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M/S. Kwality Biscuits (P) Ltd., v/s The State of Karnataka

    STRP NO.18 of 2007 (TAX)

    Decided On, 26 August 2010

    At, High Court of Karnataka

    By, THE HONOURABLE MR. JUSTICE N. KUMAR & THE HONOURABLE MR. JUSTICE H.S. KEMPANNA

    For the Petitioner: K.G. Raghavan Sr. Counsel, R.V Prasad, Advocate. For the Respondent: T.K. Vedamurthy, HCGP.



Judgment Text

(This STRP is filed under Section 23 (1) of KST Act R/W S 8A of the KAT Act against the judgment and order dated: 27.10.2006 passed in Sta.No.1749/2003 on the file of the Karnataka appellate Tribunal, Bangalore, dismissing the appeal.)


This revision is by the assessee challenging the order passed by the Tribunal as well as the authorities holding that the assessee is liable to pay sales tax on the sale of intellectual property.


2. The assessee is a private limited company incorporated under the Customs Act, 1956. The assessee is a dealer registered under the provisions of the Karnataka Sales Tax Act, 1957 (for short hereinafter referred to as ?the Act?). It is engaged in the activity of manufacture and sale of biscuits and confectionery, wheat products, jams, jellies and creams. On 29.3.2001 the promoters of the assessee-Company entered into ?Heads of Agreement? with M/s.Britannia Industries Ltd., a public Limited Company, for transfer of their biscuits business comprising of manufacture, distribution and sale along with the entire market network and the related trademarks, brands, copyrights and designs with all assets and liabilities of the biscuits business. Under the terms of the agreement entered into, the promoters of the petitioner Company agreed to altogether got out of the business of biscuits by effecting a sale of the entire business as a whole and as a going concern. The entire assets and liabilities including the movables and immovables, goodwill, intellectual property, assets such as registered trademarks and brand names as well as unregistered trade marks and brand names stood transferred by virtue of sale/transfer of equity shares held by the promoters along with their family particulars in the assessee company in favour of Britannia Industries Ltd. In terms of the aforesaid agreement M/s. Britannia Industries Ltd. acquired 49% of the equity in the assessee and its associate companies M/s.J.B.Mangharam Foods Pvt. Ltd. acquired 26% of the equity and M/s. Manna Foods Pvt. Ltd acquired 25% of the equity. M/s.Britannia Industries Ltd. acquired the trade mark of ?Kwality? with goodwill, copyright and designs from the assessee and by virtue of which the trademark ?Kwality? is now fully owned by the Britannia Industries Ltd. The said agreement has got 10 schedules which are described as schedule A to J. Schedule ?C? pertains to intellectual property assets (registered trade marks and branch names) whereas, schedule D pertains to intellectual property assets (unregistered trade marks and brand names). The assessee-Company filed its annual return in Form No.4. However, the Deputy Commissioner of Commercial Taxes (Assessments), Fast Track-31, Bangalore, issued a proposition notice in Form 31-A dated 28.1.2003 proposing to reject the annual return filed by the petitioner in Form No.4 as being incorrect and incomplete. Further, it has proposed to levy tax on the turn over relating to sale of trade mark, design and copy right. Upon receipt of the proposition notice, the assessee filed a detailed reply by way of objection to the proposition notice objecting the proposals. The assessee contended what was transferred by way of a sale was a business as a whole and that too as a going concern and therefore, there is no sale of goods as such there is no liability to pay sales tax under the Act. The Assessing Authority over ruled the said objections and held that the assessee is liable to pay sales tax on the consideration received for the sale of intellectual property and as it was not declared as a turn over in the returns filed, the assessee is liable to pay penalty also. The said order came to be passed on 18.3.2003 and consequential notice of payment was issued on 20.3.2003. Aggrieved by the order and the consequential payment, the assessee preferred a writ petition before this Court in W.P.NO.18595/2003. The said order and the demand came to be set aside on the short ground of violation of the principles of natural justice inasmuch as before passing the impugned order the assessee was not heard. After remission the assessee appeared before the Assessing Authority arguing the matter on merits and produced all necessary and relevant documents including the agreements called for by the Assessing Authority. The Assessing Authority passed an order dated 28.7.2003 again over ruling the objections of the assessee and tax liability was created as was done earlier. However, penalty proceedings were dropped. Aggrieved by the said order, the assessee preferred one more writ petition 38975/2003 which came to be rejected directing the assessee to prefer a statutory appeal within a period of two weeks from the date of receipt of the order in the writ petition. Accordingly, the assessee filed an appeal before the Joint Commissioner of Commercial Taxes (Appeals) Bangalore City Division-3. The Appellate Authority after hearing both the sides, dismissed the appeal confirming the order passed by the Assessing Officer by its order dated 27.11.2003. The assessee preferred an appeal before the Karnataka Appellate Tribunal challenging the aforesaid two orders. The said appeal also came to be dismissed by an order dated 27.10.2006. In those circumstances, the assessee is before this Court.


3. The learned counsel for the parties submit the subject matter of these revision petitions is only the tax payable for the consideration received for the sale of intellectual property only. In other words, the intellectual property owned by the assessee has been sold for a sum of Rs.30 crore, a sum of Rs.3 crore at 10% is claimed as Sales Tax. The question is whether the assessee is liable to pay the said tax on the sale consideration of intellectual properties.


4. Sri.K.G.Raghavan learned Senior counsel appearing for the assessee contended that the sale is of a going concern which includes the trade mark, design, copy right business as a whole. The same could not be brought to tax under the provisions of the Act because the said goods were not sold in the course of trade or business of the assessee. Secondly, he contended the sale has taken place in the State of West Bengal i.e., Calcutta. Therefore, the Act has no application to such sale. Lastly, it was contended the intellectual property being an intangible property is not goods as defined under the Act and therefore, the Act has no application.


5. Per contra, the learned Government Advocate supported the impugned orders.


6. In the light of the aforesaid facts and rival contentions the points that arise for our consideration in this revision petition are as under:-


1) Whether sale of intellectual property owned by the assessee-Company attracts payment of sales tax under the Karnataka Sales Tax Act when the assessee is a dealer under the Act carrying on business of sale of confectioneries and biscuits, wheat products, jellies, jams and creams?


2) When the sale of intellectual property has taken place at Calcutta, for such sale whether the Act is applicable?


3) Whether the intellectual property as intangible property is a goods as defined under the Act?


7. Point No.1:-


In order to appreciate this contention it is necessary to look at the, Section 5, the charging Section which reads as under:


S5. Levy of tax on sale or purchase of goods ?


(1) Every dealer shall pay for each year tax on his taxable turnover at the rate of (twelve percent) at the point of first sale.)


A reading of the above definition makes it clear, the liability to pay tax is on the dealer on his taxable turnover. Who is a defined under the Act.


Section 2(k) defines a ?dealer? as under:


?Dealer? means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes-


(i) the Central Government and a State Government other than the Government of Karnataka which carries on such business;


(ii) a casual trader, that is to say a person who in any year has not been regularly engaged in the business of buying, selling, supplying or distributing goods, but has in such year been occasionally engaged, whether as principal or agent, in the business of buying, selling supplying or distributing of such goods.


In order to have the correct meaning of the ?Dealer? under the Act, in defining him as the words ?business? and ?goods? are used and those words are also defined under the Act, it is necessary to look into the meaning given under the Act to the said words.


S.2(f-2) - ?Business? includes ?


(i) any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture adventure or concern is carried on with a motive to make gain or profit and whether or not any profit accrues from such trade, commerce, manufacture, adventure or concern,; and


(ii) any transaction in connection with, or incidental or ancillary to such trade, commerce, manufacture, adventure or concern;


S.2(1)(m) ? ?Goods? means all kinds of movable property (other than newspapers, actionable claims, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including goods, as goods or in some other form involved in the execution of a works contract or those goods to be used in the fitting out, improvement or repair of movable property) and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale;


Similarly, ?sale? is also defined as under:


S2(1)(t) ??Sale? with all its grammatical variation and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, (and includes,-


i) a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;)


ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;


iii) a delivery of goods on hire purchase or any system of payment by installments;


(iv) a transfer of the right to use any goods for any purpose (whether or not a specified period) for cash, deferred payment or other valuable consideration;


After understanding the meaning of the word ?Dealer?, it is necessary to understand the meaning of the word ?Taxable Turnover? referred to in the Section which reads as under;


S2(1)(u-1) ? ?Taxable turnover? means the turnover on which a dealer shall be liable to pay tax as determined after making a such deductions from his total turnover and in such manner as may as prescribed, but shall not include the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India;


For a proper understanding of ?taxable turnover?, it is also necessary to know the meaning of the word ?total turnover? and ?turnover? as defined under the Act, which reads as under:


(u-2) ? ?Total turnover? means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India;


(v) ? ?Turnover? means the aggregate amount for which goods are bought or sold, or supplied or distributed (or delivered or otherwise disposed of in any of the ways referred to in clause (t); by a dealer, either directly or trough another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration.


7.1. The Apex Court in the case of THE STATE OF GUJARAT v/s RAIPUR MANUFACTURING CO., LTD., reported in STC Vol, XIX ? 1967 P.5, explaining what constitutes a turnover has held as under:-


?in the turnover of a person carrying on the business of selling one commodity will not be included the price received by him by sale of another commodity unless he carries on the business of selling that other commodity. That is so because within the meaning of Section 2 (6) of Bombay Act 3 of 1953 to be a dealer a person must carry on the business of selling those goods, price whereof is sought to be included in the turnover. In other words, he must carry on the business of selling a commodity before his turnover form sale of that commodity is taxable. As pointed out by this Court in State of Andhra Pradesh V/s M/s Abdul Bakhi and Bros., a person to be a dealer must be engaged in the business of buying or selling or supplying goods. The expression ?business? though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression ?profit-motive? it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit-motive may be easily discernible in some transactions: in others it would have to inferred from a review of the circumstances attendant upon the transaction.?


Where a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of the business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise. To inter from a course of transactions that it is intended thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business; in the light of all the circumstances an inference that a person desires to carry on the business of selling goods may be raised.


It is clear from these cases that to attribute an intention to carry on business of selling goods it is not sufficient that the assessee was carrying on business in some commodity and he disposes of for a price articles discarded, surplus or unserviceable.?


7.2. The Supreme Court also had an occasion to define the word ?business? in the case of The District Controller of Stores, Northern Railway, Jodhpur-vs ? The Assistant Commercial Taxation Officer and Another reported in Sales Tax Cases Vol.37 1976 Page 423 held as under:-


?We think that the activity of the appellant in the selling of unserviceable material and scrap-iron, etc., would be ?business? within clause (1) the definition of the word ?business introduced by the amending Act. The word ?business? according to clause (I) of that definition would include any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture whether or not it is carried on with motive to make gain or profit. So even if it be assumed that the activity involved in selling unserviceable material and scrap iron, etc., would not amount to carrying on business in the normal connotation of that term would be ?business? within clause (i) of the sub-cause as introduced by amending Act.


7.3. The Apex Court in the case of Indian Express (P) Ltd. ? vs ? State of Tamil Nadu reported in Sales Tax Cases Vol.67 1987 Page 474 dealing with the question whether the turnover on old newspapers or waste paper is exempted from payment of sales tax or the sales tax on turn over of newspaper is exempted held as under:-


?It is also clear form the material on the record that the transactions of sale of the surplus copies must be regarded as a business carried on by the appellant. It was an activity which he pursued regularly, and the motive was to earn a profit. It was incidental to the business carried on by the appellant of printing and publishing newspapers. In the course of carrying on the business of printing and publishing newspapers, it is inevitable that a number of copies should remain surplus and that they should, therefore, be sold as waste paper. The business of selling the surplus copies as waste paper attracted sales tax, having regard to the terms of clause (d) of section 2 of the Act, which defines the expression ?business?, as it stood at the relevant time.?


7.4. Following the aforesaid judgment a Full Bench of the Andhra Pradesh High Court in the case of COROMANDAL FERTILISERS LIMITED v/s STATE OF A.P. and other connected cases, reported in STC Vol.112 1999 P.1, held as under:-


?22. In order to highlight the issue which we propose to address ourselves in extenso, it is necessary to note that the Act ordains that transfer of property in goods for valuable consideration must be ?in the course of trade or business? [vide section 2(1)(n)]. This is so because the incidence of tax falls on a dealer who ?carries on the business of buying, selling, supplying or distributing goods? [vide section 2(1)(e)]. A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax under the APGST Act. The crucial question then is whether these requirements are satisfied. Is there an element of business present in these disputed transactions? Assuming there was a sale of goods, did such sale take place in the course of business and by a person who carries on the business of buying and selling goods?


7.5. They have also referred to the meaning of the word ?business? as explained in the aforesaid Raipur case, as under:-


?24. The expression ?business? though extensively used in taxing statues, is a word of indefinite import. In taxing statues, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit ? motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in the class of goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression ?profit-motive? it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit-motive may be easily discernible in some transactions; in others it would have to be inferred from a review of the circumstances attendant upon the transaction?


70. We are therefore of the view that transfer of goods involved in the process of disposing of the entire cement manufacturing unit hitherto owned by the petitioner-company does not tantamount to ?business? within the meaning of section 2(1)(bbb) of the Act and the sale is not ?in the course of business?. The charge to tax is therefore not attracted under the APGST Act.


7.6. Following the judgments, the Madhya Pradesh High Court in the case of STI INDIA LTD. V/s COMMISSIONER OF COMMERCIAL TAX AND OTHERS reported in (2009) 20 VST 37 (MP) has held as under:-


?The transaction in question, though results in sale of movable properties upon closure of the business, but by no stretch of imagination or reasoning, it could be said to have taken place during the course of business of the petitioner as dealer. In this connection, it is necessary to keep in mind the charging section and the definition of ?dealer? in the act. Section 5 of the Act is the charging section. It enjoins upon every dealer covered by the charging section, to pay the tax under the Act on the taxable turnover. Expression ?dealer? is defined in clause (h) of section 2 of the Act. Perusal of the definition would show that a person is a dealer within the meaning of the Act, when he carries on the business of buying or selling of goods for consideration paid or payable in future. What is required is that sale or purchase must take place during the course of business of buying or selling in view of definition of ?Dealer? in clause (h) of section 2 of the Act. ?During the course of business? postulates a continuous exercise of an activity. It also connotes some real, substantial and systematic or organised course of activity or conduct set with a purpose. In taxing statures, it is used in the sense of an whole time occupation or profession of a person which requires continuous attention and labour. To regard an activity as business, there must be a course of dealings either actually continued or contemplated. In facts and circumstances of the case as found by the assessing officer and the Additional Commissioner, there was a sale of movable assets, but it could not be said that sale was during the course of business to attract levy of tax under the Act.?


7.7. Therefore, to attract the liability to pay tax u/s.5 of the Act, a dealer must be carrying on the business of buying, selling, supplying and distributing goods. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. A person is a dealer within the meaning of the Act, when he carries on the business of buying or selling of goods for consideration paid or payable in future. What is required is that sale or purchase must take place during the course of business of buying or selling in view of definition of ?Dealer? in clause (h) of section 2 of the Act. The expression ?business? though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. ?During the course of business? postulates a continuous exercise of an activity. It also connotes some real, substantial and systematic or organised course of activity or conduct set with a purpose. In taxing statutes, it is used in the sense of an whole time occupation or profession of a person which requires continuous attention and labour. The expression ?carrying on business? requires something more than mere selling or buying. It is not merely the act of selling or buying makes a person dealer but the object of the person who carries on the activity is important to attract levy of sales tax.? ?Sale? means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax. The taxing statutes must be construed with strictness and no payment is to be exacted from the subject, which is not clearly and unequivocally required by the statute.


7.8. Where a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise. But no test is decisive of the intention to carry on the business. In the light of all the circumstances an inference that a person desires to carry on the business of selling goods may be raised. Even in transaction in connection with or incidental or

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ancillary to such trade, commerce, manufacture, advertisement or concern constitutes ?business?, but such a transaction should have a direct nexus with the main business carried on by the dealer. 7.9. In this background if we look into the facts of this case to consider whether sale of intellectual property attracts the payment of tax under the Act, the first question to be answered is, whether the assessee is carrying on business of buying, selling, supplying and distributing intellectual property. If the answer is no, then there is no tax liability. Secondly, we have to find out when the assessee is carrying on the business of sale and purchase of biscuits, confectionery, wheat products, jams, jellies and creams, whether the sale of intellectual property could be considered as a transaction which is in connection with or incidental to or ancillary to the aforesaid business. If it is incidental, ancillary or in connection with the said business even though it is not the main business, there exists a tax liability. But, if it is not incidental or connected or ancillary to that trade there is no liability to pay such tax. The assessee is the owner of this intellectual property, rights, trade marks, designs and copy rights. In order to sell their Goods, they use this intellectual property. Therefore, this trade mark or design cannot be sold in the course of business. Admittedly, the assessee is not in the business of selling and buying this intellectual property rights. These intellectual property rights are acquired by the assessee over a period of time by hardwork. It is not a goods in which they are trading in the course of their business. Therefore, it is not possible to hold that either the assessee is in the business of selling and buying intellectual property rights or that the sale of intellectual property is incidental or connected with and manufacture and sale of business of biscuits, confectioneries, wheat products, jams, jellies and creams. The findings recorded by the authorities is exfacie illegal and the aforesaid sale would not attract liability under the Act. The orders passed by the authorities imposing the liability is liable to be set aside. Accordingly it is set aside. 8. Points 2 and 3:- In view of the fact that in answering point No.1, we have held the sale of intellectual property do not attract tax under the Act and the assessee is getting relief on that score we decline to answer points 2 and 3 as it becomes wholly academic in this case. For the aforesaid reasons we pass the following order:- i) The Revision is allowed; ii) Impugned orders are hereby set aside; iii) It is held that the assessee is not liable to pay sales tax under the Act on the sale of intellectual property. iv) No costs.
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