Karnataka High Court
Poonam Stone Processing Industries vs Deputy Commissioner Of Commercial ... on 3 December, 1993
Equivalent citations: [1994]94STC183(KAR)
JUDGMENT K. Shivashankar Bhat, J.
1. Petitioners have set up a small-scale industrial unit in tiny sector for the purpose of stone polishing, high polishing and stone cutting. A provisional registration certificate was issued on September 11, 1987. S.S.I. certificate was obtained on February 18, 1988. Petitioners claim the benefit of a notification dated March 31, 1983 issued under section 8-A(1)(b) of the Karnataka Sales Tax Act, 1957 ("the Act", for short). Under the said notification the Government exempted the tax payable under the Act on the turnover of goods manufactured in Karnataka and sold by all tiny sector industrial units for a period of 5 years from the respective date of commencement of the commercial production, subject to certain restrictions and conditions, with which we are not concerned here. However, condition (viii) states that industry should not be one specified in the appendix to the notification. Appendix does not refer to the industry of the petitioner. In the year 1985 the Deputy Commissioner of Commercial Taxes issued a clarification, obviously on the basis of a letter of the Commissioner stating that the petitioners were eligible for the exemption as per the said notification of March 31, 1983. In the appendix thirteen industries are mentioned. The said letter nowhere refers to the particular activity carried on by the petitioners. Subsequently on July 4, 1987, the Commissioner of Commercial Taxes issued a circular as follows :
"Since polished Cuddapah Shahabad and marble stones are not a commercially different commodity from the unpolished ones, no new commodity is obtained and hence polishing of these stones does not amount to manufacture. Hence, the benefit of concession of 50 per cent exemption would not be available."
2. In view of the above clarification, assessment orders made were sought to be revised under section 21(4) of the Act. Similarly the assessing authority also made an endorsement that since polished Shahabad stones are not a commercially different commodity from the unpolished one and no new commodity is obtained, polishing of the stones does not amount to manufacture. Consequently concession available to the petitioners was held as not available to the petitioners. The petitioners were asked to pay monthly tax on the turnover of such polished stones.
3. The petitioners have challenged the notice issued under section 21(4) as well as the endorsement of the Commercial Tax Officer referred above. The petitioners also sought for the quashing of the circular issued by the Commissioner on July 4, 1987. According to the petitioners have activity carried on by them involves manufacturing activity and that the raw stone when polished and cut into sizes become commercially different goods and therefore the benefit of the notification dated March 31, 1983, should be extended to the petitioners.
4. Mr. Ramabhadran, learned counsel for the petitioners, pointed out that the industries of the petitioners were not found in the appendix and that itself indicates that the industries of the petitioners are entitled to the benefit of the notification. Any industry referred in the appendix automatically gets excluded from the purview of the beneficial treatment under the exemption notification. But that does not mean that every industry not referred in the appendix is entitled to avail of the benefit. Any industry seeking the benefit should satisfy other requirements referred in the notification. The exemption is granted in respect of the tax payable on the turnover of the goods manufactured in Karnataka, etc. If the goods are not manufactured and then sold the benefit of the notification is not available.
5. Mr. Ramabhadran, then contended that the petitioners were engaged in the manufacture of goods. The goods sold by the petitioners are commercially distinct and different from the raw stones. None purchases the unpolished and unsized stones. There is no respectable market for the raw stone. Therefore the basic question is whether the polishing and sizing of the stones results in bringing about a new commercial commodity or whether such polishing or cutting results in the mere change in the form of the original goods. The relevant principles are enunciated by the Supreme Court in several decisions but the problem of applying the said principles to particular set of facts is perennial.
6. The learned counsel appearing on both sides referred to several decisions, some of which shall have to be referred. In this context Mr. Ramabhadran also referred to Part S of the Second Schedule to the Act. Serial No. 17 of Part S refers "stones, that is to say ......." Thereafter various stones are referred. Different rates of taxes are provided regarding polished, unpolished and chips of several kinds of stones. From this it was contended that the Legislature itself has treated a polished stone different from an unpolished stone and similarly chips are different from the raw stone. According to the learned counsel for the petitioners this is a clear indication of the fact that they are commercially different articles and if so, the change of the status of the stone from one category to the other involves manufacture. A similar contention was in fact advanced by the State when the State contended that timber is different from timber sizes or logs, etc., for which purpose, Part T, item 9 was relied upon in Bangalore Wood Industries v. Asst. Commissioner of Commercial Taxes (W.P. No. 27509 of 1991, etc., decided on 15th July, 1993 [Reported in . This contention was not accepted by the Division Bench. The Bench pointed out that the Legislature was competent to vary the tax rate depending upon the form of a particular goods and such a differentiation in the rate of tax cannot lead to the inference that the two articles are really different articles. The Bench held that division of the subject-matter of the taxable goods was mainly based on the "form of timber" and from that it cannot be inferred that every article treated as a distinct taxable goods, is a separate identifiable different goods - different from the material from which it is made.
7. Mr. Ramabhadran referred to the decision of the Madras High Court in Commissioner of Income-tax v. Perfect Liners , wherein it was held that chips made out of rough cast iron are different from the latter and that the chips form a distinct commodity. Similarly the learned counsel referred to another decision reported in Commissioner of Income-tax v. M. R. Gopal [1965] 58 ITR 598 (Mad.) wherein the Bench held that the process employed in converting the boulders into small stones with the aid of machinery is a manufacturing process and therefore the undertaking is an industrial undertaking for the purpose of section 15-C of the Indian Income-tax Act, 1922. The Bench referred to Webster's Dictionary for the meaning of the word "manufacture". The Bench also observed that the process of making chips is an enterprise, occupation or a business and therefore it is an undertaking and the process involved is manufacturing process.
8. Hind Nippon Rural Industries Private Limited v. State of Karnataka [1991] 81 STC 46 was cited which is a decision of the Bench of this Court. The petitioner who was a dealer in granites purchased crane from Calcutta in order to lift the granite slabs and stones from the quarry against form C (issued under the provisions of the Central Sales Tax Act). This Court held that the petitioner was entitled to purchase the crane against form C because the crane was used to lift the granite and to subject the same to a process to bring an end-product for sale.
9. The above decision has no bearing on the present case.
10. The decision of the Supreme Court in Deputy Commissioner of Sales Tax v. Pio Food Packers was distinguished while pointing out that the Supreme Court was concerned with the concept of consumption under section 5A of the Kerala General Sales Tax Act. However, at page 66 the court referred to the concept of manufacture thus :
"Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary ...... There must be transformation; a new and different article must emerge, 'having a distinctive name, character or use'."
11. Proceeding further the Supreme Court thereafter referred to further observation of the American Supreme Court stating that :
"At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been 'manufactured'."
12. Therefore it is clear that the Supreme Court was concerned with the two aspects (i) concept of consumption as well as (ii) the concept of manufacture, which was essential for a proper determination of the question before the Supreme Court. Sterling Foods v. State of Karnataka is another decision of the Supreme Court. The process undergone by the shrimps prawns and lobsters did not result in the change of the original character and identity and those goods in commercial parlance or popular usage remained the same goods even after the processing. Therefore it was held that there was no change in the commodity.
13. Mr. Ramabhadran conceded that any processing done in respect of any article in order to preserve it properly would not be a manufacturing activity. But according to the learned counsel the raw stone involved herein has no commercial value and it is only the polished stones or the stones cut into sizes that has a market and the real test is that any process which converts a raw material into a marketable article involves manufacturing process. The learned counsel referred to Ujagar Prints v. Union of India AIR 1989 SC 516, which is a decision of the Supreme Court. The Supreme Court was concerned mainly with the processes of bleaching, dyeing, printing, sizing, mercerising, etc. These processes were brought within the term "manufacture" in section 2(f) of the Central Excises and Salt Act, 1944. It was contended that the widening of the definition of the term imparted an artificial dimension to the concept of manufacture and therefore ultra vires entry 84, List I. This contention was negatived by the Supreme Court. The Supreme Court held that the processes referred above make the fabric into a commercially different product. The scope of the term manufacture was considered in detail while holding that the processes referred convert the grey fabric into a different marketable commodity. At pages 423-424 of STC (341 of ITR) it was held thus :
"The prevalent and generally accepted test to ascertain that there is 'manufacture' is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as a result of the processes. The principles are clear. But difficulties arise in their application in individual cases. There might be border-line cases where either conclusion with equal justification may be reached. Insistence on any sharp or intrinsic distinction between 'processing' and 'manufacture' we are afraid, results in an over-simplification of both and tends to blur their interdependence in cases such as the present one."
14. Thus the Supreme Court itself has highlighted the difficulty involved in applying the settled principles, though in the said case the processes involved were held as part of the manufacturing activity.
15. The learned Government Pleader on the other hand relied on the decision of the Rajasthan High Court in Assistant Commercial Taxes Officer v. Sitaram Badrilal [1986] 61 STC 258 wherein the Bench of the Rajasthan High Court held that even after polishing the stones they do not lose the original identity and a separate commercial article does not come into being for being marketable; essentially it is the same commercial commodity. Therefore the court held that the polishing of stones does not come within the term "manufacture" as defined in the State enactments. In Bangalore Wood Industries case (W.P. No. 27509 of 1991 [Reported in the timber logs and sizing of timber and similar activities were held as not altering the substances of the original material and all of them come within the concept of timber. To the same effect is the decision of the Supreme Court in Collector of Central Excise v. Kutty Flush Doors & Furniture Co. (P) Ltd. . It was held in Bangalore Wood Industries case (W.P. No. 27509 of 1991 [Reported in that the processes involved change the form of the material and not substance of it. The learned Government Pleader also referred to another decision of the Supreme Court in Collector of Central Excise v. Kiran Spinning Mills wherein cutting of the long fibre into small pieces was held as not involving any change in the substance. At page 228 the court observed :
"..... All that the respondents did in relation to it, was to cut it into staple length after some manual sorting and straightening. The question, therefore, is whether cutting the long fibre into short fibre resulted into a new and different article of commerce. Now it is well-settled how to determine whether there was manufacture or not. This Court held in the case of Union of India v. Delhi Cloth and General Mills [1963] Supp 1 SCR 586 that 'manufacture' means to bring into existence a new substance and does not mean merely to produce some change in a substance. It is true that etymological word 'manufacture' properly construed would doubtless cover the transformation but the question is whether that transformation brings about fundamental change, a new substance is brought into existance or a new different article having distinctive name, character or use results from a particular process or a particular activity."
16. Mr. Ramabhadran also referred to a circular issued by the department of the respondent treating coconut and desiccated coconut as different articles.
17. Decisions can be multiplied but ultimately the court still is faced with the problem of applying the principles to the facts of the case. To me it looks that the instant case is more nearer to the "timber" case and the decision referred in Bangalore Wood Industries case has a strong bearing. These are not ordinary stones. The stones have special value in the market and no doubt the marketable quality of these stones is enhanced by the polishing and cutting. The substance of the material is not altered. The article is made more presentable and attractive for the benefit of the users and therefore it cannot be said that the activity referred by the petitioners cannot be held to be a manufacturing activity (sic).
18. To avail the benefit of exemption notification dated March 31, 1983, the goods should be 'manufactured". Such is not the case here. Consequently, writ petitions are dismissed without any order as to costs.
19. Writ petitions dismissed.