Karnataka High Court
Y. Moideen Kunhi And Ors. vs Collector Of Central Excise, Bangalore ... on 12 November, 1985
Equivalent citations: 1986(7)ECC104, 1986(6)ECR407(KARNATAKA), 1986(23)ELT293(KAR), [1986]161ITR642(KAR), [1986]161ITR642(KARN)
ORDER
1. The petitioners in these four writ petitions are the owners of saw mills in Mangalore carrying on business in timber. They purchase timber logs from the State Forest depots and from others and convert them into smaller sizes, planks, etc. They also undertake job works by converting the logs belonging to others into sawn timber, planks, rafters, etc., to the specification.
2. In each of the cases the petitioner has challenged the show cause notices issued against him by the Assistant Collector of Central Excise, Mangalore, by which they were asked to show cause why action should not be taken against them for having manufactured and cleared sawn timber and other products without paying excise duty and for other offences committed under the Act, such as, failure to obtain licence, etc.
3. The petitioners have questioned the show cause notices in these petitions and have prayed for declaring that the sawing of timber logs into different sizes, planks, beams, etc., does not amount to 'manufacture' within the meaning of the said term as defined in Section 2(f) of the Central Excises and Salt Act, 1944 (Hereinafter referred to as 'the Act'), and as a consequence to prohibit the levy of duty or penalty under the Act and to quash the notices, Annexures A and H, issued by the 2nd respondent in each writ petition.
4. The petitioners relied to the said show cause notices and contended that they did not indulge in the manufacture of any excisable goods within the meaning of Section 2(f) of the Act and what they were doing was only cutting the timber logs into smaller sizes for the purpose of facilitating stacking and transport and that therefore they were not liable to take our a licence and submit the returns and pay duty thereon, as required in the show cause notices.
5. The Assistant Collector, Mangalore, did not agree with the said reply relying upon the Central Excise Trade Notice No. 145 of 1976 dated 17-6-1976 insisted on the petitioner to produce books of accounts etc., and issued summons for this purpose under Section 15 of the Act. Being aggrieved by the show cause notices and issue of summons, the petitioners have, in these writ petitions prayed for quashing the notices and for other reliefs.
6. In one of the cases, namely - Writ Petition No. 15848 of 1979 by an order dated 11-3-1980 the Assistant Collector was permitted to complete the adjudication proceedings under the Act and return the books of accounts etc., seized from the petitioner therein. After the adjudication order was made the duty and the penalty imposed by the said order was also stayed by this Court pending disposal of the writ petition and the writ petition was also suitably amended praying for quashing the adjudication order.
7. On behalf of the respondents a comprehensive statement of objections has been filed in W.P. No. 15848/79 which covers the contentions raised in all the petitions.
8. The main contention of the petitioners in these cases is : that the 'sawn timber' is a product of 'manufacture' and hence is not exigible to Excise Duty ?
9. Excise duty is levied on the manufacture of goods under the Act. 'Manufacture' is defined under Section 2(f) of the Act, as follows :-
"2(f). "manufacture" includes any process incidental or ancillary to the completion of a manufactured product; and............".
It is the petitioners' contention, (1) that they do not manufacture any excisable goods which are dutiable under the Act. The timber purchased by them in the form of logs is cut into smaller sizes for facility of transportation and for stacking, preserving and marketing;
(2) that no activity of manufacture is involved in converting logs of timber into cut sizes; etc., (3) that the timber continues to be understood as timber even after it is converted into smaller sizes and it does not cease to be timber and no new commodity comes into existence;
(4) no dressing or planning is done and the timber is not cut into any particular size but is cut into sizes it admits of;
(5) that sawn timber is not a different commodity in the commercial sense also;
(6) that term 'manufacture' has received a specific connotation by several decisions rendered by the Supreme Court, and that therefore the interpretation placed by the department on the term, 'manufacture' does not satisfy the test laid down by the Supreme Court; and (7) that the show cause notices issued solely relying on the 'trade notice', is without jurisdiction and that the trade notice should be quashed in view of the settled position in law.
10. The said 'Trade Notice' reads thus :-
"A question has been raised as to whether sawn timber and wood waster products viz., chips, waste veneers and saw dust would be classifiable under Item 68 of the Central Excise Tariff.
2. The matter has been examined and without prejudice to the quasi-judicial functioning of the Assessing Appellate authorities it is hereby clarified for information of the trade that sawn timber, wood chips, waste veneers and saw dust are classifiable under Item 68 of the Central Excise Tariff."
It is argued on behalf of the respondents that sawn timber is excisable goods and is therefore liable to duty under Tariff Item No. 68 of the Act and the proposed levy is in conformity with the Trade Notice No. 145/76 issued by the Collector of Central Excise, Bangalore.
11. It is the case of the Department that the process of sawing timber logs into planks, rafters, etc., involves to manufacture and the planks, sawn timber and other products are new commodity different from the logs themselves and that therefore the said goods are 'excisable goods' under the Act. The writ petitions are also opposed on the preliminary ground that they should not be entertained even before the department has made an order of adjudication, as required under the Act.
12. I deem it necessary, at this stage, to advert to the order (original) made by the Collector in Writ Petition No. 15848/79. Reliance is place on the Trade Notice No. 145/76 classifying the sawn timber, etc., as manufactured products falling under Item No. 68 of the Central Excise Tariff. Reliance is also placed on several decisions of the Supreme Court in support of the stand of the department as to the connotation of the term, 'manufacture'.
13. On these pleadings and the arguments advanced by both sides the following points arise for my consideration in these writ petitions :
(i) whether nascent timber and sawn timber are different commercial commodities ?
(ii) whether any 'manufacture' is involved in converting the nascent timber into cut sizes, planks etc. ? and
(iii) whether the goods in question are 'excisable goods' under the Central Excises Act ?
In support of the contentions put forward on behalf of the petitioner by Sri S. G. Sundaraswamy and assisted by Sri K. R. D. Karanth, a number of decisions of the Supreme Court as well as of several High Courts are cited in addition to the oral arguments. I propose to refer to the decisions first then comment on their oral arguments.
14. The first series of cases cited, deal with the connotation of the term 'manufacture'. They are referred in the order in which they were cited.
(1) Union of India v. Delhi Cloth and General Mills Co. Ltd. [1977 E.L.T. (J 199) = A.I.R. 1963 S.C. 719], wherein it was laid down that excise duty is on the manufacture of goods and not on the sale. The manufacture, which is liable to excise duty must therefore 'bring into existence a new substance known to the market'.
On the facts of the case their Lordships held, that no excise duty was leviable at any intermediate stage and only the end product which the petitioners manufactured, namely, vanaspathi, should be subjected to duty.
15. Their Lordships explained how the word 'manufacture' should be understood for purpose of the Central Excises Act. In this context it was observed as follows :
"The word 'manufacture' used a verb is generally understood to mean as bringing into existence a new substance and does not mean merely 'to produce some changes in a substance', however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases, Vol. 26, from an American Judgment. The passage runs thus :-
'Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."
16. (2) South Bihar Sugar Mills v. Tata and Chemical Mills Ltd. (Intervenor) .
The ratio laid down in DCM Mills case was followed and referred to by the Supreme Court in this case. On the facts of that case, the Supreme Court held : that the kiln gas generated by the petitioners was not a commercial commodity to attract levy of duty under the Act. The gas generated by the kilns set up by the sugar mills was utilised in the process of manufacture of sugar and therefore it was held that kiln gas was not a commercial commodity to attract levy under the Act.
17. The meaning of the word, 'manufacture' was again explained by the Supreme Court in another case which arose under Section 106 of the Transfer of Property Act, viz. - Alembic Engineers Pvt. Ltd. v. Sri Ramakrishna Dalmia and Ors. . In para 8 of the judgment, the Supreme Court again explained what is a 'manufacture' and the two decisions of the Supreme Court earlier referred to above, were relied upon.
18. The question in that case was : whether mixing of different drugs as prescribed by a doctor and prepared by a medical practitioner of his employee, can be considered as a manufacture of medicine within the meaning of the expression, 'manufacturing purposes' occurring in Section 106 of the T.P. Act. While rejecting the contention of the appellants before it, the Court held that it did not amount to a manufacturing process.
19. Sri Sundaraswamy has brought to my notice the latest decision of the Supreme Court in State of Orissa & Ors. v. The Tithagur Paper Mills Co. Ltd. & Anr. & Mangalji Mulji Khara & Ors. , and has largely relied upon the ratio of that decision in support of his contentions. Though the appeal before the Supreme Court arose under the Orissa Sales Tax Act, the question which is relevant for our purposes, namely, "whether planks, cut sizes, etc., sawed out of logs, are different from logs and in its nascent state" was gone into in detail.
20. The appeals arose out of the judgment of the Orissa High Court allowing 209 writ petitions under Article 226 of the Constitution. The facts in brief relevant for our purpose are :-
The dealers registered under the Orissa Sales Tax Act entered into two types of contracts with the State Government. The first category related to the agreement with the State of Orissa for the purpose of felling, cutting, obtaining and removing the bamboos from the forest areas. The second category with which we are concerned consisted of those dealers who had entered into an agreement with the State Government for the purchase of standing trees referred to as 'timber contract'. The notification issued by the Government of Orissa under the Orissa Sales Tax Act levying purchase tax on the purchase of timber sold by the State forest department was struck down by the Orissa High Court in the writ petitions. It was held by the Orissa High Court that the sales of dressed or sized logs by the forest contractor had already been assessed to sales tax and hence the sales to the forest contractor of timber, by the State Government insofar as the timber was concerned, should not be subjected to tax over again.
21. The correctness of the judgment of the Orissa High Court was challenged by the State of Orissa before the Supreme Court in the appeals considered along with the other batch of appeals relating to the 'timber contracts'.
22. The respondents in Civil Appeal No. 220/82 were Mangalji Mulji Khara and others, who were dealers in timber and had been subjected to single point tax on the sales effected by them in respect of sawn timber, cut sizes, rafters, etc., under the Orissa Sales Tax Act.
23. The dealers resisted the proposed levy of tax at the point of purchase of said 'timber' at the auctions held by the Government. The business of the firm consisted of bidding at auctions held by the Government of Orissa in respect of trees standing in forest areas and if it was the highest bidder, entering into an agreement with the Government for felling and removing such trees and in its turn selling the trees felled by it in the shape of logs to others.
24. Therefore, the question that arose before the High Court as well as the Supreme Court was : whether sawn timber cut into various sizes, was the same as the timber purchase by the dealers after felling them, for purposes of levy of purchase tax, under the Orissa Sales Tax Act.
25. Proviso to Section 8 of the Orissa Act, prohibited levy of tax on the same goods at more than one point in the same series of sales or purchase by the successive dealers. Relying upon this provision, it was contended before the High Court that the timber at the point of purchase cannot be subjected to tax, since timber purchased and sold was one and the same. This contention of the dealers was, upheld by the High Court.
26. While considering this contention in the appeals preferred by the State of Orissa, the Supreme Court observed : that the High Court had rejected the contention of the State, that timber and dressed or sized logs were different commercial commodities and that therefore sales tax could be levied on both, and that does not amount to double taxation. According to the High Court, they were the same commodity and therefore could not be subjected to sales tax at two points in the same series of sales.
27. Dealing with this contention in great detail under the hearing, "TIMBER AND LOGS", the Supreme Court considered various decisions relied upon by both - State of Orissa and the respondents-assessee, before it. The assessees' contention before the Supreme Court was that the timber purchased by them had been convertedinto sized and dressed logs and had paid the sales tax. According to them, timber purchase and timber sized or dressed were one and the same commercial commodity.
28. This contention had been upheld by the High Court as already stated. Therefore, the question before the Supreme Court was : whether this conclusion of the High Court was justified in law.
29. The Supreme Court considered and dealt with the decision of various High Courts taking differing views on this question. The two decisions which held against the assessees' contentions were :
(1) Shaw Bros. & Co. v. State of Bengal (14 S.T.C. 878), in which it has held by the Calcutta High Court that planks sawed out of logs are different things from logs and timber in its nascent state. The same learned Judge had held in another case reported in Baccha Tewari v. Divisional Forest Officer (14 S.T.C. 1064), that the chopping of timber into fire-wood involved manufacturing process and that, therefore, the imposition of tax on timber and on fire-wood manufactured from that timber did not amount to double taxation.
30. Dealing with these two decisions, the Supreme Court held that the question involved in those case was different and the Supreme Court observed thus :
"But even where the question is : whether a certain process has resulted in a manufacture, the resultant product must be a different commercial commodity and merely because certain articles are known by different names, it does not meant that they are different commercial commodities, if in fact, they are merely different forms of the same commodity."
For this proposition, their Lordships have referred to the decision in Tungabadra Industries Ltd., Kurnool v. C. T. O., Kurnool (1961 S.C. 412), known as the 'Vanaspathi case'.
31. It was held in that decision that hydrogenated ground-nut oil, commonly called as 'Vanaspathi' is ground-nut oil for purposes of levy under the Madras General Sales Tax Act. The Supreme Court further held that the processing of ground-nut oil to render it more acceptable to the customer by improving its quality would not render the oil a commodity other than ground-nut oil.
32. In State of Gujarath v. Sakarwala Bros. (19 S.T.C. 24) (S.C.), it was held that 'patasa', 'harda' and 'alchidana' were sugar in different forms and fell within the definition of sugar in Entry 47 of Schedule A to the Bombay Sales Tax Act, 1959.
33. A decision more relevant for the case before them was the decision of a Division Bench of the Madhya Pradesh High Court in Mohanlal Vishram v. Commissioner of Sales Tax, Madhya Pradesh, Indore (24 S.T.C. 101) wherein, it was held by the High Court that felling standing timber trees, cutting them and converting some of them into 'ballis', a dealer did not alter their character as timer or used them for manufacture of other goods within the meaning of Section 8(1) of the Madhya Pradesh Sales Tax Act, 1958.
34. Another decision equally relevant was the decision of Andhra Pradesh High Court in G. Ramaswamy and Others v. The State of Andhra Pradesh and others (32 S.T.C. 309), wherein, the High Court held as follows :-
"Merely because planks, rafters, cut sizes, etc., were sawn or cut from logs of wood, they did not alter their character and still continued to be raw materials which by themselves and in the same form could not be directly put to use for construction purposes and the logs of wood purchased by the assesses were merely cut or sawn to sizes for the sake of convenience and to make them acceptable to the customers and that by reason of this process they did not lose their character as timber."
The Division Bench of the Andhra Pradesh High Court after considering the usual tender notices for supply and the rules prepared by the Indian Standards Institution and other documents held, that even the cut sizes of timber were commodity known as timber in commercial field and that, therefore, both in the popular sense and in the commercial sense, the word "timber" had the same meaning.
35. The Supreme Court also referred its decision in Ganesh Trading Co., Karnal v. State of Haryana and another (1974 S.C. 1302), in which the commodity concerned was paddy and rice. It was held that paddy did not continue to be paddy after dehusking, paddy and rice are two different things, and it was further observed that what is relevant for purpose of sales tax is, how entries are understood in common parlance, specially in commercial circles.
36. The Court (Supreme Court) then considered the statutory definition of the term 'timber' since the Orissa Act did not define timber or logs. 'Timber' as defined in Orissa Forest Act, 1972, includes, trees fallen or felled and all wood cut-up or sawn.
37. Under the Madras Forest Act, "timber" as including "trees when they have fallen or have been felled, and all wood, whether cut up of fashioned or hollowed out for any purpose or not." The Indian Forest Act defines "timber" in identical terms. Under the Orissa Forest Produce (Control of Trade) Act, "timber" means "marketable wood, round, sawn or fashioned, straight piece of and above two metres in length, standing or felled (excluding fuel).
38. The definition of "timber" in the Forest Acts, referred to above, was referred by the Supreme Court, and in their view what was pertinent was that the cardinal concept that can be gathered from the various definitions stated above is timber is not merely felled trees.
39. Turning next to the dictionary meaning of the word 'timber' their Lordships observed that the dictionary meanings also largely coincides with the statutory meaning of timber. In this connection they referred to the Shorter Oxford Dictionary (third edition), 'timber' are building material generally; wood used for the building of houses, ships, etc., or for the use of the carpenter, joinder or other artisan.
40. In Concise Oxford Dictionary (6th edition), "Timber" means, "wood prepared for building, carpentry, etc., trees suitable for this; woods, forests, piece of wood, beam",.... "unhewn piece of felled trees, or similar rough mass of wood especially cut for firewood".
41. In Webster's Third New International Dictionary, "timber" is described as "wood used for or suitable for building (as a house or boat) or for carpentry or joindry".
42. In Webster's Collegiate Dictionary, "standing timber" means wood suitable for building houses, bridges, ships, etc.
43. The Supreme Court, therefore, held that having regard to the fact that sales of dressed or sized logs by the respondent-firm which had already been assessed to sales tax, the sales to the respondent-firm which has already been assessed to sales tax, the sales to the respondent-firm by the State Government cannot be subjected to tax under the Orissa Sales Tax Act over again.
44. The main question that arises for decision in these cases is as to the exigibility to duty under the Central Excises Act, in respect of sawn timber planks, rafters, etc. In order to attract the levy as 'excisable goods' under the Act, the goods must satisfy that the goods are a result of manufacture in a factory. "Manufacture" as understood and interpreted by the Supreme Court in several of its decisions which are referred to in detail in the course of this order implies bringing into existence a distinct new commodity. The taxable event under the Act is on the manufacture of goods. Therefore, the test that is relevant to be applied is : "whether a new and different commodity has come into existence ?"
45. According to the department, the conversion of logs into smaller sizes as a result of such a manufacture, and the planks, rafters and cut sizes sawn out of the logs, are different commodity. This argument is based on the assumption that the logs wood/timber undergoes a transformation as a result of labour and manipulation and a new and different article emerges out of such process. Further argument is that the planks, rafters and cut sizes have a distinct name, character or use in the commercial parlance.
46. Though the petitioners have approached this Court even before an adjudication is made by the authorities under the Act, it is strenuously contended by the learned Counsel for the petitioners is that in view of the position in law being more or less settled by the Supreme Court in earlier cases and in the latest decision in Titaghur Paper Mills' case, they should not be driven to agitate this matter before the various forums provided under the Act. It is also submitted that in view of the Trade Notice issued by the Collector of Central Excise, the authorities under the Act cannot take a different view and challenge to the order of the original authority before other appellate forums would be a futile exercise.
47. The Supreme Court went into both the aspects, namely : the real connotation and meaning of the term; 'manufacture', vis-a-vis the meaning of the term 'timber'. As to what is manufacture is settled by the various decisions of the Supreme Court which are already referred to.
48. As to how timber is to understood for the purpose of taxing it even after it was cut into sizes, was the subject-matter of the appeal before the Supreme Court. After elaborately dealing with the question, the Supreme Court held that timber includes, sized timber; planks, rafters, etc., and that even in commercial parlance they mean the same thing. It was also the view emphatically expressed by the Supreme Court.
49. The Point in controversy on the facts of the present case is : whether the sawn timber or cut sizes is the product of manufacture to attract the levy of excise duty ?
50. If timber even after it is cut and converted into smaller sizes, planks, beams, etc., continues to be timber and is not a different commodity commercially, whether it admits of a different interpretation for purposes of levy under the Central Excises Act ? If it is not a different commodity even after it is sawn and cut into smaller sizes then it does not satisfy the requirements of 'manufactured goods' as understood and interpreted by various decisions of the Supreme Court.
51. Therefore, considering every aspect of the case and the point raised by the petitioners and having regard to the enunciation of the law with reference to the connotation of the term 'timber' as considered by the Supreme Court in Titaghur Paper Mills' case, I am of the opinion that this is a fit case for interference even at the stage of show cause notice which the High Court is normally reluctant to do so. The conclusions reached by the Supreme Court in Titaghur Paper Mills' case, which arose under the Orissa Sales Tax Act, are, in my opinion, applicable to these cases arising under the Central Excises Act. The observations made by the Supreme Court and the guidelines given in the said judgment as regards the correct understanding and the meaning of 'timber' in its diverse aspects are appropriately pressed by the petitioners for my acceptance.
52. The subject-matter of controversy both that arose in the appeals before the Supreme Court in Titaghur Paper Mills case, and in these cases, is substantially the same, namely, whether 'timber' includes, sawn/sized timber, etc.
53. In the light of the Supreme Court decision, the contentions put forward by the petitioners should prevail.
54. In the result, the impugned show cause notices issued in each of the writ petitions are liable to be quashed. It is, therefore, ordered accordingly and the Rule issued in each of the cases is made absolute.