Proviso read with Explanation III to the Section 5(3)(a),  whereas the learned counsel for the revenue submitted that the transaction is  squarely covered by the Third Proviso.  In view of this difference in the  stands taken by the appellant and the respondent, the appellant filed an  application for confirmation of its view before the Authority for  Clarifications and Advance Rulings under Section 4 of the Act by posing the  following question :

       "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."  

       The Authority by its order dated 27.10.2003 has given its clarification  holding that the transactions between Applicomp and the appellant are  governed by the Third Proviso to Section 5(3)(a) and not by the Sixth  Proviso and Explanation III to that Section.

       Aggrieved, the appellant filed an appeal to the High Court, which was  dismissed and hence this appeal.

       In our opinion, there is no merit in this appeal and we agree with the  view taken by the High Court.

       Learned counsel for the appellant submitted that by virtue of the Sixth  Proviso read with Explanation III under Section 5(3)(a) of the Act, credit has  to be given to the appellant in respect of sales tax that would have been paid  by Applicomp in respect of the branded goods sold by it to the appellant.  It  is submitted that Applicomp as a matter of fact has not paid the sales tax as  it is exempt from such payment.

       In our opinion this argument is clearly untenable.  In our opinion it is  the Third Proviso and not the Sixth Proviso which applies in this case  because the goods are manufactured by the dealer (Applicomp) using the  branded name of another dealer (appellant).  These goods are not used as  raw materials, components or packing materials.  Hence the sale by  Applicomp to the appellant cannot be deemed to be the sale by the first  dealer liable to tax under this Section, but it is the subsequent sale of such  goods by the dealer having the right either as proprietor or otherwise  (appellant) which has to be deemed to be the first sale liable to tax under this  Section.  This submission is further supported by the illustration to the Sixth  Proviso which states :

"Illustration - ‘A’ has registered a trade mark for  manufacture of certain goods.  He gets the said goods  manufactured by ‘B’ under the said trade mark.  The sale  by ‘B’ to ‘A’ of the said goods is not the first sale but the  sale by ‘A’ or by any other person on his account is the

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first sale."     

       Applying the above illustration to the facts of the present case, ‘A’  would be the appellant and ‘B’ would be Applicomp.  The incidence of tax  on the first sale would be on the appellant and not on Applicomp.

       Moreover, a reading of clauses 4 and 5 of the agreement dated  4.2.2003 between the appellant and Applicomp makes it clear that  Applicomp is neither a registered user nor a licensee of the trade mark.  Thus  it is not selling the goods as either a trade mark holder or as one having any  rights as the proprietor of the trade mark or otherwise.  Hence the Sixth  Proviso clearly does not apply and any sale by Applicomp to the appellant  does not give the benefit of any reduction in tax to the appellant.

       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 wholeseller or any other  dealer but are only sales of manufactured branded goods to the brand owner.   Hence in our opinion the Sixth Proviso and Explanation III to Section  5(3)(a) is clearly not applicable.   

       Thus, there is no force in this appeal.  The appeal is accordingly  dismissed.  There shall be no order as to costs.