Holding

The transaction is governed by the Third Proviso of Section 5(3)(a), so the brand owner is liable for tax on the first sale and cannot claim a credit under the Sixth Proviso.

Summary

Whirlpool of India Ltd., a licensed user of the "Whirlpool" trademark, entered into an OEM agreement with Applicomp India Ltd. to manufacture appliances under the brand. Applicomp was exempt from sales tax under a State Government notification issued under Section 19C of the Karnataka Sales Tax Act, 1957. The dispute centered on whether Whirlpool could claim a tax credit under the Sixth Proviso of Section 5(3)(a) (with Explanation III) for tax that would have been payable by Applicomp, or whether the Third Proviso applied, making Whirlpool liable for tax on the first sale. The Supreme Court held that the Third Proviso, not the Sixth, governs the transaction because the goods were manufactured by Applicomp using Whirlpool's brand and were not raw materials or components. Consequently, the sale by Applicomp to Whirlpool is not the first taxable sale; the subsequent sale by Whirlpool is deemed the first sale, and no tax credit is available. The appeal was dismissed.

Issues considered

Whether the transaction between the brand owner and the exempt manufacturer falls under the Sixth Proviso of Section 5(3)(a) of the Karnataka Sales Tax Act, 1957, allowing a tax credit.
Whether the Third Proviso of Section 5(3)(a) applies, making the brand owner liable for tax on the first sale.

Legislation cited

Karnataka Sales Tax Act, 1957s. 19C, s. 5(3)(a) Explanation III, s. 5(3)(a) sixth proviso, s. 5(3)(a) third proviso, s. 8A

Subjects

Sales taxKarnataka Sales Tax ActSection 5(3)(a)Third provisoSixth provisoTrademarkOEM agreementTax creditExemption

Judgment

WHIRLPOOL OF INDIA LTD., BANGALORE (KARNATAKA) A
v.
THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES
(INTELLIGENCE 3) SOUTH ZONE, BANGALORE (KARNATAKA)

NOVEMBER 22, 2006
B
[S.B. SINHA AND MARKANDEY KA TJU, JJ.]

Sales Tax:

Appellant-dealer, a registered user of trade mark "Whirlpool", was C
getting certain goods manufactured by another dealer under the said trade
mark-Sale by other dealer to Appellant was exempted from tax in view of
Government Notification-Sale transaction between appellant and the other
dealer-Held, fails under the Third proviso to s.5(3)(a) and not under Sixth
~~ Proviso read with Explanation Ill to s.5(3)(a) -Appellant not entitled to D
any credit' in respect of sales tax that would have been paid by the other
dealer for goods sold by it to Appellant-Sale by the other dealer does not
give any benefit of reduction in tax to Appellant-Karnataka Sales Tax Act,
1957-Section 5(3)(a)- 'Third and Sixth proviso; Explanation Ill' & Section
19C.
E
Appellant, a registered dealer under the Karnataka Sales Tax Act, 1957,
is a licensee and registered user of the trade mark "Whirlpool" in terms of
an agreement executed between it and M/s. Whirlpool Corporation, USA, the
proprietor and owner of the said trade mark. Appellant was getting certain
goods manufactured by another dealer, namely, Mis. Applicomp, on Original F
Equipment Manufacture basis under the said trade mark.

·In view of a notification issued by the State Government under Section
19C of the Act, no tax was payable under the said Act by M/s Applicomp on
sale of furnished goods manufactured by it and consequently sales by M/s
Applicomp to appellant were exempted from payment of any tax under the Act G
In appeal to this Court it is contended by the appellant, that the
transaction between M/s. Applicomp and the Appellant falls under the Sixth
Proviso read with Explanation Ill to Section 5(3)(a) of the Act, by virtue of
•• which credit has to be given to the Appellant in respect of sales tax that would
305 II

•
306 SUPREME COURT REPORTS [2006) SUPP. 9 S.C.R.

A have been paid by M/s 'Applicomp' for the branded goods sold by it to the
Appellant.

Rejecting the contention of the Appellant and thereafter dismissing the
appeal, the Court

B HELD: 1.1. 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
C 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. The incidence of tax on the first sale would ther~fore be on the
appellant and not on Applicomp. (310-D, E, G)

1.2. Moreover, a reading of the agreement between the appellant and
D
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. The sales made by Mis. Applicomp to the appellant, are not sales
to the exclusive marketing agent or distributor or wholeseller or any other
E dealer but are only sales of manufactured branded goods to the brand owner.
Hence the Sixth Proviso and Explanation III to Section 5(3)(a) is clearly not
applicable. Any sale by Applicomp to the appellant does not give the benefit of
any reduction in tax to the appellant. [310-H; 311-A)

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5150 of2006.
F
From the Judgment and Order dated 20-1-2004 of the High Court of
Karnataka at Bangalore in S.T.A. No. 70/2003.

Harish N. Salve, Y. Raja Gopala Rao, Y. Ramesh and Vismai Rao for the
appellant.
G
Sanjay R. Hedge, Anil Kumar Mishra, Vikrant Yadav and Sashidhar for
the Respondent.

The Judgment of the Court was delivered by

H MARKANDEY KATJU, J. Leave granted.
WHIRLPOOL OF INDIA LTD .. BANGALORE (KARNATAKA) ••.DEPUTY. COM~ffi. OF COMM. TAXES IMARKANOEY KATJU. l.I 307

This appeal has been file against the judgment of a Division Bench of A
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, B
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 Mis. 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 C
trade mark is non-transferable.

On 4.2.2003, the appellant entered into an agreement with M7s. 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 D
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 :

" .... The manufacturer is exempted from payment of Sales Tax for the
goods manufactured at its factory at Hosur Road, Attibele.. E
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. F
5. Manufacture. 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. G
6. Buyer has the right to inspect samples of the 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 .... "

Applicomp is neither a registered user nor a licensee in respect of the H
308 SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.

A 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
B of power under Section l 9C 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 l 0 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
C 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
D corresponding entry of column (3) of the said Schedule, on the taxable tum
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 l .4.2002, and washing machines as Electrical Goods, falls under
Entry-2(V) of Part-E of the Second Schedule, the rate of tax bdng 16% frorri
l.6.2003. The.third proviso and the sixth proviso to. Section 5(3) as also
E Explanation III thereto, which are relevant to this case are extracted below :

. "Third Proviso to Section 5(3)(a) Provided further that where any
goods liable to tax under this Act.· are produced or manufactured by
a dealer with the brand n~me or trade mark of any other dealer and
which are not used by the latter as raw materials, component parts or
F packing materials, as defined under the explanation to Section 5-A,
. the sale of such goods by the dea.Jer who has produced or
manufactured to the dealer who is the brand name or trade mark
holder, shall not be deemed ~o be, but the subsequent sale of such
goods by the dealer having the right either as proprietor or otherwise
· G 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.

H
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
••
WHIRLPOOL OF INDIA LTD .. BANGALORE (KARNATAKAI ,._DEPUTY. COMMR. OF COMM. TAXES IMARKANOEY KATJU. I.I 309

first sale but the sale by 'A' or by any other person on his account A
is the first sale.

Sixth Proviso to Section 5(3)(a) - 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 n.ame or trade mark either directly or through another B
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 shaU also be liable to tax under this
Section and the tax so payable shall be reduced by the amount of tax
already paid on ~he sale of such goods by the former.
c
Explanation III - 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 D
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 E
appellant, that the transaction between the Applicomp and the appellant falls
unfjedhe 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 th.is 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 F
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
exerripted under Section 8A o~ i 9C is entitled to claim set off on the G
·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 H
310 SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
I-
A 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.
B
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
c 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
D 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 td tax
E 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 wh_ich states :

"Jllustration - 'A' has registered a trade mark for manufacture of
F 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."

Applying the above illustration to the facts of the present case, 'A'
G 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 u.ser nor a licensee of the trade mark. Thus it is not selling the
H
j-
WHIRLPOOL OF INDIA LTD .. BANGALORE (KARNATAKA) 1·. DEPUTY_ COMf\1R. OF COMM.TAXES IMARKANDEY KATJU. J.J 311

goods as either a trade mark holder or as one having any rights as the A
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 r.ame
'Whirlpool' registered under the Trade and Merchandise Act, 1958. Under the B
agreement between the parties, the refrigerators and other consumer goods
are got manufactured by Mis. Applicomp India Ltd. and as per the agreement
Mis. Applicomp have to manufacture the products under the brand name
'Whirlpool' and sell them exclusively to the appellant. Mis. Applicomp is not
the registered user of the brand name 'Whirlpool'. Moreover, the sales made C
by Mis. 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 Ill to Section S(3)(a) is clearly not applicable.

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

8.8.B. Appeal dismissed.