Karnataka High Court
Habeeb Proteins And Fats Extracts vs The Commissioner Of Commercial Taxes ... on 19 January, 2005
Equivalent citations: ILR2005KAR1804, 2005 AIR - KANT. H. C. R. 475, (2005) 58 KANTLJ(TRIB) 155
Author: H.L. Dattu
Bench: H.L. Dattu, A.C. Kabbin
ORDER H.L. Dattu, J.
1. The appellant is a partnership firm and a dealer registered under the provisions of the Karnataka Sales Tax Act, 1957 (KST Act for short). It is engaged in the process of extracting solvent oil from oil cake and soyabean seeds. In the course of its business activity, the appellant has purchased, both from registered and unregistered dealers sunflower oil cake, groundnut oil cake and soyabean seeds and consumed in the production of de-oiled sunflower oil cake, groundnut oil cake etc., for sale. The purchases made from unregistered dealers, who are not liable to pay tax under the Act was to the tune of Rs. 81,39,300/- and Rs. 9,51,000/- respectively. The dealer had filed its annual returns in form-4 before the assessing authority claiming exemption on the purchase turnover of sunflower oil cake, groundnut oil cake and soyabean seeds from unregistered dealers, on the ground that the extraction of solvent oil out of oil cake and soyabean seeds does not amount to manufacture and the resultant product namely de-oiled sunflower oil cake and de-oiled groundnut oil cake are not new commercial commodities even in commercial circles nor in common parlance. The assessing authority while computing the tax liability of the assessee for the assessment year 1993-1994 has rejected the claim of the appellant and has levied purchase tax under Section 6 of the Act, on the ground that the oiled sunflower cake and groundnut oiled cake are consumed to bring into existence a new commercial commodity and are capable of being sold or supplied as de-oiled sunflower oil cake and de-oiled groundnut oil cake.
2. The dealer being aggrieved by the said order of assessment, wherein the assessing authority had levied purchase tax on the purchase of oiled sunflower cake and oiled groundnut cake made from unregistered dealer, had carried the matter before the first appellate authority by filing an appeal under Section 20 of the KST Act. The primary ground urged in the appeal on the findings of the assessing authority on this aspect of the matter, was that the process of extraction of solvent oil out of oil cake and soyabean seeds does not amount to manufacture and it is a simple process of extracting oil from the cake and soyabean seeds. The de-oiled cake and de-oiled soyabean seeds are nothing but oil cake and soyabean seeds. The assessee had also placed reliance on the clarification issued by the Commissioner of Commercial Taxes in No. CLR CR 378/89-90, dated 6-11-1989 and the decision of the Karnataka Appellate Tribunal in STA Nos. 923 and 924/1992 and 318/1993 decided on 16-2-1995.
3. The first appellate authority after affording an opportunity of hearing to the appellant, apart from other issues, had also framed the following issue for his consideration and decision. The issue is:
"Whether on the facts and circumstances of the case, the assessing authority is justified in levying tax under Section 6 of the Act on the purchase turnover of sunflower oil cake and groundnut oil cake amounting to Rs. 81,39,300.00 purchased from persons other than registered dealers and used in the process of extraction of solvent oil?"
While answering this issue, the first appellate authority relying on the observations made by the Madras High Court in the case of S. Viswanathan v. State of Tamilnadu and Ors. - 100 STC 76, has come to the conclusion that the oil cakes used in the process of extraction of solvent oil do not lose their main character and use and therefore, the oil cake and de-oiled cake are considered as one and the same commodity. The first appellate authority further observes in his order, that the oil cake and the de-oiled cake are understood as one and the same commodity even in common or commercial parlance. If at all there is any difference between the two, it may be only in respect of oil content therein and therefore, the oil cake or de-oiled cake are still oil cake irrespective of the oil content therein and the oil content may vary and this variation itself does not distinguish one from the other and that therefore, the de-oiled cal(sic) continues to be oil cake inspite of undergoing sonic degrees of processing in the extraction of solvent oil. Lastly, while obtaining the de-oiled cake, no manufacturing activity is involved and in other words, the oil cake is not consumed in the process of extraction of solvent oil and therefore, the levy of purchase tax under Section 6 of the Act on the purchase turnover of sunflower oil cake and groundnut oil cake amounting to Rs. 81,39,300/- from unregistered dealers is illegal and contrary to the provisions of the Act.
4. The revisional authority being of the view that the order passed by the first appellate authority in the appellant's case are erroneous and prejudicial to the interest of the revenue, after notice to the assessee, has set aside the order passed by the first appellate authority and has confirmed the order passed by the assessing authority in levying purchase tax on the purchase turnover of sunflower oil cake and groundnut oil cake purchased from persons other than registered dealers. To come to this conclusion, the revisional authority has relied on the amendment made to Section 6 of the Act by Karnataka Amendment Act No. 8 of 1989 which is given effect to from 8-9-1998; and according to him, the condition mentioned in Section 6(a) of the Act has enlarged the scope of Section 6 of the Act so as to include cases where the dealer consumes goods otherwise than by way of manufacture. Further, the revisional authority has observed in his order, than in view of the amendment by Act No. 8/1989 to Section 6 of the Act, the process of manufacture is no longer the decisive factor or the criteria and it will suffice, if the goods purchased are captively consumed either in a manufacturing process or otherwise. It is the correctness or otherwise of the order passed by the revisional. authority that is the subject matter of this sales tax appeal filed under Section 24(1) of the Act.
5. The question of law raised for our consideration and decision in this appeal is, whether the revisional authority was justified in levying purchase tax on the purchase turnover of Sunflower Oil cake and Groundnut oil cake purchased from persons other than the registered dealers and used in the process of extraction of sol vent oil.
6. The learned Counsel Sri Krishna appearing for the appellant contended that the sunflower oil cake and groundnut oil cake purchased by the appellant are not exigible to levy of purchase tax under Section 6 of the Act, since the goods purchased by the appellant are not consumed in the manufacture of other goods or consumed otherwise. The oil cake used in the process of extraction of solvent oil does not lose its main character, identity and use and therefore, the oil cake and de-oiled cake arc one and the same. In aid of his submission, the learned Counsel relies on the observations made by this Court in the case of OIL SEEDS, OIL TRADE AND INDUSTRIES ASSOCIATION AND ANR. v. STATE OF KARNATAKA AND ORS., (1993) 111 STC 234 VISHISTA SOLVENT OIL PRIVATE LIMITED v. DEPUTY COMMISSIONER OF COMMERCIAL TAXES (ADMINISTRATION) TUMKUR AND ANR., (2001) 121 STC 492 and the decision of the Madras High Court in the case of S. VISWANATHAN v. STATE OF TAMILNADU, (1996) 100 STC 76 and the decision of the Orissa High Court in the case of Halari Store v. Commissioner of Sales Tax, Orissa and Anr., (1996) 103 STC 26.
7. Per Contra, Sri Anand, learned Government Advocate submitted that the appellant purchases oil cake from unregistered dealers, who are not liable to pay sales tax and consumes in the process of obtaining solvent oil and since the oil cake is consumed in the manufacture of other goods for sale, the ingredients of Section 6 of the Act are attached. In aid of his submission, the learned Government Advocate relies on the observations made by the Apex Court in the case of DEWDAS GOPALA KRISHNA v. STATE OF PUNJAB, STATE OF KARNATAKA v. RAGHURAMA SHETTY, . STATE OF A.P. AND ORS. v. M/S MODERN PROTEINS LIMITED, 1994 Suppl.(2) SCC 496. UNION OF INDIA AND ANR. v. V.M. SALGAONKAR AND BROTHERS (P) LIMITED AND ORS., (1998) 4 SCC 263 and the decision of this Court in the case of J.S. AUTO MACHINESHOP v. STATE OF KARNATAKA AND ANR., (1993) 90 STC 121 and the decision of the Supreme Court in the case of B.R OIL MILLS LIMITED v. SALES TAX TRIBUNAL AND ORS., (1998) 111 STC 188.
8. The question that requires to be considered and decided by this Court is whether the sunflower oil cake and groundnut oil cake are consumed in the manufacture of other goods for sale or otherwise, or consumed otherwise to attract levy of purchase tax under Section 6 of the Act?
9. Section 9 of the Act has undergone several amendments and during the relevant assessment year, the material portion of Section 6 of the Act read as under:
"Section 6; Levy of purchase tax under certain circumstances: Subject to the provisions of Sub-section (5) of Section 5, every dealer who in the course of his business purchases any taxable goods in circumstances no tax under Section 5 is leviable on the sale price of such goods, and (I) either consumes such goods in the manufacture of other goods for sale or otherwise or consumes otherwise, or disposes of such goods in any manner other than by way of sale in the State, or (II) dispatches them to place outside the State except as a direct result of sale or purchase in the course of interstate trade or commerce;
shall be liable to pay tax on the purchase price of such goods at the same rate at which it would have been leviable on the sale price of such goods under Section 5."
10. Prior to amendment by Karnataka Act No. 8 of 1989, which is given effect to from 8-9-1988, the Section dealt with levy of purchase tax in the following circumstances, namely, when a dealer purchases in the courses of his business taxable goods in circumstances in which no tax under Section 5 of the Act is leviable on the sale price of such goods; when the dealer consumes such goods in the manufacture of other goods for sale; when the dealer otherwise disposes of such goods in any other manner than by way of sale within the State; and when the dealer dispatches the goods to a place outside the State, except as a direct result of sale or purchase in the course of interstate trade or commerce.
By Karnataka Act No. 8 of 1989, which is given effect to from 8-9-1988, condition mentioned in Section 6(a) of the Act has been expanded. In view of this amendment, every dealer who in the course of his business purchases any taxable goods in circumstances in which no tax under Section 5 is leviable on the sale price of such goods "consumes" such goods, the levy under Section 6 of the Act is attracted. The effect of this amendment is that the presence of manufacturing process is no longer the decisive criteria or factor and it will suffice if the goods purchased are captively consumed either in the manufacture of other goods for sale or consumed otherwise.
11. The words 'consumption', 'manufacture' and 'consumes otherwise' seem to be key words which would eventually decide the issue raised in this appeal by the asessee/dealer.
12. Sri K. Krishna, learned Counsel for the appellant has brought to our notice the interpretation placed by this Court and other High Courts on the meaning of the expression 'consumption'. In Re. S. Viswana than v. State of Tamilnadu - (1996) 100 STC 76, a Division Bench of Madras High Court has observed that in order to attract the levy of purchase tax under Section 7A of the Tamil Nadu General Sales Tax Act., 1959, the goods purchased should have been consumed or devourced or exhausted in the process of manufacturing with the result the identity of the goods is completely lost. So Song as the identity of the goods remains the same, the goods purchased and used in the manufacture of some other goods would not be said to have been consumed in the process of manufacture of other goods.
13. In Oil Seeds, Oil Trade and Industries Association's case (1998) 111 STC 234, a learned Single Judge of this Court had an occassion to consider whether rice bran and de-oiled rice bran cake are one and the same or different commodities. Parties before the Court had made available to the Court a report of the Central Poultry Training Institute, Bangalore, in regard to nee bran and de-oiled rice bran. After a detailed consideration, the Court has come to the conclusion that, the de-oiled rice bran cake does not loose the character of rice bran and as such the de-oiled rice bran cake continues to remain the same even after oil is extracted from it and that the oil which may not be helpful ingredient for the manufacture of the cattle feed is removed, so as to make a rice bran useful for manufacturing cattle feed and therefore, it is not a case of transforming in to some other commodity.
14. Sri Anand, learned Government Advocate appearing for the revenue while supporting the findings and conclusion reached by the revisional authority has relied on the observations made by the Apex Court and this Court.
In RE. M/S DEVIDAS GOPAL KRISHNAN v. STATE OF PUNJAB, the issue was whether conversion of oil seeds into oil, is a manufacturing activity or not. While answering this issue, the Court was pleased to observe, that, when oil is produced out of oil seeds there is a process of transformation of raw material into different article for use and therefore, it is a manufacturing activity.
15. In STATE OF KARNATAKA v. RAGHURAM SHETTY, it was a case where the sales of paddy which is a taxable commodity in favour of the Rice Millers did not suffer tax under Section 5 of the Act and when the miller purchases it for converting into rice for sale, whether the provisions of Section 6(1) of the KST Act is attracted or not was the question before the Apex Court. While answering the point at issue, the Court has stated that the case of the millers would squarely fall under Section 6(1) of the Act since the miller consumes paddy in the manufactures of rice, which is a different commodity. Consequently, millers would be liable to pay purchase tax on their turnover of purchase of paddy.
16. In STATE OF A.P. AND ORS. v. M/S MODERN PROTEINS LIMITED, 1994 Suppl. (2) SCC 496 the question before the Court was whether the groundnut protein flour is the same as de-oiled groundnut cake. The Supreme Court after considering the report of the Analyst was pleased to observe that both de-oiled cake and groundnut protein flour contain common properties but the use and purpose being different and distinct, they cannot be considered to be the same commodity. The groundnut protein flour is an edible protein food for human consumption and is different commercially marketable entity and thereby is distinct from de-oiled cake for animal feed though obtained in the course of same process at different stages. Both emerge into different and distinct commodities commercially known in the common parlance for distinct and different use. Thereby groundnut protein flour did not remain part of the genus i.e. de-oiled cake but became a new and a different entity known in the commercial parlance. The Court went on to make further observation that the Sales Tax Law is intended to tax sale or supply of different commodities and not to tax the production or manufacture of particular substance out of which the commodities may have been made. As soon as a separate commercial commodity comes into existence or emerges from production or manufacture, it becomes a separately taxable entity or goods for the purpose of sales tax. When commercial goods without change of their identity as such goods, are merely subjected to some processing or finishing or are merely joined together, they remain commercially known as same goods and cannot be taxed again in a series of sales so long as they retain their identity as goods of a particular original type.
17. In UNION OF INDIA v. SALGAONKAR AND BROTHERS, (1998) 4 SCC 263 the expression 'consumption' came up for consideration before the Apex Court and in that decision, the Court was pleased to explain the meaning of 'consumption' as under:
"The word 'consumption' may involve in the narrow sense using the article to such an extent as to reach the stage of its non-existence. But the word 'consumption' in Fiscal Law need not be confined to such a narrow meaning. It has a wider meaning in which any sort of utilisation of the commodity would as well amount to consumption of the article, albeit that article retaining its identity even after its use".
18. IN RE. J.S. AUTO MACHINE SHOP v. STATE OF KARANTAKA, (1993) 90 STC 121 the subject matter before the Division Bench of this Court was under the provisions of the Karnataka Tax on Entry of Goods Act and the expression which came up for consideration was the word 'use' and the Court after a detailed consideration of the case law on the point was pleased to hold that the expression 'use does not necessarily mean 'used up'.
19. In B.P. OIL MILLS LIMITED v. SALES TAX TRIBUNAL AND ORS., (1998) 111 STC 188 the question before the Court was whether the crude oil purchased by dealer and converted into refined oil and sold would attract sales tax under the provisions of U.P. Trade Tax Act. The Act provides for the definition of 'manufacture' which would include 'processing' and in view of the definition of 'manufacture', the Court was pleased to hold that where any commodity is subjected to a process or treatment with a view to its development or preparation for the market, it would amount to processing and therefore, the nature and extent of the process to which crude oil is subjected to make it refined oil bring the latter within the meaning of the expression 'goods manufactured' and a dealer who purchases crude oil paying tax on the purchase thereof and converts it into refined oil is liable to pay tax on the sale of refined oil.
20. The expression 'consumed otherwise' came up for interpretation before the SUPREME COURT IN THE CASE OF ASSISTANT COMMISSIONER (INTELLIGENCE) v. NANDANAM CONSTRUCTION COMPANY, (1999) 115 STC 427 The Court has observed:
"The intention of the legislature, it appears to us is to bring to purchase tax in either event of consumption of goods in the manufacture of goods for sale or consumption of goods in any other manner. Once the goods are utilised in the construction of buildings the goods cease to exist or cease to be available in that form for sale or purchase so as to attract the tax and therefore, the correct meaning to be attributed to the said provision would be that tax will be attracted when such goods are consumed in the manufacture of other goods or otherwise."
21. A large number of case laws are available on the issues which we have proposed as "points at issue" for our consideration and decision. We do not propose to lengthen this judgment by quoting extensively from those case laws. We believe that the following summary of the relevant principles is sufficient to answer the issue.
22. The word 'consume' contemplates the complete exhaustion of the purchased goods. Alternatively, the conversion of a commodity into a different commercial commodity by subjecting it to some processing is consumption of the former commodity. The 'consumption' in the true economic sense does not mean only use of goods in the production of consumer goods or final utilisation of consumer goods by consumers. It also means 'used up', 'spend', etc. The goods purchased should be consumed, the consumption should be in the process of manufacture, and the result must be the manufacture of other goods. There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture, and where there is no essential difference in identity between the original commodity and the processed article, it is not correct to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, processed commodity must be regarded as still retaining its original identity.
23. Manufacture implies a change but every change is not a manufacture. Something more is necessary. There must be a transformation as a result of the process undertaken on the product and a new and different article having a distinctive name or character must emerge. The true test for determining whether a manufacture has taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. The difference between 'processing and 'manufacture' is by now well understood and well recognised. 'Processing' means subjecting a commodity to a process or treatment so as to develop it or make it fit for market. With each process, the original commodity undergoes a change. But it is only when the change takes the commodity to a point where it can be no longer regarded as the original commodity but is recognised in the trade as a new and distinct commodity that a manufacture can be said to take place. Where the commodity retains a continuing substantial identity through a processing stage, it cannot be said that there has been a manufacture.
24. The expression "consumed otherwise" can only mean when the goods cease to exist in the original form or used up or spent itself wholly.
25. In the case on hand, the Revisional Authority has taken exception to the order passed by the Appellate Authority on the ground that in view of the amendment to Section 6 of the Act by Karnataka Amendment Act 8 of 1989, the legislature has inserted the expression "or consume otherwise" immediately after the words either consumes such goods in the manufacture of other goods for sale or otherwise and the effect of this amendment is that the manufacturing process is no longer the decisive criteria and it will suffice if the goods are captively consumed either in the manufacturing process or otherwise. This reasoning of finding of the Revisional Authority is no more a correct thinking in view of the law declared by the Apex Court in the case of ASSISTANT COMMISSIONER (INTELLIGENCE) v. NANDANAM CONSTRUCTION COMPANY, (1999) 115 STC 427 wherein a larger Bench of the Supreme Court while interpreting a provision in Andhra Pradesh Sales Tax Act, 1957, which is akin to Section 6 of the Karnataka Sales Tax Act, 1957, has held "that the intention of the legislature is to bring to purchase tax in either event of consumption of goods in the manufacture of other goods or consumption of goods in any other manner, i.e., once the goods are utilised the goods cease to exist or cease to be available in the same form for sale or purchase so as to attract purchase tax. Therefore, there was no error which was prejudicial to the interest of the State revenue in the orders passed by the Appellate Authority and therefore, the Revisional Authority could not have invoked his suo-motu revisional jurisdiction to revise the orders passed by the Appellate Authority. It is now well settled that the power under Section 22A(1) of the Act can be exercised either by the Commissioner or Additional Commissioner only if the order passed by their subordinate Officer is erroneous and if it is prejudicial to the interest of the State's revenue. Since the order passed by the Appellate Authority is in accordance with law laid down by the Apex Court, the order so made cannot be construed as erroneous and prejudicial to the interest of the revenue. Therefore, firstly the Revisional Authority could not have invoked his suo-motu powers to set aside an order which is not erroneous and prejudicial to the interest of the revenue.
26. Secondly, the learned counsel for the parties have not placed any material before us to demonstrate how the sunflower oil cake and groundnut oil cake are in any way different from de-oiled sunflower cake and groundnut oil cake. Therefore, the only way we need to understand these commodities is the way in which they are understood in common parlance and in trade circles. The oil cake contains a certain percentage of oil and several other ingredients. When these commodities are subjected to processing of extraction of oil, some quantum of oil is removed, but they continue to remain as oil cakes with lesser content of oil, and the original commodity is not used in the manner as to cease to exist or cease to be available in that form for sale or purchase to attract levy of tax under Section 6 of the Act. An article which is commonly and generally known as oil cake would not loose its identity merely because the purchasing dealer utilises the same for extraction of oil and therefore, the essential ingredients required to attract the levy of purchase tax under Section 6 of the Act are not satisfied and accordingly it requires to be held that there is no consumption of oiled sunflower cake and oiled groundnut oil cake in the manufacture of other goods for sale nor there is any consumption otherwise, since even after extraction of oil, the oiled sunflower cake and oiled groundnut oil cake continued to remain as oil cake with lesser quantity of oil and therefore they continue to remain the same commodity.
27. In view of the above discussion, we cannot sustain the order passed by the Revisional Authority in SMR No. 37/96-97 dated 7-5-1997 and the same requires to be set aside. Accordingly, the following:
ORDER I. Appeal is allowed.
II. The impugned order passed by the Revisional Authority in SMR. No. 37/1996-97 dated 7-5-1997 is set aside.
III. The order passed by the First Appellate Authority in No. KST AP29/96-97, dated 20-1-1997 is restored. Ordered accordingly.