E.I.D. Parry (India) Ltd. vs Commissioner of Commercial Taxes

C.N. Ramachandran Nair, J.—The appellant is challenging annexure C order of clarification issued u/s 59A of the Kerala General Sales Tax Act, 1963 by the Commissioner of Commercial Taxes. Even though the Commissioner has clarified three questions raised by the appellant, the challenge is only against decision on question No. 1(b) which pertains to the appellant''s liability for tax u/s 5A of the Act on the purchase of goods manufactured by an exempted unit in the appellant''s brand name.

The appellant, a registered dealer under the KGST Act and Central Sales Tax Act, 1956, is marketing products manufactured by them and also products manufactured by other industries in the brand name of the appellant. One industrial unit which is engaged in the manufacture and sale of goods to the appellant in the appellant''s brand name was entitled to sales tax exemption under the notification issued by the Government as an industrial unit in the Cochin Export Processing Zone. So far as branded goods purchased and sold by the petitioner in Kerala are concerned, such goods are taxable at the hands of the appellant as the appellant is the deemed first seller of branded products by virtue of Section 5(2) of the KGST Act. However, the issue involved in this case is whether the appellant is liable to pay sales tax u/s 5A of the KGST Act on the branded goods purchased by the appellant from the industry in Kerala which enjoys sales tax exemption. The relevant provision which the Commissioner has clarified fixing appellant''s liability, namely, Section 5A(1) is extracted hereunder:

5A. Levy of purchase tax.--(1) Every dealer who, in the course of his business, purchases from a registered dealer or from any other person any goods, the sale or purchase of which is liable to tax under this Act, in circumstances in which no tax is payable under Sub-section (1), (3), (4) or (5) of Section 5 and either,--

(a) consumes such goods in the manufacture of other goods for sale or otherwise ; or

(b) uses or disposes of such goods in any manner other than by way of sale in the State ; or

(c) despatches them to any place outside the State except as a direct result of sale or purchase in the course of inter-State trade or commerce, shall, whatever be the quantum of the turnover relating to such purchase for a year, pay tax on the taxable turnover relating to such purchase for the year at the rates mentioned in Section 5.

All what the Commissioner in the impugned clarification order has said is that since the manufacturer, an industrial unit, enjoys sales tax exemption, it is not liable to pay sales tax on the sale of goods manufactured in appellant''s brand name and sold to them, the appellant will be liable to pay tax u/s 5A(1)(c) of the Act when such goods are despatched by the appellant to any place outside the State except as a direct result of sale or purchase in the course of inter-State trade or commerce. It is against this order of clarification, this appeal u/s 40 of the KGST Act has been preferred.

4 We have heard learned Counsel appearing for the appellant and learned Government Pleader for the respondent.

5 The learned Counsel for the appellant has relied on the decision of the Supreme Court in Peekay Re-Rolling Mills (P) Ltd. v. Assistant Commissioner [2007] 6 VST 541 : [2007] 2 KLT 704 and contended that the facts of the appellant''s case is similar to the facts decided by the Supreme Court and therefore the impugned order is liable to be quashed with a declaration that the appellant is not liable to pay tax on the branded goods purchased from the exempted unit and despatched on stock transfer for sale outside Kerala.

6 The learned Government Pleader has relied on the decisions of this Court reported in Deputy Commissioner of Sales Tax (Law) v. Supreme Boards, Pappinissery, Cannanore [1998] 111 STC 305 : [1998] 6 KTR 374 and Deputy Commissioner of Sales Tax (Law) v. C.T. Kochouseph [2004] 136 STC 545 : [2005] 13 KTR 58 and an unreported decision of a Division Bench of this Court in O.P. No. 34485 of 2000 and connected cases dated July 10, 20071 and contended that the issue raised is squarely covered by the above decisions of this Court and several other unreported decisions. It is further contended by the learned Government Pleader that the appellant''s case is very similar to the case decided by the three-judge Bench of the Supreme Court in State of Tamil Nadu v. M.K. Kandaswami [1975] 36 STC 191. We find that the appellant has not challenged the validity of Section 5A(1)(c) of the Act which provides for levy of purchase tax on purchase made by a dealer of taxable goods, if the supplier has not paid any tax on the sale of such goods. In this case, admittedly the commodity named branded sanitary products are liable to tax under the Act. However, by virtue of exemption granted to the industrial unit in Cochin Export Processing Zone which manufactured the products in appellant''s brand name, the manufacturer is not liable to pay any sales tax on the sales made by such unit to the appellant. Since the commodity is "taxable goods" as explained by the Supreme Court in Kandaswami''s case [1975] 36 STC 191 above referred, it attracts tax at the hands of the purchaser u/s 5A of the Act which is the same as Section 7A of the Tamil Nadu General Sales Tax Act, 1959. Even though the issue is similar to the one raised by the assessee in the case decided by the Supreme Court relied on by the learned Counsel for the appellant, we find that the Supreme Court has heavily relied on Section 15 of the CST Act, because the question involved in that case pertains to liability for tax at purchase point on declared goods, namely, steel ingots which enjoyed sales tax exemption at the hands of seller. However, we find that the facts of this case are quite similar to the case decided by the three-member Bench of the Supreme Court in Kandaswami''s case [1975] 36 STC 191.

We, therefore, uphold the order of the Commissioner and dismiss the appeal on the above issue.

The next aspect in this case is whether irrespective of Section 5A of the Act, the appellant is liable to pay tax u/s 5(2B) which provides for payment of sales tax by the brand-name holder when the product purchased is despatched to outside Kerala otherwise than by way of sale in the course of inter-State trade or commerce. The scheme of levy of tax on branded products contained in sections 5(2), 5(2A) and 5(2B) are extracted hereunder:

5(2) Notwithstanding anything contained in this Act, in respect of manufactured goods other than tea, which are sold under a trademark 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 purpose of this Act.

5(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.

5(2B) Where a trade-mark or brand-name holder consumes the goods purchased by him under Sub-section (2A), in the manufacture of other goods or uses or disposes of such goods in any manner otherwise than by way of sale within the State or despatches such goods to any place outside the State, otherwise than by way of inter-State sale, such trade-mark or brand-name holder shall be liable to pay tax on the turnover relating to such purchase for the year irrespective of the quantum of his total turnover.

When Sub-section (2) of Section 5 declares that the brand-name holder shall be deemed to be the first seller of branded goods, Sub-section (2A) provides for exemption to dealers who sell the goods to the brand name holder based on a declaration furnished by the purchasing dealer, namely, the brand-name holder. However, liability under Sub-section (2B) is attracted when the brand-name holder purchasing the goods that have not suffered tax by virtue of Sub-section (2A) and despatches the same outside Kerala as stock transfer. In the normal course, since the brand-name holder is the deemed first seller liable to pay tax, he should issue a declaration to the first seller for such seller to claim exemption under Sub-section (2A). Since the appellant has not issued any declaration to the manufacturer under Sub-section (2A), the Commissioner thought that Sub-section (2B) has no application. However, in this case since the supplier is entitled to exemption on their sales by virtue of another notification issued u/s 10 of the Act, there was no necessity for the appellant to issue any declaration in terms of Sub-section (2A) of Section 5 for the seller to claim exemption. However, all the conditions of Section 5(2B) are satisfied inasmuch as the appellant has purchased and despatched the branded goods to outside the State otherwise by way of inter-State sale and since the supplier has not paid sales tax on their sales by virtue of exemption granted to them, the appellant is liable to pay tax u/s 5(2B) of the Act.

Therefore, even if the first point raised is answered in favour of the appellant, the appellant has no escape from liability by virtue of operation of Section 5(2B) of the Act.

In view of the above findings, we dismiss this appeal.