Bombay High Court
Commissioner Of Sales Tax, Maharashtra ... vs Ruby Surgical And Allied Products ... on 5 October, 1996
Author: D.G. Deshpande
Bench: D.G. Deshpande
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 61(1) of the Bombay Sales Tax Act, 1959, made at the instance of the Revenue, the Maharashtra Sales Tax Tribunal has referred the following question of law to this Court for opinion :
"Whether, on the facts and circumstances of the case, the Tribunal was correct in law in holding that absorbent cotton wool I.P. was in its unmanufactured state and was thus covered by entry 2 of Schedule B to the Act by virtue of rule 3(xviii) of the Bombay Sales Tax Rules, 1959."
The material facts are as under :
The assessee, who is a registered dealer under the Bombay Sales Tax Act, 1959 ("the Act") sells and supplies absorbent cotton wool. He made an application to the Commissioner of Sales Tax, Maharashtra State, Bombay, under section 52 of the Act for determination of the rate of tax payable under the Act on the sale of absorbent cotton wool made by him. Before the Commissioner, the assessee described the process applied to cotton for converting it into absorbent cotton wool as follows :
"The broken seed leaf and dirt in raw cotton are removed and the opened cotton is boiled with caustic soda and soda ash. As a result, fats and waxes are removed from cotton. The cotton is then bleached to white colour. The water in the cotton is removed by pressing it through the hydro/extractor machine. The cotton that comes out is in the form of lumps and hence lumps are opened in the wet cotton opener machine. The opened cotton is then dried and the dried cotton is taken in blow room where cotton laps are prepared. The cotton laps are carded and the carded laps are rolled, cut, weighed, labelled and sealed in plastic bags for marketing."
The case of the assessee was that absorbent cotton wool was nothing but cotton in its unmanufactured state and hence it should fall under entry 2 of Schedule B to the Act. Entry 2 of Schedule B, at the material time, was as follows :
"SCHEDULE B (See sections 7, 13 and 14) Declared goods, the sales or purchase of which is subject to sales tax or purchase tax and the rate of tax.
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Sl. Description of goods Rate of Rate of No. sales tax purchase tax
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2 Cotton, that is to say, all kinds 4% 4%"
of cotton (indigenous or imported) in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise, but not including cotton waste.
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2. The Commissioner did not agree with the contention of the assessee and held that absorbent cotton wool did not fall under the above entry and hence, sales thereof were exigible to tax at the rate of 10 per cent as a residuary item under entry 102 of Part II of Schedule "C" to the Act at the rate of 10 per cent. While arriving at the above conclusion, the Commissioner relied upon the decision of this Court in Commissioner of Sales Tax v. Fairdeal Corporation Ltd. [1962] 13 STC 750 and the decision of the Madras High Court in Sri Ram Products v. State of Tamil Nadu [1983] 52 STC 187. Aggrieved by the above decision of the Commissioner, the assessee appealed to the Maharashtra Sales Tax Tribunal ("Tribunal"). The Tribunal held that absorbent cotton wool was "cotton" within the meaning of entry 2 of Schedule B to the Act and hence it was taxable at the rate of 4 per cent. The Tribunal distinguished the decisions of this Court and the Madras High Court referred to above and allowed the appeal of the assessee. The Revenue sought for reference of the question as to whether "absorbent cotton wool" was "cotton" within the meaning of entry 2 of Schedule B to the Act to this Court. Hence this reference at the instance of Revenue.
3. We have heard Mr. M. D. Siodia, learned counsel for the Revenue, who submits that absorbent cotton wool is not cotton in its unmanufactured state as the process undertaken by the assessee to convert cotton into absorbent cotton wool amounts to manufacture. In support of this contention, reliance is placed on the wide phraseology used in the definition of "manufacture" contained in section 2(17) of the Act. The case of the Revenue, in other words, is that cotton ceases to be cotton and becomes a different marketable commodity once it is converted into absorbent cotton wool. According to the Revenue, the use to which the absorbent cotton wool is normally put is different from the use to which ordinary cotton is put.
4. We have also heard Mr. J. K. Sheth, learned counsel for the assessee, who submits that absorbent cotton wool is nothing but cotton. Mr. Sheth further submits that the process applied to raw cotton to convert the same into absorbent cotton wool cannot be regarded as a process of manufacture because cotton remains cotton in its unmanufactured state even after the same is processed to make it fit for a particular use. According to the learned counsel, no new commercial product comes into existence as a result of the process applied by the assessee to raw cotton to convert it into absorbent cotton wool. Reliance is placed in support of this contention on the decision of the Supreme Court in Alladi Venkateswarlu v. Government of Andhra pradesh and the decisions of this Court in Commissioner of Sales Tax v. Rajshree Electronics [1995] 98 STC 403, Commissioner of Sales Tax v. Abhaykumar and Co. [1995] 98 STC 212, Commissioner of Sales Tax v. Mahalaxmi Stores [1995] 97 STC 601 and Technova Graphic Systems Private Limited v. Commissioner of Sales Tax [1995] 99 STC 77. The case of the assessee is that every process undertaken by the assessee on the goods to make them fit for the market or for improving their marketability does not amount to a process of manufacture and the product emerging as a result of such process cannot be regarded as a manufactured product different and distinct from the product which is processed. Reliance is also placed on rule 3(xviii) of the Bombay Sales Tax Rules, 1959, in support of this contention.
5. We have carefully considered the rival submissions. We have perused entry 2 of Schedule B to the Act which deals with "cotton". The scope and ambit of this entry has been made clear by the Legislature itself by describing "cotton" to mean all kinds of cotton (indigenous or imported) in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise. The only exception is cotton waste.
6. The expression "all kinds of cotton" is wide enough to include cotton in all its forms. It cannot be construed to mean "cotton of all varieties" because that would be so ever without the addition of the words "all kinds of cotton". The only exclusion is manufactured cotton. As a result, all forms of cotton will fall under this entry. The question that arises for consideration is what is "manufactured cotton" or, in other words, when cotton can be said to be in its unmanufactured state. It is well-settled by a catena of decisions of the Supreme Court and this Court that every process undertaken by a dealer on the goods to make them fit for the market or for improving their marketability does not amount to a process of manufacture. "Manufacture" implies a change but every change is not "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 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 recognized in the trade as a new and distinct commodity. Where the commodity retains substantial identity through the process stage, it cannot be said that it has been manufactured. It remains despite such process in its unmanufactured state.
7. It is equally well-settled that by defining the expression "manufacture" to mean certain activities which may not amount to manufacture, the meaning of the expression "manufacture" cannot be widened. The Supreme Court had occasion in State of Maharashtra v. Shiv Datt & Sons (1992) 84 STC 497 to consider the definition of manufacture contained in section 2(17) of this Act which is couched in the widest possible language to mean, "Producing, making, extracting, altering ornamenting, finishing or otherwise processing, treating, or adapting any goods except such manufactures or manufacturing process as may be prescribed."
The contention of the Revenue before the Supreme Court in the above case, State of Maharashtra v. Shiv Datt & Sons [1992] 84 STC 497, was that the definition of "manufacture" in section 2(17) of this Act being very wide and unrestricted any process with reference to the goods purchased will, according to the definition, amount to a process of manufacture and consequently render the goods of a different class altogether. The Supreme Court repelled this contention of the Revenue and held that that was not the intention of the Legislature. The Supreme Court emphasised the necessity of interpreting the expression "manufacture" in a practical and workable manner and observed that the mere fact that the words used in the definition of "manufacture" are very wide cannot lead one to so widely interpret them as to render the provision practically meaningless and so as to treat the goods sold as different merely because some slight additions or changes are made in the goods. It was further observed that the section should be so interpreted to mean only such of the various processes referred to in the definition and applied to the goods as are of such a character as to have an impact on the nature of the goods. The Supreme Court read down the scope of the words used by the Legislature in section 2(17) of this Act and held that for the purposes of the definition there should be some alteration in the nature or character of the goods.
8. There are a number of other decisions of the Supreme Court where also a distinction has been drawn between a "process" and a "process of manufacture" and it has been held that it is only when the change as a result of a particular process takes the commodity to a point where it can be no longer regarded as the original commodity but it recognized as a new and distinctive commodity that a manufacture can be said to have been taken place. Reference may be made in this connection to the decision of the Supreme Court in Deputy Commissioner of Sales Tax v. Pio Food Packers [1980] 46 STC 63 where it was held that preparation of pineapple slices for sale in sealed cans does not amount to manufacture because despite the processing involved in preparing pineapple slices from the original fruit, the commodity continued to possess its original identity, notwithstanding the removal of inedible portions, the slicing and thereafter canning it or adding sugar to preserve it. In Sterling Foods v. State of Karnataka [1986] 63 STC 239 the Supreme Court held that processing and freezing shrimps, prawns and lobsters did not amount to "manufacture". It was observed that when raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and become another distinctive commodity. In common parlance they are known as shrimps, prawns and lobsters. While saying so the Supreme Court took note of the fact that the processed shrimps, prawns and lobsters were the result of subjecting raw shrimps, prawns and lobsters to a certain degree of processing. Despite that the Supreme Court held that they continued to possess their original character and identity notwithstanding the process undertaken on them to make them fit for the table. It was, therefore, held that the processing and freezing of prawns was not a process of manufacture.
9. It may be expedient in this connection to refer to the decision of the Supreme Court in Alladi Venkateswarlu v. Government of Andhra Pradesh [1978] 41 STC 394 where "rice" was held to include "parched rice" and "puffed rice". In the above case, it was observed (at page 397) :
"The term 'rice' is wide enough to include rice in its various forms whether edible or inedible. Rice in the form of grain is not edible. Parched rice and puffed rice are edible. But, the entry 'rice' seems to us to cover both forms of rice. At any rate, it is wide enough to cover them."
While saying so the Supreme Court observed :
"Even if parched rice and puffed rice could be looked upon as separate in commercial character from rice as grain offered for sale in a market, yet.......it could not be presumed that it was intended to exclude from entry ........ 'rice', which, at any rate, had not so changed its identity as not to be describable as 'rice' at all."
10. Reference may also be made in this connection to some of the recent decisions of this Court where the meaning of the expression "manufacture" came up for consideration. In Commissioner of Sales Tax v. Rajshree Electronics [1995] 98 STC 403 (Bom), a controversy arose whether the recording of songs and programmes on cassette tapes amounted to a process of manufacture. This Court held that it did not amount to "manufacture". While saying so, it was observed :
"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 new and distinct commodity that a manufacture can be said to take place......... Where the commodity retains a continuing substantial identity through the processing stage, it cannot be said that there has been a 'manufacture'."
The legal position was summed up by this Court thus :
"(i) Manufacture implies a change, but every change is not manufacture. Something more is necessary. There must be transformation and a new different article must emerge, having a distinctive name, character or use. (ii) The true test for determining whether manufacture can be said to have 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. (iii) Where the commodity retains a continuing substantial identity through the processing stage, it cannot be said that it has been manufactured."
11. Reference may also be made to the following observations of this Court in Technova Graphic Systems Private Limited v. Commissioner of Sales Tax [1995] 99 STC 77 :
"..........it is now well-settled that though manufacture implies a change, every change is not manufacture. It is only when the change or a series of changes take a commodity to a point where commercially it can no longer be regarded as the original commodity but instead recognised as a distinct article that manufacture can be said to take place. Where the commodity retains a continuing substantial identity through the processing state, no manufacture can be said to have taken place. The principle that has to be applied in all such cases is whether commercially different and distinct article has come into existence as a result of the processing of the original commodity. In other words, whether the article produced is regarded in the trade by those who deal in it as distinct in identity from the commodity involved in processing."
12. Applying the ratio of the above decisions, it is clear that cotton which had been specifically defined to mean all kinds of cotton, whether ginned or unginned, would include absorbent cotton wool. Absorbent cotton wool does not cease to be cotton merely because it is prepared by cleaning, ginning, drying and sterilizing. Despite all that it retains its essential character of "cotton". It has therefore to be regarded as a "kind of cotton" within the meaning of entry 2 of Schedule B to the Act. The expression "all kinds of cotton" cannot be construed to refer only to various varieties of cotton because that would be implied by the mere use of the expression "cotton". It would take within its ambit all forms which cotton may take so long as they do not altogether lose the original shape or character of cotton. In the instant case, absorbent cotton wool does not lose its original shape or character of cotton. It is only a variety of cotton processed to make it more suitable for certain purposes. In common parlance, it is nothing but "cotton". Despite the process undertaken on cotton to get absorbent cotton wool, cotton does not cease to be cotton. That being so, in our opinion, absorbent cotton wool would fall under entry 2 of Schedule B to the Act.
13. We have carefully considered the decision of the Madras High Court in Sri Ram Products v. State of Tamil Nadu [1983] 52 STC 187, on which reliance has been placed by the learned counsel for the Revenue. We, however, find that the said decision has no application to the facts of the present case. In that case, there was a specific entry which included "surgical dressings" and it was in that view of the matter that it was held that absorbent cotton wool would fall under that specific entry and not under general entry of "cotton". Similarly, in Commissioner of Sales Tax v. Fairdeal Corporation Ltd. [1962] 13 STC 750 (Bom), absorbent cotton wool was held by this Court not to fall under item 1 of Schedule B of the Bombay Sales Tax Act, 1959 because the said entry read : "Raw cotton (whether ginned or unginned)". It was held that absorbent cotton wool is not "raw cotton". But entry 2 of Schedule B is not confined to raw cotton.
14. In view of the above construction placed by us on the expression "manufacture" it is necessary to rely upon clause (xviii) of rule 3 of the Bombay Sales Tax Rules, 1959, which reads :
"3. Processes not included in 'manufacture'. - For the purposes of clause (17) of section 2 'manufacture' shall not include the following manufacture and manufacturing process, namely, .........
(xviii) subjecting the goods specified in any entry in Schedule B to any process or doing anything to them, which does not take them out of the description thereof in that entry."
The above rule merely supports the well recognised interpretation of the expression "manufacture". In effect, this clause is merely clarificatory in nature.
15. In view of the above, the question referred to us is answered in the affirmative and in favour of the assessee and against the revenue.
16. This reference is disposed of accordingly. In the facts and circumstances of the case, there shall be no order as to costs.
17. Reference disposed of accordingly.