TMI Blog2014 (9) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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. Liability at the rate of eight per cent under section 85 of Schedule I - Held that:- 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. 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Decided partly in favour of Revenue. - S.T. Rev. Nos. 353,358,368,373 of 2006 - - - Dated:- 17-8-2012 - THOTTATHIL B. RADHAKRISHNAN AND VINOD CHANDRAN K. JJ. For the Appellant : Bobby John, Government Pleader, For the Respondent : A.K. Jayasankar Nambiar and E.K. Nandakumar, Senior Advocates, K. John Mathai, P. Benny Thomas and P. Gopinath ORDER:- The order of the court was made by K. VINOD CHANDRAN J.- The State is in revision, challenging the orders of the Tribunal for the assessment years 1998-99 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nonexclusive 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.? 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 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 turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides 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. We extract hereunder the respective entries under the KGST Act as was available in the relevant assessment years: SCHEDULE I Goods in respect of which single 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 ... ... ... (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 (1) (2) (3) (4) 127 Shampoo, talcum powder including medicated talcum powder, sandal wood oil, remachom oil, cinnamon oil, other perfumeries and cosmetics not falling under any other entry in this Schedule. do 20 ... ... ... 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, remachom oil, cinnamon oil 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 restricte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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. 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 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. Now we have to consider the issue raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls 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 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment 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 Kail Ltd. v. State of Kerala [2012] 52 VST 245 (Ker). He also relied on a decision of the honourable Supreme Court reported in Whirlpool of India Ltd. v. Deputy Commissioner of Commercial Taxes [2006] 148 STC 675 (SC); [2006] 13 SCC 537. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kerala [2012] 52 VST 245 (Ker). He also relied on a decision of the honourable Supreme Court reported in Whirlpool of India Ltd. v. Deputy Commissioner of Commercial Taxes [2006] 148 STC 675 (SC); [2006] 13 SCC 537. 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 considerations of revenue can be given a fair-play in interpreting taxing statutes. The learned senior counsel also relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement 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 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 would be deemed to be the first sale liable to tax. Section 5(2), on the other hand, clearly states ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase 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. 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 the assessee. By the agreement, this court found that, the assessee retained the exclusive right to sell the branded product in the Kerala 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). Maaks Cream Holdings case [2009] 26 VST 443 (Ker) was a case in which the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, this court found that, the assessee retained the exclusive right to sell the branded product in the Kerala 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). Maaks Cream Holdings case [2009] 26 VST 443 (Ker) 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 an SSI unit entitled to sales 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. In Nilkamal Plastics case [2010] 30 VST 510 (Ker), Nilkamal Plastics Limited was an assessee who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position. 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. 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 5(2) the following conditions are to be satisfied: (i) sale of manufactured goods other than tea; (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 trademark holder within the State. This postulates the liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing conditions are to be satisfied: (i) sale of manufactured goods other than tea; (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 trademark 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 assuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Balsara Hygiene Products Ltd. Kochi 01-07-2002 Sd/- Authorised signatory. 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 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 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05] 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visos 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 of course 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 Division Bench judgments cited above with the additional reasons enumerated in the above discussion. We are unable to sus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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