Karnataka High Court
Bprl Fine Chemicals Pvt. Ltd. vs State Of Karnataka And Anr. on 2 December, 2003
Equivalent citations: [2006]143STC403(KAR)
Author: K.L. Manjunath
Bench: K.L. Manjunath
ORDER K.L. Manjunath, J.
1. In all these writ petitions, the petitioners are questioning the validity of show cause notices issued by the respondents under Section 29 read with Section 31 of the Karnataka Sales Tax Act, 1957 ("the KST Act", for short). Since the facts involved in all these writ petitions are similar, these writ petitions are disposed of together.
2. In Writ Petition No. 22009 of 2002, the petitioner is challenging the notice issued under Section 29 read with Section 31 of the KST Act, issued by the second respondent calling upon the petitioner to pay tax liability of Rs. 80,32,500. In W.P. 22013 of 2002, the petitioner is challenging the notice issued by the second respondent dated March 6, 2002 under Section 12A of the KST Act, calling upon the petitioner to pay sales tax liability of Rs. 25,65,000. Similarly in W.P. No. 22015, the petitioner is questioning the notice issued by the second respondent calling upon the petitioner to pay tax liability of Rs. 5,41,01,250.
3. According to the petition averments, under a memorandum of understanding dated May 24, 2000, three companies namely (i) Wintac Formulations Pvt. Ltd., which later on changed to Hari Formulations Limited, which company subsequently merged with the BPRL Fine Chemicals Ltd., the petitioner in W.P. No. 22009 of 2002; (ii) the petitioner in W.P. No. 22013 of 2002, namely, M/s. Bangalore Pharmaceutical and Research Laboratory Private Limited and the petitioner in W.P. No. 22015 of 2002 ; (iii) Recon Ltd, which is now changed to Wintac Limited with Cadila Healthcare Ltd., agreed to float a joint venture company by name Recon Health Care Limited agreeing to transfer their trademarks/brands, marketing and distribution personnel including the personnel connected with finance, accounts, taxation, administration, legal and pharma development to the newly floated joint venture company. Pursuant to the abovesaid memorandum of understanding, these three companies have executed three different documents in favour of Recon Healthcare Ltd. (a joint venture company) for valuable consideration. The three agreements executed by the respective petitioners in each of the petitions in favour of Recon Healthcare Ltd., on June 30, 2000, at Delhi, are known as deed of assignment of trademarks, deed of transfer of trademarks and a deed of transfer of technical know-how and noncompetition agreement. The deed of assignment of trademarks executed by the petitioner in the first petition is produced at annexure C to the writ petition. As per terms and conditions of this agreement, the petitioner herein has agreed to assign and transfer the trademarks along with goodwill to the assignee therein for a total consideration of Rs. 5 crores. The list of trademarks sold to the assignee is also mentioned in schedule annexed to the said document. Under an agreement of transfer of know-how, the petitioner has agreed to transfer outright to the transferee the said know-how in respect of the products mentioned by their trademarks in the Schedule annexed to the said document for total consideration of Rs. 50,00,000 and that the transferee delivered complete documents consisting of technical processes, engineering data calculations and information, design, data, calculations and information, etc., and the know-how for the products mentioned in the Schedule thereto. The said document is produced as annexure D to the writ petition. On the same day, the petitioner has executed a non-competition agreement in favour of Recon Healthcare Limited, agreeing not to compete with the business products mentioned in the Schedule to the said document for a period of 3 years, by receiving a consideration of Rs. 45 lakhs. The said agreement is produced as annexure E to the writ petition.
4. Pursuant to the memorandum of understanding dated May 24, 2000, the petitioner in the second writ petition has assigned the trademarks in respect of certain products of the petitioner in favour of Recon Healthcare Ltd., perpetually for sale consideration of Rs. 1 crore. The details of trademarks which are assigned in favour of Recon Healthcare Limited is also annexed as annexure C to the writ petition. The petitioner has also sold the technical know-how of certain products in favour of Recon Healthcare Limited by receiving a total consideration of Rs. 50 lakhs. The technical know-how transferred by the petitioner in the second writ petition in favour of the Recon Healthcare is also enclosed at annexure D to the writ petition. Similarly, the petitioner in the second petition also executed noncompetition agreement dated June 30, 2000 as per annexure E to the writ petition agreeing not to compete with the assignee for a period of 3 years in respect of the products mentioned in the Schedule to the said document by receiving a sum of Rs. 40 lakhs.
5. Similarly, the petitioner in the third petition, pursuant to the memorandum of understanding has sold and assigned its trademarks in respect of certain products in favour of Recon Healthcare Limited on June 30, 2000 by receiving consideration of Rs. 11 crores. The details of trademarks sold in favour of the Recon Healthcare Limited is mentioned in the Schedule to annexure C to the writ petition. Certain items of technical know-how of the petitioner were also sold under an agreement of transfer of know-how in favour of Recon Healthcare Limited, by receiving a consideration of Rs. 25 crores. The list of products for which know-how is transferred in favour of the Recon Healthcare Limited is also enclosed at annexure D to the writ petition. Similarly, the petitioner also entered into an agreement known as non-competition agreement, agreeing not to compete with the business sold in favour of the Recon Healthcare Limited for a period of 3 years by receiving consideration of Rs. 4 crores. The document executed by the petitioner is produced as annexure E to the writ petition.
6. The Additional Deputy Commissioner of Commercial Taxes (Assessments) BCD-Ill, Bangalore, considering the documents executed by each of the petitioner in favour of Recon Healthcare Limited and considering the amount received under three documents has issued notices, calling upon the petitioners in each of the writ petitions to pay sales tax, which are produced at annexure "A" to the writ petitions. After receipt of the said notices, the petitioners have also sent reply challenging the power of respondent No. 2 in issuing notices as colourable exercise of power, without jurisdiction and that the documents referred to as annexures C, D and E to the writ petition have no situs and not capable of falling within the purview of Section 5(1) of the KST Act and that the transfer of trademarks, technical know-how and non-competition agreement are to be considered as intangible and incorporeal properties and are incapable of having a local situation. They also contend that annexures C, D and E are executed at Delhi and that the State of Karnataka has no jurisdiction to issue notice in question. It was also contended that even if the documents, annexures C, D and E, are considered as having situs, it has to be considered that the sale has taken place only in Delhi as the documents were executed at Delhi. The reply sent by each of the petitioners to the notices received by them is produced as annexure H to the writ petitions. Before considering the reply sent by the petitioners, these writ petitions are filed by the petitioners contending that, the second respondent has no jurisdiction to issue notice as per annexure A to the writ petitions and therefore, notices issued by the second respondent have to be quashed. In other words, these writ petitions are filed challenging the notices issued by the second respondent. Reiterating the grounds urged in the reply these writ petitions are filed.
7. The respondents-State has filed a detailed counter. According to the respondents, this Court has no jurisdiction to entertain the petition and that the petitioner cannot challenge the notice issued under Section 29 read with Section 31 of the KST Act, as the second respondent is yet to consider the replies sent by the petitioners. According to the State, the trademarks, technical know-how, noncompetition rights are incorporeal and intangible rights and that the sale of such rights attracts the provisions of Sales Tax Act.
8. Relying upon Vikas Sales Corporation v. Commissioner of Commercial Taxes , counsel for the respondents contends that sale of these rights amount to sale of incorporeal rights and treated as a special property and it attracts sales tax. It is also contended that the sale of these rights are nothing but sale of Rep-licence and sale of intellectual property rights. It is further contended that the writ petitions filed by the petitioners are not maintainable. The respondents also contended the petitions as premature, as the notices challenged by the petitioners are only a show cause notices issued by the respondents, for which a detailed reply has been given by the petitioners. The respondents further contended that the properties sold by the petitioners under annexures C, D and E are to be considered as sale of goods or not, is a disputed question of fact which has to be ascertained only after examining the contentions raised by the petitioners and the respondents have got a right to consider the replies sent by the petitioners. Therefore, the respondents requested the court to dismiss these writ petitions.
9. Sri P. Chidambaram, learned Senior Counsel appearing for J.C. Sagar Associates, contends that the sale of trademarks/brands, pharmaceutical products including commercial and personnel could not amount to sale of goods under the Sales Tax Act and Rules made thereunder. According to him, the consideration received under these documents would not be included in turnover of the transferor company and further the transferee is not a dealer in respect of property transferred under these documents. He further contends that even though the manufacturing facilities is not transferred under these documents, the sale consideration has to be considered as sale of running concern and therefore, it does not attract the provisions of KST Act. According to him, a person or a company can have a manufacturing facility without a factory and manufacture pharma products on a Rep-licence from trademarks/brand holders pharma products. According to him, the trademark holders can get their product manufactured in different factories through loan licence and the Drugs and Cosmetics Act, 1945 makes the provision for such licence. Therefore, he contended that the documents on record cannot be doubted and that the entire business relating to the trademark/ brands transferred, in each case in favour of Recon Healthcare Limited, and such a transfer has to be considered only as a sale of business and not a sale of goods in the course of trade or business. To support his case, he has relied upon the judgments of Coromandal Fertilisers Limited v. State of A.P. [1999] 112 STC 1 [FB] (AP) and (Deputy Commissioner (C.T.) v. K. Behanan Thomas), (Deputy Commissioner of Sales Tax (Law) v. Dat Pathe).
10. He further contended that the sale of trademarks, technical know-how and non-competition rights cannot be termed as goods within the meaning of KST Act. In support of his contention, he has relied upon, two decisions, namely, AIR 1956 SC 7 (Ananda Behera v. State of Orissa) and (Anandilal Naraindas v. Commissioner of Sales Tax, M.P., Indore). According to him, the trademarks, technical know-how and non-competition rights have no situs and that they are not goods within the State of Karnataka and even if it is considered as goods, the said goods are not sold in Karnataka and therefore, KST Act does not apply to the present transaction. In support of the said contention, he has relied upon [1897] 1 QBD 175 (Smelting Company of Australia v. Commissioners of Inland Revenue).
11. He further contended the property in trademarks and technical know-how passed on from the transferor to the transferee at Delhi, where the documents in each case were executed and as has been decided by the Supreme Court the KST Act must be read down to the effect that it would not apply to transactions if the transaction took place outside the State. In support of the said contention, he has relied upon (20th Century Finance Corporation Ltd. v. State of Maharashtra). Lastly, he contended that respondents have no right to issue show cause notices, which are now questioned in these petitions. If the second respondent does not have jurisdiction to issue notice as per annexure A to each of the writ petitions, the petitioners can maintain writ petition under Article 226 of the Constitution of India. To support the said contention, he has relied upon two judgments :
(1) (Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta).
(2) , (Whirlpool Corporation v. Registrar of Trademarks, Mumbai).
On these grounds, he requests this Court to quash the show cause notices issued by the second respondent as per annexure A to each of the writ petitions.
12. Per contra, Sri Anand, Government Advocate, in support of his counter contends that the petitioners cannot maintain the writ petitions before this Court challenging the show cause notices issued by the second respondent. According to him, the facts in this case are disputed by the respondents and the disputed facts cannot be gone into under Article 226 of the Constitution of India. He further contends that whether the sale of trademarks, technical know-how and non-competition agreement amounts to sale of goods or not, is a mixed question of law and facts and are to be adjudicated only by the authorities. If the petitioners' satisfy the authorities that the petitioners have not sold goods, then the authorities will certainly drop the proceedings. He further contends that this Court cannot adjudicate "whether the sale of transfer of trademarks/Rep-licence or incorporeal rights or transfer of intellectual property rights can be considered as goods or not".
13. Sri Anand, learned Government Advocate, further contends that some of the products sold in W.P. No. 22009 of 2002 and in W.P. No. 22013 of 2002 W.P. No. 22015 of 2002 are included in all the writ petitions. Comparing the Schedule annexed to C, D and E to each of the writ petitions, he points out that the second respondent has to enquire and find out whether the petitioners had right to transfer the trademarks, technical know-how and can enter into noncompetition agreement with the assignee or the transferee as per the Schedule to annexures C, D and E in each of the writ petitions and contends that the trademark in respect of the same properties are included and sold in all the three petitions and therefore, this Court cannot hold that the notices issued by the second respondent as one without jurisdiction. According to him, the petitioners herein have transferred not only the trademarks obtained by them but also the trademarks yet to be granted by the authorities and the sale of such transfer amounts to sale of Rep-licence and attracts sales tax. In support of his contention, he has relied upon the judgment of the Supreme Court Vikas Sales Corporation v. Commissioner of Commercial Taxes reported in [1996] 102 STC 106.
14. Having heard the learned Counsel for the parties, the following points will emerge for consideration :
(1) Whether the petitioners can challenge show cause notices issued by the second respondent on the ground that second respondent has no jurisdiction to issue such notice ?
(2) Whether the transfer of trademark, technical know-how and non-competition agreement are to be held as sale of goods ?
(3) Whether the petitioners are entitled to any relief ?
15. In the light of the submissions made by Sri Chidambaram, learned Senior Counsel for the petitioners and Sri Anand, learned Government Advocate, this Court has to consider whether the petitioners can challenge the show cause notices issued by second respondent and if this Court holds that the petitioners can maintain petitions challenging the show cause notices, then only this Court has to consider whether the transfer of trademark, technical know-how and non-competition agreements are to be held as sale of goods. Therefore, the question of considering point No. 2 and various decisions relied upon by Sri P. Chidambaram on second point will arise only if petitioners can maintain petitions before this Court. In this background, let me examine how far the judgment of the Supreme Court can be made applicable to this case in Whirlpool Corporation v. Registrar of Trademarks, Mumbai held as hereunder :
Constitution of India, Art. 226--Alternative remedy--Availability of--Does not affect jurisdiction of High Court, specially in case where authority against whom writ is filed is shown to have had no jurisdiction.
The jurisdiction of the High Court in entertaining a writ petition under Article 226 of the Constitution, in spite of the alternative statutory remedies, is not affected, specially in a case where the authority against whom the writ is filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation. That being so, the High Court was not justified in dismissing the writ petition at the initial stage without examining the contention that the show cause notice issued to the appellant was wholly without jurisdiction."
From the above decision, it is clear that this Court can entertain a writ petition under Article 226 of the Constitution provided the petitioners prove that second respondent had no jurisdiction to issue show cause notice and that the respondents have purported to usurp jurisdiction without any legal foundation. In the circumstances, this Court has to examine whether second respondent had any legal foundation to issue show cause notice in the background of this case.
16. The lists of trademarks assigned in each of the writ petitions in favour of Recon Healthcare Limited, are described in the Schedule annexed to the said documents. For example, at page 82 of the Writ Petition No. 22009 of 2002, the details of trade marks sold in favour of transferee are listed. The petitioner herein has sold Eyemol, Imol, Yeemol and also several trademarks of different products. The petitioner in W.P. No. 22013 of 2002 along with annexure C has also produced the list of trademarks sold in favour of the assignee, which is available at page 83 of the writ petition. Similarly, the petitioner in W.P. No. 22015 of 2002 has also sold trademark in respect of certain products manufactured by the petitioner, which is available at page 78 of the writ petition. By comparing these three Schedules, this Court has noticed that the first petitioner has sold the trademark in respect of Alphacillin, Amebis forte, Amebist and Hepoferrin and most of the trademarks sold by the first petitioner are also sold by the second petitioner. Similarly, the third petitioner also sells some of the products sold by the first and second petitioner. For example, in W.P. No. 22013 of 2002, the petitioner has sold Vasolar and the trademark pertaining to the said product is also sold by the petitioners in the remaining writ petitions. The trademarks of Imol, Eyemol are also sold by the petitioner in the first writ petition which also find place at page 83 in the second writ petition. Therefore, this Court is of the opinion that the respondents have to ascertain whether the documents executed by the petitioner in each of the petitions at annexures C, D and E are really sold and assigned the trademarks, technical know-how in respect of the trademarks which are yet to be granted in their favour. If the memorandum of understanding entered into on May 24, 2000, at Ahamadabad, with Cadila Health Care Limited is considered the petitioners herein agreeing to float the joint venture company agreeing to transfer not only the trademarks which are assigned to them, but also in respect of the rights of registration of the trademarks of different products of their company pending.
17. Sri. Anand, learned Government Advocate, relying upon these Schedule contends that when the registration of trademarks is pending, when the petitioners are yet to obtain the said right, the sale of such right amounts to transfer of Re-plicence. In other words, even before getting the trademarks, the petitioners have transferred the trademarks in favour of the assignee-company. The selling of licences which are yet to be granted in their favour amounts to sale of Re-plicence. Relying upon the Vikas Sales Corporation v. Commissioner of Commercial Taxes, , contends that they are to be treated and dealt with the commercial word as "merchandise goods". According to him, Rep-licence is neither chose in action nor actionable claim. It is also not in the nature of title. It has value of its own. It is deemed as property and therefore, he contends that the transfer of trademarks by the petitioners are to be considered as goods and it attracts sales tax.
18. From the above discussion it is clear that in the background of the judgment of apex Court in Whirlpool Corporation v. Registrar of Trademarks, Mumbai , it cannot be held that second respondent had no legal foundation to issue show cause notices to the petitioners. Complicated questions of facts and law are involved in the present case and such questions cannot be considered by this Court by usurping the jurisdiction of second respondent. Powers granted to second respondent under the Karnataka Sales Tax Act has to be exercised by second respondent alone. While exercising the powers, second respondent is required to consider all the points urged and canvassed by the petitioners in these writ petitions and has to take a decision on merits. Therefore, in the circumstances, it cannot be held that notices issued by the second respondent as one without jurisdiction. Therefore, the petitioners cannot maintain these writ petitions.
19. When I have held that the petitioners cannot maintain these writ petitions challenging the show cause notices issued by second respondent, there is no necessity for this Court to consider the various submissions made by Sri P. Chidambaram, learned Senior Counsel, for the petitioners on the second point.
20. In the circumstances, these writ petitions are dismissed as premature. Second respondent is directed to examine all the contentions urged by the petitioners in reply and take action in accordance with law on merits if need be by giving personal hearing to the writ petitioners. In the circumstances, parties to bear their costs.