State of Kerala Vs. Nilkamal Plastics Limited - Court Judgment

Excerpt:
- c.n. ramachandran nair, j.1. the question raised in the revision case filed by the state is whether the sales tax appellate tribunal was justified in holding that the respondent-assessee, namely, nilkamal ltd., formerly known as nilkamal plastics ltd., which got plastic moulded chairs manufactured from an ssi unit in kerala under agreement, purchased and sold the same in the brand name 'nilkamal', is not liable to pay sales tax as brand name holder under section 5(2) of the kerala general sales tax act, 1963 (hereinafter called 'the act'). the w.p. (c)s. are filed by the assessee challenging their subsequent assessments as brand name holders under section 5(2) of the act. we have heard government pleader appearing for the state which filed the revision case and advocates sri k. srikumar and sri r. muralidharan appearing for the assessee.2. the government pleader relied on our recent judgment in s.t. rev. no. 445 of 2006 and connected cases in the case of state of kerala v. oxford mouldings (p) ltd., wherein we have reversed order of the very same tribunal on the very same issue. the government pleader submitted that the facts of this case are similar to the case decided by this court because in that case also the product, the brand name holder got manufactured through ssi unit, is plastic moulded chair and sold under the marketing company's brand name 'regal'. however, counsel appearing for the assessee contended that facts of this case are not same to apply the judgment in the other case. therefore, we have heard in detail the arguments of the government pleader and the counsel appearing for the assessee and have also perused the orders of the tribunal and that of the lower authorities and have gone through the terms of agreement between the parties.3. the assessee has produced photocopy of the memorandum of under standing executed between the executive director of the assessee-company and the executive director of the ssi unit, kaveri pet and polyforms pvt. ltd., located at kolencherry in kerala. it is conceded that apart from memorandum of understanding, there is no other agreement between the parties. it is worthwhile to refer to some of the clauses in the agreement executed in the form of memorandum of understanding between the parties and the said clauses are extracted hereunder:(1) kaveri pet & polyforms pvt. ltd. (kaveri) to manufacture moulded furniture as per requirement of nilkamal plastics limited (nilkamal).(2) nilkamal to procure from kaveri, the entire production of moulded furniture of kaveri subject to the condition that the product confirms to nilkamal specifications.(5) pricing shall be fixed by kaveri taking into account all factors including raw material, master batch, packing material, stickers and manufacturing and other overheads as fixed from time to time plus sales tax and excise as applicable.(7) kaveri shall procure all raw materials, master batch, packing materials, etc., for nilkamal's production based on nilkamal's specifications.(8) any fluctuations in the prices of raw material, master batch, packing material, etc., shall be reflected in the pricing by kaveri and shall be approved by nilkamal vide letter orders/amendments to letter orders.4. it is clear from the above that the manufacturing company with whom the assessee entered into agreement will manufacture moulded furniture depending on the demand of the assessee-company. clause 2 mandates that the entire production of moulded furniture by the manufacturer will be procured/purchased by the assessee-company. clause 5 is a guideline for the purpose of fixation of price by the manufacturer on the sale of the entire production to the assessee-company. clause 7 states that the raw materials, packing materials, etc., for production for the assessee should be procured based on assessee's specifications. the last but most important clause is the restriction on the manufacturer to fix the price of the product depending on market conditions in as much as the assessee has reserved to itself benefit in the fluctuation in raw material price. in other words, if raw material's price goes down, the price reduction will go to the advantage of the assessee. besides the terms of the agreement, government pleader has produced the website of the assessee-company which shows that the nilkamal group mainly is engaged in production and sale of plastic moulded chairs under the brand name 'nilkamal'. the concern is a family concern with five members whose names and addresses and the companies and concerns under their control are also given in the website. it is further stated in the website that nilkamal brand name used by the assessee-company is owned by nilkamal crates and containers which may be a partnership firm and the assessee-company got the rights by way of grant from the said company without payment of any royalty whatsoever. the government pleader contended that by virtue of the relationship between the assessee-company and the partnership firm which are owned and managed by the same persons, the assessee also has got the right to produce and market plastic moulded chairs under the brand name nilkamal. counsel for the assessee has relied on agreement executed between m/s. nilkamal crates and containers, a partnership firm and the assessee-firm whereunder the assessee was assigned the right to use the brand name by the firm without payment of any royalty. based on the terms of licence agreement between the firm, namely, nilkamal crates and containers and the assessee, counsel contended that the real proprietor of the brand name is the partnership firm nilkamal crates and containers and not the assessee which got only a licence to get the product manufactured and sold.5. the only question to be considered is whether the assessee's sale is the first sale within the state that attracts tax under section 5(2) of the kgst act. section 5(2) is extracted hereunder for easy reference:5. (2) notwithstanding anything contained in this act in respect of manufactured goods other than tea, which are sold under the trade mark or brand name, the sale by the brand name holder or the trade mark holder within the state shall be the first sale for the purposes of this act.(2a) where a dealer liable to tax under sub-section (1), sells any goods to a trade mark or brand name holder for sale under a trade mark or brand name, no such dealer shall be liable to pay tax under the said sub-section, if he produces before the assessing authority a declaration in the prescribed form from that trade mark or brand name holder.6. it is an admitted position that plastic moulded chair is a product taxable at the point of first sale in the state by a dealer who is liable to pay tax. in the normal course, sale by the manufacturing company to the assessee-company is the first sale in the state and the sale should attract tax under section 5(1) of the act. however, the question to be considered is whether by virtue of operation of sub-section (2) of section 5 of the act, the assessee being a brand name holder is the first seller in the state liable to pay tax. sub-section (2a) of section 5 provides for a mechanism by which the first seller, if he is not a brand name holder of the goods, is entitled to claim exemption from tax by obtaining a declaration from the purchaser that the purchaser is the brand name holder of the goods liable to pay tax on first sale. however, in this case the manufacturer has not produced any declaration from the purchaser because being an ssi unit, they are otherwise entitled to exemption on the sale of products. the assessee has no case that they are not the brand name holders of the product and their only case is that the original brand name holders, namely, the partnership firm nilkamal crates and containers, granted the assessee licence to use the brand name without payment of royalty. in our view, it makes no difference whether assessee is the owner or only a grantee of licence from the original owner which is the sister concern of the assessee. so long as the assessee is entitled to manufacture or get the goods manufactured in - the brand name nilkamal and market it to the exclusion of others except the original owner of the brand name which is none other than a sister concern, the assessee's sale shall be deemed to be the first sale by virtue of operation of sub-section (2) of section 5. consequently the assessee will be liable to pay tax as first seller of the goods in the state. the purpose of section 5(2) itself 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. admittedly the agreement between the manufacturer and the assessee provides for purchase of entire production of the goods, by the assessee. even though counsel contended that the agreement does not prohibit the manufacturer from selling the product in the market, the same is incorrect because under clause (2) of the memorandum of understanding, the entire production of moulded furniture will be acquired or purchased only by the assessee. this obviously means that manufacturing company which is an ssi unit is not free to produce and market the product in the brand name in which it is marketed, i.e., nilkamal, with the mould supplied by the assessee. in our view, the memorandum of understanding is nothing but an agreement or contract for manufacture and the only difference is that instead of giving manufacturing cost and agreed margin to the manufacturer, the assessee has allowed the manufacturer to fix the price on a rational basis but with provision to give the benefits of price variations in raw materials to the assessee. in our view, the test to be applied for the application of section 5(2) in this case are the following:(1) whether the manufacturer is the brand name holder?(2) if manufacturer is not the brand name holder, whether the assessee is the brand name holder?(3) whether assessee's sale can be treated as first sale under section 5(2) of the act?7. we have already found in the memorandum of understanding that the manufacturer has no right to produce and sell the plastic moulded chairs in the brand name 'nilkamal' in the market. on the other hand, the entire production should be sold to the assessee on a price to be fixed in accordance with the terms of the agreement. so much so, the sale by the manufacturer to the assessee is not as brand name holder, but as the producer of goods under agreement with the assessee which is the brand name holder entitled to sell the goods in the brand name.8. in view of the above finding, the next question to be considered is whether the assessee is the brand name holder. the case of the assessee itself is that even though it is not the actual brand name owner and the brand name owner is the sister concern which is the firm named nilkamal crates and containers, it is granted a licence to use the brand name by the original owner without payment of any royalty. admittedly the assessee got the product manufactured by the manufacturer in the brand name nilkamal, purchased the entire production and sold the same. when the marketing of the product is done by the assessee in the brand name nilkamal, the assessee's sale, in our view, will be the deemed first sale by virtue of operation of section 5(2) of the act. so much so, the assessee becomes the dealer liable to pay tax on the first sale of the goods, namely, plastic moulded chairs sold in the brand name nilkamal. the tribunal has relied on the licence agreement dated december 6, 2001 between the assessee's sister concern, namely, the partnership firm nilkamal crates and containers and the manufacturing company by which licence is granted and held that the manufacturing company has obtained a licence for manufacture of the product in the brand name nilkamal. based on this, the tribunal has held that the assessee is not the exclusive holder of the brand name in kerala. in our view, the finding of the tribunal is against assessee's own case because the memorandum of understanding between the assessee and the manufacturer provides that manufacturer is bound to sell the entire goods produced to the assessee which alone has the right to market plastic moulded chairs made in the brand name nilkamal. even though counsel for the assessee contended that in the absence of a prohibitory clause contained in the agreement between the brand name owner, namely, the firm and the manufacturing company in kerala, the manufacturer, namely, kaveri pet and polyforms pvt. ltd., is free to manufacture and sell the goods in the brand name. however, the assessee has no case that the manufacturing company was permitted under its agreement with the manufacturer, to manufacture and sell the plastic moulded chairs in the brand name nilkamal. on the other hand, it is the admitted position that consistent with the agreement, namely, the memorandum of understanding between the assessee and the manufacturer, the entire production was purchased by the assessee and the assessee marketed the products in the state in their brand name. we, therefore, hold that the tribunal has erred not only in their conclusions, but has failed to appreciate even the facts of the case and their findings are absolutely incorrect and untenable. we, therefore, allow the revision case by reversing the order of the tribunal and by restoring the order of the deputy commissioner issued under section 35 directing revision of assessment for bringing to tax the sales turnover of moulded plastic chairs sold under the brand name nilkamal in the hands of the respondent-assessee in the revision case. in view of our judgment in the s.t. revision case, we dismiss both the writ petitions upholding the assessments in the hands of the petitioner-assessee under section 5(2) of the kgst act.