Madras High Court
State Of Tamil Nadu vs Bharat Dairy Farm on 27 February, 1991
Equivalent citations: 1992(37)ECC99, 1992(61)ELT25(MAD)
Author: A.S. Anand
Bench: A.S. Anand
JUDGMENT Dr. A.S. Anand, C.J.
1. Would the conversion of cream into butter by stirring, amount to a process of manufacture attracting the levy of purchase tax under Section 7A of the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as "the Act") ? This is the only question which requires our consideration in these revision petitions filed by the Revenue against the orders of the Sales Tax Appellate Tribunal (Additional Bench), Coimbatore, dated November 28, 1979, passed in C.T.A. Nos. 252 and 309 of 1979 and C.T.M.P. Nos. 230 and 212 of 1979. The circumstances in which this question arises are as follows :
2. The assessee in both these revision petitions is one and the same dealer, Bharat Diary Farm. The assessee sold butter converted from cream purchased by it. The sale of butter was reflected by the assessee in its returns and the accounts. The assessment in T.C.R. No. 586 of 1981 relates to the assessment year 1976-77 while the assessment in T.C.R. No. 857 of 1981 relates to the assessment year 1977-78.
3. The assessee had reported its taxable turnover for 1976-77 as Rs. 43,611.75 in the A1 return filed by it. The accounts were called and checked. An inspection by the Special Deputy Commercial Tax Officer (ST), Erode, at the business premises led to the recovery of two exercise note books and two pocket note books. Investigation revealed that for the assessment year 1976-77, there was purchase of cream for Rs. 68,701/-, which was not covered by purchase bills. According to the Revenue, the assessee had suppressed the purchase of cream in its returns. Consequently, assessment under Section 7A of the Act was made and the total and taxable turnover of the assessee was worked out at Rs. 1,23,216.75. Penalty under Section 12(3) of the Act was also proposed.
4. For the assessment year 1977-78, the assessee had filed the A1 return showing sales turnover of butter and curd from April 1, 1977 to July 24, 1977, at Rs. 4,710/- and from July 25, 1977 to March 31, 1978, as Rs. 34,593. According to the assessing authority, the purchase of cream amounting to Rs. 1,13,499/-, which was not supported by any purchase bills, had been suppressed. Since the sales of butter and curd were exempted from tax with effect from July 25, 1977, the taxable turnover of the assessee was worked out at Rs. 6,280/- by adding to the turnover furnished by the assessee of Rs. 4,710/- and amount of Rs. 1570/- by way of one-third for "defects and probable omissions". The turnover liable to tax under Section 7A of the Act in respect of the purchases of cream was calculated at Rs. 1,13,499/-. Thus, the total taxable turnover was worked out at Rs. 1,19,779/- and penalty, both under Section 12(3) and Section 22(2) of the Act was also levied. The assessing authority did not accept the argument of the assessee that the cream which had been converted into butter by stirring, was not a commodity different than butter and that since no manufacturing process was involved in converting cream into butter, levy under section 7A of the Act was not warranted. The assessing authority held butter and cream to be separate commodities.
5. Aggrieved by the orders of assessment, the assessee preferred appeals in respect of both the assessment years before the Appellate Assistant Commissioner. The assessee disputed the best judgment assessment made by the assessing authority. It was pleaded before the appellate authority that the assessee only purchased milk from villagers and got cream out of it and after processing it converted the same into butter. It was asserted that milk being exempt from tax, there could be no liability under Section 7A of the Act in respect of the cream obtained from that milk by natural process. In the alternative, it was argued that even if it be held that the assessee had purchased cream from the villages, the levy under Section 7A of the Act was not attracted because purchase of butter had been accounted for and no manufacturing process whatsoever was involved in converting cream into butter. There was no dispute that sales tax on butter had been paid by the assessee. The Appellate Assistant Commissioner, after examining the record, observed :
"The contention of the appellants that the purchases of butter as accounted for by them in their accounts were only with reference to the purchase of cream as in the recovered records and receipt of butter as reflected in their accounts would completely agree with the quantity of cream accounted for in the records recovered but for the loss due to the process of conversion of cream into butter, has got force. The purchase of cream as reflected in the records recovered are found to be accounted for purchases, as the appellants have straightway accounted for the purchases of cream as the purchases of butter."
6. The Appellate Assistant Commissioner, after recording the above finding of act, proceeded to examine the process by which cream is converted into butter. He opined that if cream, taken out of milk, is left as such, it would turn into butter after a few days by itself and if, for commercial convenience, stirring is done to quicken the process of conversion of cream into butter it could not be said that there was any manufacturing process involved in the conversion of cream into butter. The appellate authority, accordingly, held that there was no liability on the assessee to tax under Section 7A of the Act and consequently, the turnover assessed under Section 7A of the Act was set aside. The penalty under Section 12(3) was also set aside. The addition made by the assessing authority at 33 per cent for "omissions and defects" was not interfered with, but was assessed at 20 per cent of the sales turnover. The levy of penalty under Section 22(2) of the Act was, however, maintained.
7. Aggrieved by the orders of the Appellate Assistant Commissioner, the assessee went up in Appeal before the Sales Tax Appellate Tribunal (Additional Bench), Coimbatore, basically questioning the levy of penalty under Section 22(2) of the Act. The Revenue did not contest the orders of the appellate authority and did not file any appeal. However, while the appeals of the assessee were pending before the Tribunal, the Revenue also filed two applications seeking enhancement of the assessment. The Tribunal dismissed both the appeals as well as the enhancements applications by the order impugned in these revision petitions.
8. We have heard learned counsel for the parties.
9. The assessee, as already noticed, is a dealer in butter. In the course of its business, it purchased cream, which was converted into and sold as butter. For both the assessment years, the cream purchased by the assessee was not reflected in the accounts as purchase of cream, though the same was reflected as purchases of butter, which was sold and sales tax was paid thereon. There is no dispute that the receipt of butter, as reflected in the accounts of the assessee, completely tallied with the quantity of cream reflected in the recovered records, except to the extent of the loss due to the process of conversion of cream into butter. There is also no controversy about the fact that the assessee has straightway accounted for the purchase of cream as the purchase of butter. Both these factual bases are amply borne out from the findings recorded by the appellate authority. Did the conversion of cream into butter involve any manufacturing process ? On facts, the assessing authority, the Appellate Assistant Commissioner as well as the learned Tribunal have returned concurrent findings that cream is only the prior stage of butter and that in the conversion of cream into butter, no manufacturing is done in the process. It was noticed by the Appellate Assistant Commissioner that if cream is left for a few days, it would, by the natural process itself, get converted into butter and if in order to quicken the process of conversion some stirring is done, it cannot amount to process of manufacture. We agree with the finding recorded by the authorities and hold that cream is only a prior stage of butter and its conversion by stirring or churning into butter does not involve any manufacturing process.
10. Faced with this situation and since the Revenue had not filed any appeal against the findings recorded by the Appellate Assistant Commissioner, the learned Additional Government Pleader (Taxes) argued that since cream and butter, as found by the assessing authority, are two separate commodities, levy of purchase tax under Section 7A of the Act was attracted, as the new commodity butter, had come into existence by the consumption of cream by the process of stirring. We cannot agree, Section 7A is both a charging as well as a remedial provision and has, as its main object, to plug leakage and prevent evasion of tax. It would come into operation, inter alia, if it is shown that the goods purchased by a dealer, in the course of his business, whether from a registered dealer or from any other person, which have not suffered tax under Section 3, 4 or 5 of the Act, as the case may be, have been (a) consumed in the manufacture of other goods for sale or otherwise, or (b) disposed of in any manner other than by way of sale in the State, or (c) have been despatched to a place outside the State, except as a direct result of sale or purchase in the course of inter-State trade or commerce. Section 7A of the Act would be attracted if all the above noted ingredients are cumulatively satisfied. Thus, it would be seen that tax would be levied on the purchase of goods within the State in respect of which no tax has already been levied either at the sale point or at the purchase point under the Act on any dealer who, inter alia, consumes such goods in the process of manufacture of other goods. The rate of tax payable on such purchase would be at the rates mentioned in Sections 3, 4 and 5 of the Act, as the case may be. Where the conditions imposed by Section 7A of the Act for creating the charge are satisfied, the purchase turnover of the dealer has to be included in the total turnover and if it exceeds the statutory turnover limits, the dealer is liable to pay tax. Since all the authorities below have concurrently found that in the conversion of cream into butter, no process of manufacture at all was involved and that cream was not consumed when butter was converted our of it, it necessarily follows that the levy of tax under Section 7A of the Act cannot be attracted to the facts of the instant case. Where cream is left for a few days it would, on its own, get converted into butter and if stirring is done in order to quicken the process of conversion, it cannot by any stretch of imagination be said to be a process of manufacture in which the cream may be said to have been consumed in the manufacture of butter, producing a different commodity. Unless the conversion takes the new commodity to the point where commercially it can no longer be recognised as the original article, no manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. Cream and butter are not two different or separate commodities. They are the two forms of the same commodity and no process of manufacture is involved in the conversion of cream into butter. There is no essential difference in the identity between cream and butter and, therefore, it is futile to contend that cream gets consumed in the process of manufacture of butter. There is no merit in the submission that the process of stirring of cream brings into existence a different commercial commodity. The identity of cream does not get devoured or exhausted by its conversion into butter, which is only the next stage of cream. The Legislature consciously used the expression "consumes" in Section 7A(1)(a) of the Act in contradistinction to the expression "use", implying loss of original identity.
11. In State of Tamil Nadu v. Indodan Milk Products - 1980 (45) S.T.C. 498, a Division Bench of this Court accepted the submission that condensed milk, obtained by a process of dehydrating the milk or taking the water out of the milk, so that the milk could, with added preservatives, stand for a long time, would continue to be only milk and thus exempt from tax under the Act. The court negatived the contra submission that merely because some process was employed to convert milk into condensed milk, it would bring into effect a different commercial commodity.
In Deputy Commissioner, Sales Tax v. Pio Food Packers - , the Supreme Court found that if there is no essential difference in identity between the original commodity and the processed article, it would not be possible to say that one commodity has been consumed in the manufacture of another, even if it had undergone a degree of processing. After reviewing a number of judgments, the court held that when pineapple fruit is processed into pineapple slices for the purpose of being sold in sealed cans, there is no consumption of the original pineapple fruit for the purpose of manufacture, even though a degree of processing is involved in preparing pineapple slices for the original fruit. The court held that the commodity continued to possess its original identity notwithstanding the removal of inedible portions, slicing, adding of sugar and preservatives and thereafter canning it.
13. It would, at this stage, be also profitable to refer to the judgment of the Supreme Court in Sterling Foods v. State of Karnataka - . Bhagwati, C.J., speaking for the court observed that when raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, divining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and such processed goods are commercially regarded the same commodity as raw shrimps, prawns and lobsters, and there is no essential difference between raw shrimps, prawns and lobsters and the processed or frozen shrimps, prawns and lobsters. The court considered in depth as to when it could be said that by reason of processing of the goods they have changed their identity to an extent that commercially those goods cannot be regarded as the original goods. The Bench opined :
"The test which has to be applied for the purpose of determining whether a commodity subjected to processing retains its original character and identity is as to whether the processed commodity is regarded in the trade by those who deal in it as distinct in identity from the original commodity or it is regarded, commercially and in the trade, the same as the original commodity. It is necessary to point out that it is not every processing that brings about change in the character and identity of a commodity. The nature and extent of processing may vary from one case to another and indeed there may be several stages of processing and perhaps different kinds of processing at each stage. With each process suffered, the original commodity experiences change. But it is only when the change or a series of changes take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct commodity that it can be said that a new commodity, distinct from the original, has come into being. The test is whether in the eyes of those dealing in the commodity or in commercial parlance the processed commodity is regarded as distinct in character and identity from the original commodity."
14. Applying the test, as enunciated by the Apex Court, to the facts of the present case, the conclusion becomes irresistible that cream, when converted into butter, cannot be said to so charge its identity that commercially it can no longer be regarded as the original article. There is indeed, no essential difference between cream and butter. The process of stirring cream to quicken the process of conversion into butter, does not bring into existence any different commercial commodity than the original one. Since no manufacturing process at all is involved in the conversion of cream into butter, as has also been found by all the authorities below, it follows that there is no consumption of "cream" in the process of converting it into "butter" and, therefore, the provisions of Section 7A of the Act cannot be attracted to the instant case. The answer to the question, therefore, posed in the earlier part of this judgment, has to be in the negative and we so answer it. The Tribunal, therefore, was right in holding the Section 7A of the Act was not applicable to the facts and circumstances of the instant cases. We, accordingly, do not find any cause to interfere with the order of the Tribunal.
15. In the view that we have taken, we refrain from expressing any opinion as to whether the purchase in this case was of milk and not of cream and since milk is exempt, the cream obtained from the exempted item would also be exempt. No factual basis for the submission is available on the record. No evidence was let in before the authorities below to show that what was actually purchased by the assessee was milk and not cream. On the contrary, we find that the authorities proceeded to deal with the cases and the assessee also understood its case in the manner that what was purchased by the assessee was cream and not milk. We, therefore, do not deal with that aspect of the case and in fairness to the learned counsel for the assessee record that he also submitted that the said question be left open to be decided in a proper case at the appropriate time.
16. In the result, both the revision petitions fail and are dismissed, but without any order as to cost.