Kerala High Court
State Of Kerala vs M/S.Balsara Hygiene Products on 3 June, 2005
Author: Thottathil B.Radhakrishnan
Bench: Thottathil B.Radhakrishnan
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HONOURABLE MR.JUSTICE THOTTATHIL B.RADHAKRISHNAN
&
THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN
FRIDAY, THE 17TH DAY OF AUGUST 2012/26TH SRAVANA 1934
S.T.Rev.No.353 of 2006
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[AGAINST THE COMMON ORDER IN T.A.NO.89 OF 2004 DATED 3.6.2005
OF THE KERALA SALES TAX APPELLATE TRIBUNAL, ADDITIONAL BENCH-I,
ERNAKULAM - ASSESSMENT YEAR 1998-99]
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REVISION PETITIONER/RESPONDENT/REVENUE:-
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STATE OF KERALA,
REP. BY JOINT COMMISSIONER (LAW) IN-CHARGE,
COMMERCIAL TAXES, ERNAKULAM.
BY GOVERNMENT PLEADER SRI.BOBBY JOHN.
RESPONDENT/APPELLANT/ASSESSEE:-
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M/S.BALSARA HYGIENE PRODUCTS,
ARANGATH ROAD, COCHIN-18.
BY ADV.SRI.A.K.JAYASANKAR NAMBIAR (SENIOR ADVOCATE).
THIS SALES TAX REVISION HAVING COME UP FOR ADMISSION ON
31.07.2012 ALONG WITH S.T.REV.NOS.358/2006, 368/2006 & 373/2006,
THE COURT ON 17-08-2012 PASSED THE FOLLOWING:-
"C.R."
Thottathil B.Radhakrishnan & K.Vinod Chandran, JJ.
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S.T.Rev.Nos.353/2006, 358/2006, 368/2006 & 373/2006
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Dated this, the 17th day of August, 2012
ORDER
K.Vinod Chandran,J.
The State is in revision, challenging the orders of the Tribunal for the assessment years 1998-1999 and 1999-2000. Two issues, one of classification and the other of the exigibility of the second sale conducted by the assessee within the State under Section 5(2) of the Kerala General Sales Tax Act, 1963, hereinafter referred to as "the Act", arises in the above revisions. The question with respect to classification is raised in S.T.Rev.Nos.353 of 2006 and 358 of 2006, while the other question emerges in S.T.Rev.Nos.368 of 2006 and 373 of 2006.
2. The assessee, a Company registered 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 8% 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.
ST.Rev.353/2006 & - 2 - connected cases
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% 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 the assessee and the said manufacturer. It was the contention that by the said agreement the said manufacturer was granted a licence to manufacture the said goods under the brand name and the sale by such brand name holder to the assessee should be considered as the first sale liable to tax and also the sale under Section 5(2) of the Act. The 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 ST.Rev.353/2006 & - 3 -
connected cases 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% as is applicable under the relevant assessment years.
4. 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 8% under Entry 85 of the First Schedule to the Act.
5. 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:
ST.Rev.353/2006 & - 4 - connected cases
"Whether the Tribunal is justified in classifying 'Odonil' sold by the assessee as an item falling under Entry 85 of the 1st Schedule as against the stand of the Department that the commodity would fall only under entry 127 of the 1st Schedule, KGST Act?"
The issue of exigibility of second sale under Section 5(2) has been raised in S.T.Rev.Nos.368 and 373 of 2006 by the following questions of law:
"(i). Is not the Tribunal as well as the lower appellate authority in error in holding that in view of the agreements entered into by the assessee with the manufacturers of the products, permitting non-exclusive use of the trademark/brand name by the manufacturer, the assessee ceases to be the brand name/trademark holder of trademark/brand names Promise, Meswak, Odomos etc?
(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?"
ST.Rev.353/2006 & - 5 - connected cases
6. We have heard the learned Government Pleader appearing for the State and Senior Counsel Sri.A.K.Jayasankar Nambiar appearing for the assessee/respondent.
7. The learned Government Pleader would contend that going by the use to which the product Odonil is put to and also the test of common parlance; the product is obviously an air freshener, providing pleasant odour and hence definitely would be classified as a perfumery under Entry 127. The learned Government Pleader would also take us through a photo copy of the package of the product to demonstrate that even the assessee has understood the product as an air freshener.
8. Per contra, the learned Senior Counsel for the assessee would submit that the active ingredient of the product is Para-dicholoro benzene, which is an aromatic hydrocarbon having the properties of an insecticide. The said chemical, according to the learned Senior Counsel, is listed as an "insecticide" under the Schedule to the Insecticides Act, 1968. The aroma or good odour of the product does not take it away from its essential qualities of repelling insects. We would endeavour to answer this question before we step on to the next.
ST.Rev.353/2006 & - 6 - connected cases
9. We extract hereunder the respective entries under the KGST Act as was available in the relevant assessment years:
"FIRST SCHEDULE Goods in respect of which single point tax is leviable under sub-section (1) or sub-section (2) of Section 5
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Sl. Description of Goods Point of Levy Rate of
No. tax (per
cent)
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(1) (2) (3) (4)
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xx xx xx 85. Mosquito repellants At the point of 8 including electric or first sale in the or electronic mosquito State by a dealer repellants, gadgets and who is liable to tax and insects repellants. under Section 5. xx xx xx 127. Shampoo, Talcum powder do. 20 including medicated talcum powder, sandal wood oil, ramachom oil, cinnamon oil, other perfumaries and cosmetics not falling under any other entry in this schedule. xx xx xx".
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10. Looking at Entry 127 of Schedule I, we notice that it refers to specific cosmetics, like shampoo, talcum powder, then widely accepted perfumes like sandalwood oil, ramachom oil, cinnamon oil ST.Rev.353/2006 & - 7 -
connected cases and expands to include other perfumeries and cosmetics not falling under any of the schedules. By including the specific items as mentioned above, the expansion to include other perfumeries and cosmetics should also be restricted to such items which would answer the description of the specific items mentioned in the Entry. The principle of 'ejusdem generis' would compel us to understand 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 v. Gordhandas Tokersey, (1983) 52 STC 381; 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.
11. 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 ST.Rev.353/2006 & - 8 -
connected cases 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.
12. Now, we come to the contention of the assessee claiming liability at the rate of 8% 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%, the same is an insecticide. True, the chemical Para-dicholoro benzene is an insecticide under the Insecticides Act. However, a query regarding ST.Rev.353/2006 & - 9 -
connected cases 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 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.
13. We have noticed above that the assessee had conceded considerable turnover of the product under Entry 127. If the assessee has so returned its product under Entry 127, necessarily tax ST.Rev.353/2006 & - 10 -
connected cases also would have been collected at the higher rate. A mistake committed by the assessee in classifying its product under an entry will not conclude the issue for all time and for all purposes. But, however, having collected the tax at a higher rate, the assessee cannot make a claim for refund. Hence, as per the provisions of the Act, the collected tax, even if done on a wrong premise, would remain with the State.
14. Now we have to consider the issue raised in the other two revisions with respect to the exigibility under Section 5(2). We extract Section 5(2) hereunder:
"(2) 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".
In the instant case, the 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 ST.Rev.353/2006 & - 11 -
connected cases 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. 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.
ST.Rev.353/2006 & - 12 - connected cases
15. 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% as against the gross profit at the rate of 35% 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 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 & Co. v. Assistant commissioner (Asst.) [(2003) 132 STC 68], Cryptom Confectioneries v. State of Kerala [(2007) 8 VST 21 (Ker)], ST.Rev.353/2006 & - 13 -
connected cases State of Kerala v. Maaks Cream Holdings P. Ltd. [(2009) 26 VST 443 (Ker)], State of Kerala v. Nilkamal Plastics Ltd. [(2010) 30 VAST 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 KAIL Ltd. v. State of Kerala [(2012) 52 VST 245 (Ker)]. He also relied on a decision of the Hon'ble Supreme Court reported in Whirlpool of India Ltd. v. DY.CCT [(2006) 13 SCC 537].
16. Per contra, learned Senior Counsel appearing for the assessee would contend that there cannot be any intendment in interpretation of taxing statutes and what is understood from the plain words have to be adopted. The Court cannot supplement, supplant, substitute, modify or ignore the plain words employed by the legislature. It is trite that when a particular goods or transaction comes within the net of taxation, the same has to be applied irrespective of the hardship caused to the assessee. However, when such liability is not clear from the plain words employed in the provision, Courts cannot import words and meanings on assumptions or presumptions about the intention of the legislature. The decisions of the various Division Benches relied on by the State, according to the learned Senior Counsel, is clouded by such exercise. Neither equity nor ST.Rev.353/2006 & - 14 -
connected cases considerations of revenue can be given a fair-play in interpreting taxing statutes. The learned Senior Counsel also relied on a decision of the Supreme Court reported in Commissioner of Central Excise v. ACER India Limited [(2004) 8 SCC 173].
17. The provision which came up for interpretation in Whirlpool of India Limited case (supra) before the Supreme Court was clear and unambiguous as is the present provision arising in the above case. However, the clear words employed in the Karnataka General 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 would be deemed to be the first sale liable to tax. Section 5(2), on the other hand, clearly states that the sale by the trademark holder would be the first sale, liable to tax. It has also been held that such trade/brand name holder need not be the owner or the registered owner of such trademark. In the instant case, the manufacturer has, by agreement, obtained the licence to use the trade/brand name and manufacture goods under such trade/brand name, making the first sale of the manufacturer to the assessee; the first sale liable to tax under Section 5(1) and Section 5(2), so proceeds the arguments for the assessee.
ST.Rev.353/2006 & - 15 - connected cases
18. 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 & Co. (supra).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.
19. 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 ST.Rev.353/2006 & - 16 -
connected cases 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 & Co. case (supra); but the same does not arise here since in the instant case there are only two points of sale.
20. 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 paid by him on his purchase turnover from the tax due on the sale of the said goods by virtue of the provisions of Rule 32(13B) of the KGST Rules. We find from the assessment order in the instant case that such deduction has also been granted by the Assessing Officer. The very object of sub-section (2) of Section 5 in shifting the levy was found to be a measure of augmenting the revenue by bringing to tax the value addition of the subsequent sale by the trademark owner, under the trademark.
21. In Cryptom Confectioneries case (supra), 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 the assessee. By the agreement, this Court found that, the assessee retained the exclusive right to sell the branded product in the Kerala ST.Rev.353/2006 & - 17 -
connected cases market and the permission granted to the manufacturer was only to manufacture goods under its brand-name. In such circumstance, the sale by the assessee was held to be covered under Section 5(2).
22. Maaks Cream Holdings case (supra) was a case in which the assessee entered into an agreement with the brand name owner to manufacture ice creams under the brand-name "Joy Ice Creams. Pursuant to the said agreement, the assessee arranged for the manufacture of ice creams by a SSI Unit entitled to sale tax exemption of its manufactured product. The Tribunal held that since the assessee was not the owner of the brand name, Section 5(2) could not be applied in the case. This Court reversed the findings of the Tribunal and held that the legislature was well aware of the practice of franchisee agreements and that brand name or trademark is an assignable right and hence the word "holder" cannot mean "owner" and the same would defeat the purpose of the legislation.
23. In Nilkamal Plastics case (supra), Nilkamal Plastics Limited was an assessee who got manufactured from a SSI Unit in Kerala, under an agreement, plastic moulded chairs and purchased and sold the same under the brand name "Nilkamal". This Court again reiterated the purpose for enacting Section 5(2) being to ensure that tax is paid on the real price of the goods which gets collected only ST.Rev.353/2006 & - 18 -
connected cases when the product is sold by the brand name holder in its 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.
24. Kitchen Appliances India Ltd. (supra) dealt with a 100% 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 holding company, to its subsidiary company for marketing. 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 Hon'ble Supreme Court, the same was withdrawn and a review ST.Rev.353/2006 & - 19 -
connected cases was filed before this Court, which was dismissed by the decision in KAIL Limited case (supra). 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/-.
25. Elite Foods Private Limited (supra) 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 share holder 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).
26. 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 ST.Rev.353/2006 & - 20 -
connected cases 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 with the said proposition. We find that in almost all the cases which reached this Court, the respective assessees had consistently maintained that the manufacturer was manufacturing the goods under a brand name by licence or otherwise granted by the brand name owner. Such manufacture being under the brand name and the specific terms of the agreement under which assessee having conferred the manufacturer the specific rights to use the trade/brand name, the sale by the manufacturer to any person including even the trade/brand name owner would be a sale by a trade/brand name holder liable to tax under Section 5(2); was the consistent stand. The misconception would be in that the section merely postulates the levy to be when the sale is by a trade/brand name holder.
27. In Cryptom Confectioneries case (supra) another Division Bench of this Court had held:
"In order to attract section 5(2) the following conditions are to be satisfied:
(i) sale of manufactured goods other than tea;
ST.Rev.353/2006 & - 21 -
connected cases
(ii) sale of the said goods is under a trade
mark/brand name; and
(iii) the sale is by the brand name holder or the trade mark holder within the State".
This postulates the liability to be at that point where these three conditions arise by a deeming provision; i.e., sub-section (2) of Section
5. The first condition is that the sale should be of manufactured goods other than tea, which is not disputed in any of the above cases, nor in the instant case. The second condition is that the sale should be under a trademark/brand name, and the third being that such sale is by the brand name or trademark holder within the State. The sale should be under a trademark/brand name. The manufacturer having conferred the right to manufacture a product under a brand name/trademark, it cannot be gainsaid that sale of such products to a trademark owner or a trademark holder is a sale under a trademark/brand name. The trade/brand name has no significance in such a sale, since it is between two entities, both of whom are trademark/brand name holders. Trade mark/brand name depicts and holds forth an assurance of quality. It distinguishes the product and makes it stand out or stand apart from other similar products. The discerning customer is attracted to it despite a higher cost. That ST.Rev.353/2006 & - 22 -
connected cases essentially is a sale under trade mark/brand name. It is in this context that various 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 (supra), 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. (supra) held that brand name has no relevance when the sale is between two brand name holders.
28. 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 the gross profit of the assessee in the sale of the products sold under trade / brand name is 43%. 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 1.7.2002, 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:
ST.Rev.353/2006 & - 23 - connected cases "Sir, Sub: KGST Assmt. - 1998-99 Ref : 23050271/98-99 dtd.07.06.02.
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
Less: Closing stock 5,41,549 93,77,736 70,40,688 = 43%
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 be 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 ST.Rev.353/2006 & - 24 -
connected cases addition to the own manufacturer and also purchase from BCL, we also make purchases from certain other companies. It is submitted that the customers for the goods manufactured and traded by the company (i.e. BHPL) and the goods of BCL 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 & 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 127,76,41,421
% of the above expenses to sales 18%
It is submitted that the above expenditures being direct expenses in connection with marketing expenses, are necessarily to be deducted to arrive at the actual gross profit of a marketing firm. The gross profit earned by BHPL after reducing the above expenditure is only 25% (43% - 18%). As such it can be seen that the gross margin earned by BHPL is actually less than that earned by BCL.
We may also be granted a personal hearing on this matter. Thanking you, Yours faithfully, For BALSARA HYGIENE PRODUCTS LTD.
Kochi. Sd/- 01.07.2002 Authorised signatory". ST.Rev.353/2006 & - 25 - connected cases
The assessee in unequivocal terms admits the gross profit at 43% for the assessment year 1998-99. The assessee also volunteers the figures in the said assessment year of its sister company, which is the manufacturer. It is not disputed that Besta Cosmetics Limited and the assessee Balsara Hygiene Products are fellow subsidiaries of the holding company, Dabur India Limited. In the above extracted letter, the assessee would contend that the actual profit earned by the assessee is only 25% after giving deductions to expenditure incurred on business. This is a concept familiar in the assessment of income tax under the Income Tax Act and is totally alien to assessment of sales tax, which is to be done at the price or value for which the goods are sold.
29. The Hon'ble Supreme Court in CEE v. AKAY Cosmetics (P) Ltd. [(2005) 3 SCC 764] considered the question as to how and when the assessable value of the manufactured product is to be determined under the Central Excise Act, specifically Section 4 which dealt with "Valuation of excisable goods for the purpose of charging duty of excise". While clause (a) of Section 4(1) spoke of the "value" being the normal price, i.e., the price at which such goods were ordinarily sold by the assessee to a buyer in the course of wholesale trade; clause (b) of Section 4(1) provided that the nearest ST.Rev.353/2006 & - 26 -
connected cases ascertainable equivalent shall be the "value" of the excisable product for the purpose of charging excise duty. Three circumstances were mentioned in the three provisos to Section 4(1)(a) under which "value could vary". Proviso (i) recognises that in the normal practice the same class of goods could be sold by the assessee at different prices to different classes of buyers; in that event each such price was deemed to be the "normal price" of such goods in relation to such buyers. Proviso (ii) provided 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 ST.Rev.353/2006 & - 27 -
connected cases 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 anti-evasion measure.
30. 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 ofcourse 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 ST.Rev.353/2006 & - 28 -
connected cases 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. We answer the questions of law raised by the State with respect to the liability of the assessee under Section 5(2) of the KGST Act in favour of the Revenue and against the assessee.
In view of the question regarding the classification also being answered holding the product to be classified under the residuary entry; negativing the contention of both the State and the assessee, we partly allow S.T.Rev.Nos.353 of 2006 and 358 of 2006 and allow S.T.Rev.Nos.368 of 2006 and 373 of 2006.
Sd/-
Thottathil B.Radhakrishnan, Judge Sd/-
K.Vinod Chandran, Judge.
Vku/-
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