Madras High Court
The State Of Tamil Nadu vs Tvl.M.A.Khizar Hussain & Sons on 21 December, 2017
Author: S.Manikumar
Bench: S.Manikumar, R.Pongiappan
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 21.12.2017 CORAM: THE HONOURABLE MR.JUSTICE S.MANIKUMAR and THE HONOURABLE MR.JUSTICE R.PONGIAPPAN T.C.(R).No.72 of 2017 The State of Tamil Nadu, rep. by the Deputy Commissioner (CT), [now re-designated as Joint Commissioner (CT)], Vellore Division, Vellore. .. Petitioner Vs. Tvl.M.A.Khizar Hussain & Sons, No.117, M.B.T. Road, Ranipet. .. Respondent Prayer: Tax Case Revision filed under Section 38 of Tamil Nadu General Sales Tax Act, 1959, against the order in S.T.A.No.410 of 2006, dated 18.09.2010, on the file of the Tamil Nadu Sales Tax Appellate Tribunal (Main Bench), Chennai. For Petitioner : Mr.S.Kanmani Annamalai Additionals Govt. Pleader (Taxes) For Respondent : Mr.S.Ramanathan ORDER
(Order of this Court was made by S.MANIKUMAR, J.) Tax Case Revision is filed against the order in S.T.A.No.410 of 2006, dated 18.09.2010, on the file of the Tamil Nadu Sales Tax Appellate Tribunal (Main Bench), Chennai.
2. Short facts leading to the Tax Case Revision are that the respondent, dealer in Tanned and finished leathers and tanning chemicals, was originally assessed on a total and taxable turnover of Rs.31,98,22,627/- and Rs.22,32,01,743/- respectively, as against the reported total and taxable turnover of Rs.31,78,11,077/- and Rs.22,11,90,188/- respectively, by the Commercial Tax Officer, Ranipet Assessment Circle vide proceedings dated 31.05.2005. On verification of the accounts, it was found that the assessee effected purchase of machinery spares, Generator spares, Hand lift for Rs.8,42,490/- effected by issue of Form XVII declarations and for which, the concessional rate of tax, at the rate of 3% under Section 3(5) of the Tamil Nadu General Sales Tax Act, 1959 was availed by the assessee. The assessing officer rejected the concessional rate of tax by holding that, as per provisions of section 3(5) and entries 3(i) to 3(ix) of English Schedule to the Tamil Nadu General Sales Tax Act, 1959, the assessee was not eligible to purchase machinery spares separately for repairs, reconditioning or replacement. The assessing officer, inter-alia, also noticed that the assessee had purchased chemicals, dyes and finishing chemicals for Rs.1,05,89,361/- and used for converting wet blue to finished leather and since both wet blue and finished leather are one and the same commodity, under Entry 7(b) of the second schedule to Tamil Nadu General Sales Tax Act, 1959 and there no new commodity had emerged in the process of conversion, the assessing authority held that there is no manufacturing activity involved and therefore, the assessee was not eligible to purchase the dyes and chemicals by issue of Form-XVII declaration under Section 3(3) of the Act. The place of business of the assessee was inspected by the Enforcement Wing Officials on 08.01.2004 and they noticed a deficit stock of 1813 pieces of finished leather amounting to Rs.5,62,030/-. Based on the inspection report, the assessing officer, added an equal time addition of Rs.5,62,030/- alleging suppression for probable omission. Thus, the assessing officer determined the total and taxable turnover as stated above. A penalty of Rs.5,65,710/- has also been slapped, under section 23 of the Act.
3. On appeal, the first appellate authority, while sustaining the actual suppression, deleted the equal time addition. He set aside the assessment made on the purchase turnover of dyes and chemicals of Rs.1,05,89,361/- at the differential rate of tax, by holding that the assessee was entitled to purchase chemicals and dyes by issue of Form-XVII declarations, by relying on various judgments. He also set aside the levy, of tax at the differential rate of 9%, on the turnover of Rs.8,42,490/- by issue of Form XVII under section 3(5) of the Act. He deleted the penalty levied under section 23 read with section 45(2)(e) of the Tamil Nadu General Sales Tax Act, 1959.
4. Aggrieved against the same the state filed appeal before the Tamil Nadu Sales Tax Appellate Tribunal (MB), Chennai. Following the decision of this Honble High Court in W.P.No.3000 of 2008 dated 22.04.2010 (Golden Leathers Tannery Vs. State of Tamil Nadu), the appellate Tribunal, by its order dated 18th September 2010 held that the disputed turnovers are liable for concessional rate of tax under section 3(3) by issuance of Form XVII declarations and further held that conversion of wet blue into finished leathers amounts to manufacture and dismissed the State Appeal.
5. Tax Case Revision is filed on the following substantial questions of law:-
"(i) Whether the Tribunal has committed a grave procedural error in having overlooked the judgments of Supreme Court in the case of A.Hajee Abdul Shukuoor and Co. Vs. State of Madras reported in 15 STC 719 and in the cse of State of Tamil Nadu Vs. Mahi Traders & Others reported in 73 STC 228 admittedly cited on behalf of the Revenue in para 6 of the impugned judgment?
(ii) Whether the order of Tribunal is perverse in its factual finding that process involved in the conversion of wet blue leather (also known as tanned leather or semi finished leather) into finished leather amount to manufacture by overlooking in the conversion of law hides and skins into dressed hides and skins as approved in the case of Hajee Abdul Shukuoor Vs. State of Madras reported in 15 STC 719 and in the case of State of Tamil Nadu Vs. Mahi Traders & others reported in 73 STC 228?
(iii) Whether the Tribunal has correctly appreciated and applied the principles laid down by Supreme Court in the decisions relied upon the impugned judgment to the facts of the present case in as much as wet blue leather does not admittedly constitute a raw material for manufacture of finished leather?"
6. Supporting the substantial questions of law, Mr.S.Kanmani Annamalai, learned Additional Government Pleader (Taxes), submitted that the Tribunal has failed to appreciate that conversion of wet blue into finished leather does not amount to manufacture. Both wet blue and finished leather are one and the same, and has the same entry, that is, 7-(b) of the II Schedule to the Tamil Nadu General Sales Tax Act, 1959. Hence it could not be used for purchase of chemical in the aforesaid process. Learned counsel for the petitioner further submitted that the Tribunal ought to have seen that the process employed in converting wet blue leather (tanned leather) would not amount to manufacture of both wet blue leather and dressed hides and skins and basically it remains only as tanned leather.
7. Mr.S.Kanmani Annamalai, learned Additional Government Pleader (Taxes), further submitted that the Appellate Tribunal ought to have seen the primary issue is whether wet blue leather ought to be treated as raw hides and skins and then only, the question of examining, as to whether any manufacturing activity is involved or not. In this regard, he submitted that wet blue leather cannot, by any stretch of imagination, be treated as raw hides and skins, as contained in entry 7(b) of the Second Schedule to the Tamil Nadu General Sales Tax Act, 1959 since it pertained to raw hides and skins, in its putrescible state. On the other hand, wet blue leather being tanned leather is not essentially different from dressed hides and skins, which is also characteristically and basically tanned leather. He therefore submitted that there is no manufacturing process of wet blue leather into finished leather.
8. Learned Additional Government Pleader (Taxes), further submitted that the Tribunal had simply followed the Division Bench of this Honble High Court, without giving any independent finding as to whether how wet blue leather is manufactured out of raw hides and skins in the facts of this particular case. The Tribunal ought to have seen raw hides and skins procured from slaughtered animals are easily putrescible, if it is not preserved, before reaching the tanneries, which would always be away from the place of procurement. Therefore, these raw skins are subjected to curing through several processes viz. salting, wet salting and drying. At this stage of drying if is called picked. It is the stage of temporary curing to prevent decay.
9. After tanning is done, the leather becomes non-putrescible and leather attains its character, nature and use and ready for use. In view of the above, he submitted that hides and skins after undergoing process including tanning become dressed hides and skins, which are also tanned, leather after undergoing refining process, according to the needs of leather industries. He submitted that the Tribunal ought to have followed the aforesaid principles of law.
10. Learned Additional Government Pleader (Taxes), submitted that the Tribunal ought to have followed the principles laid down, in the judgment of this Honble High Court in 73 STC 228, 15 STC 719. He further contended that the Tribunal ought to have considered that manufacture implies a change, but every change is not manufacture and yet every change in an article, is the result of treatment. But something more is necessary. There must be transformation; a new and different article must emerge having distinct name, character or use. Applying the above yardstick, he submitted that mere process on wet blue leather does not bring out a new distinct commodity, since dressed hides and skins are nothing but making them ready for multifarious users depending upon specific requirements, at the same time, retaining the common bond of tanned leather.
11. Heard the learned counsel for the parties and perused the materials available on record.
12. In Golden Leathers Vs. Secretary Tamil Nadu Sales Tax Appellate Tribunal, Chennai and Others, reported in (2010) 35 VST 216 (Mad), a Hon'ble Division Bench of this Court, after considering the several decisions, held as follows:-
"8. The various stages the wet blue leather undergo transformation from raw hides and skins to finished leather were explained to us, which are as follows :
"Raw Hides/Skins -> Trimming, Sorting, Desalting (raw material storage yard) -> Soaking -> Liming Unhairing -> Fleshing -> Washing -> Deliming/Batting -> Washing -> Degreasing/Washing -> Pickling -> Chrome Tanning -> Wet Blue."
9. The wet blue leather undergoes the following processes when it get transformed to finished leather which are as follows :
"Wet blue -> Splitting (Splitting Machine) -> Shaving (Shaving Machine) -> Washing (Drums) -> Rechroming (Drums) -> Neutralization and Washing (Drums) -> Retanning/Dyeing/ Fatliquoring (Drums) -> Drying/Staking/ Trimming -> Buffing/ Dedusting (Machine) -> Finishing (Autospray) -> Finished Leather."
10. The phrases mentioned above have been explained by the respondents in their written statements filed before the Tribunal, which are as follows:
SPLITTING and SHAVING The leather is shaven in the back side for having even thickness.
Washing Watered and wetting agent is added and drumming is done and the process is carried for 15 minutes and thereafter, it is again washed for removal of dust and stains.
Rechroming Water, basic chrome sulphate, and cationic fatliquor are added in drum and run for 3 hours for strength.
Neutralization Water, sodium formate, sodium acetate, sodium sulphide and soda bi carbonate are added in drum for increase in PH value for intake of chemicals for one hour.
Retanning Syntans, vegetable extracts are added in drums and rotated for one hour for tightness and strenght.
Dyeing The required colour is taken and dyed for colouring Drying The Water, which is already present in the leather is removed.
Staking This process involves to made leather soft and flat.
Trimming The process is carried on for the neat surface area and good looking purpose.
Buffing/stuffing This process removes the dust in the backside of the leather and for uniformity on both sides.
Dedusting Process is carried on for the purpose of smooth surface on both sides.
Finishing The process is for fixing the colour in the grain surface.ss
11.We have to consider whether this activity will amount to manufacture. So, we seek help from the various rulings of the Courts.
In the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam V. Coco Fibres (reported in (1991) 80 STC 249), the Supreme Court held that when coconut husk is converted into coconut fibre, a manufacturing activity takes place where green husks are soaked in saltish sea water for days together and after decomposition, it is subjected to beating process and the fiber is extracted. The Supreme Court held as follows (at page 251 of STC):
"...The word 'manufacture' has not been defined under the Act, and therefore, we have to look into the meaning known in commercial parlance. In Blacks Law Dictionary, Fifth Edition, the word manufacture has been defined as, the process or operation of making goods or any material produced by hand, by machinery or by other agency; anything made from raw materials by hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand, labour or machine. Thus, by process of manufacture, something is produced and brought into the existence, which is different from that, out of which, it is made, in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. The Constitution Bench of this Court in Ujagar Prints V. Union of India (1989) 74 STC 401 ; (1989) 179 ITR 317; (1959) 3 SCC 488, 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, recognized 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 borderline 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 oversimplification of both and tends to blur their interdependence in cases such as the present one.
In State of Bihar Vs. Chrestien Mica Industries Ltd. (1956) 7 STC 626, the Patna High Court was to consider the question whether the process of mining mica is tantamount to manufacture of goods within the meaning of section 2(g) of the Bihar Sales Tax Act, 1947. It held that to manufacture must mean to bring into being something in a form in which it was capable of being sold or supplied in the course of business. The essential point to remember is that something is brought into the existence which is different from that originally existing, in the sense that the thing produced is by itself a commercial commodity and is capable as such of being sold or supplied. It is not necessary that the stuff or the material of the original article must lose its character or identity or it should become transformed in its basic and essential properties. In Commissioner of Sales Tax, U.P., Lucknow V. Harbilas Rai and Sons (1968) 21 STC 17 (SC), this Court held at page 20 that the word manufacture has various shades of meaning, and in the context of sales tax legislation, if the goods to which some labour is applied remain essentially the same commercial article, it cannot be said that the final product is the result of manufacture. The test laid down by this Court is that the article which comes into being must be commercially different from the one from which it is made or manufacture."
11. In the case of Aspinwall & Co.Ltd. Vs. Commissioner of Income Tax reported in (2002) 125 STC 101 (SC); (2001) 251 ITR 323 (SC), the question was as to whether when raw coffee berries undergo nine processes to become coffee beans, there is a manufacturing activity. The Supreme Court took note of the factual observation of the Tribunal regarding nine processes involved in curing of coffee and then, they held that the conclusion of the Tribunal that a manufacturing activity takes place is correct. It was further held as follows (at page 106 of 125 STC):
"Adverting to the facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from the raw material from which it was manufactured. A distinct change comes about in the finished product."
12. In the case of India Cine Agencies Vs. Commissioner of Income Tax, Madras reported in (2009) 308 ITR 98 (SC), the question was as to whether the activity undertaken was manufactured or produced in the conversion of jumbo rolls of photographic films into small flats and rolls in the desired sizes. The Supreme Court held as follows (at page 101):
"Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise, Jaipur Vs. Rajasthan State Chemical Works, Deedwana, Rajasthan (1991) 4 SCC 473).
'Manufacture' is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that, in manufacture something is brought into existence, which is different from that, which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produce a commercially different article. (See Saraswati Sugar Mills V. Haryana State Board (1992) 1 SCC 418).
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, recognized as a distinct and new article that has emerged as a result of the process. There might be borderline cases where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between processing and manufacture, results in an oversimplification of both and tends to blur their interdependence. (See Ujagar Prints Vs. Union of India (1989) 74 STC 401; (1989) 179 ITR 317; (1989) 3 SCC 488).
To put it differently, the test to determine whether a particular activity amounts to 'manufacture' or not is : Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes 'manufacture' takes place and liability to duty is attracted. Etymologically the word 'manufacture' properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Limited. V. Union of India (1987) 64 STC 42 (SC); (1986) 162 ITR 846 (SC); (1985) 3 SCC 314)."
13. They then referred to the words production and manufacture with their grammatical variations and cognate expressions and held that when the jumbo rolls of photographic films are cut into small flats and rolls, the manufacturing activity takes place since, after cumulative effect of various processes, a manufactured product emerges from the raw material and each step towards such production would be a process in relation to the manufacture.
14. In the case of Commissioner of Income-tax v. N.C.Budharaja and Co. reported in (1993) 91 STC 420; (1993) 204 ITR 412, the Supreme Court again referred to the words manufacture and production wherein the relevant portions read thus :
"...The words 'manufacture' and 'production' have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterized as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this Court in Deputy Commissioner of Sales Tax V. Pio Food Packers (1980) 46 STC 63 (SC), among other decisions. In the said decision, the test evolved 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 recognized in the trade as a new and distinct commodity. Pathak J., as he then was, stated the test in the following words (at page 65) :
'Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a 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 recognized as a new and distinct article that a manufacture can be said to take place.' The word 'production' and 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods..."
15. In the present case, it is very clear from the facts before us that if a person placed an order for finished leather, wet blue leather will not be supplied to them. The same observations are made by the Supreme Court in the decision in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Coco Fibres reported in in (1991) 80 STC 249 (SC). It is clear that after the 12 processes, which have been described in the earlier paragraphs, wet blue leather gets transformed into finished leather, after which, it loses it identity as wet blue leather and becomes a different commodity with a distinct identity in the market and in the industry concerned. Therefore, we find that the activity satisfies all the propositions laid down by the Supreme Court to decide as to whether a process is a manufacture or not.
16. The Tribunal did not take note of the factual finding of the Appellate Assistant Commissioner, who had not only referred to various stages, which the wet blue leather undergoes and becomes finished leather, but also the fact that each activity is known in the industry with different name. One is called the full-fledged unit, by which, the raw hides and skins get transformed into finished leather; the other is called the wet unit; and the third is called the dry unit. It is after discussing these facts the Appellate Assistant Commissioner came to the conclusion that a manufacturing activity takes place. The Tribunal appears to have been persuaded by the fact that in item 7B of Schedule II to the Act, the two categories of leather that are mentioned in the entry are 'raw hides and skins' and 'dressed hides and skins'. The entries indicate taxability and the rate. That cannot decide the issue as to whether any manufacturing activity takes place or not. Both 'wet leather' and 'finished leather' may be described as "dressed hides and skins" that is opposed to "raw hides and skins". But we must still examine whether, when the wet blue takes through the various stages, a manufacturing activity takes place. The change or series of changes take the wet blue to a point where it can no longer be regarded as wet blue but must be recognized as finisher leather. So there is a manufacture. This question must be decided on the facts and circumstances of each case that comes up for consideration, the processes that the particular goods pass through and whether they get converted or not and whether the inputs are used for such activity. In this case, we are satisfied that the activity amounts to a manufacturing activity."
13. Abovesaid decision has been followed by us in T.C.R.No.47 of 2017, dated 20.11.2017. Decisions are squarely applicable to the case on hand. Following the same, the instant Tax Case Revision is dismissed. No costs. All the substantial questions of law are answered against the revenue.
[S.M.K., J.] [R.P.A., J.]
21.12.2017
Index : Yes
Internet : Yes
dm
S.MANIKUMAR, J.
AND
R.PONGIAPPAN, J.
dm
To
The Deputy Commissioner (CT),
[now re-designated as Joint Commissioner (CT)],
State of Tamil Nadu,
Vellore Division,
Vellore.
T.C.(R).No.72 of 2017
21.12.2017