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CASE NO.: Appeal (civil)  3160 of 2008

PETITIONER: M/s. Punjab Aromatics

RESPONDENT: State of Kerala

DATE OF JUDGMENT: 30/04/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T KAPADIA, J.

REPORTABLE

CIVIL APPEAL NO.  3160   OF 2008 (Arising out of S.L.P. (C) No.3328 of 2007)

Leave granted.

2.      This civil appeal filed by the assessee raises the question  relating to liability to pay "purchase tax" under Section 5A of  the Kerala General Sales Tax Act, 1963 ("1963 Act", for short).

3.      Appellant-assessee purchases "red oil" from unregistered  dealers and converts such red oil into "sandalwood oil" by  removing water content and other impurities.  As regards the  processing, there is no dispute between the parties.  The case  of the Department, in short, is that the assessee is not selling  red oil as such; that the commodity purchased (i.e. red oil) by  the assessee has undergone manufacture when it is heated to  a specified degree and the same is filtered by which impurities  are removed and, therefore, according to the Department,  conversion of red oil into sandalwood oil attracts levy under  Section 5A of the 1963 Act.

4.      For the sake of convenience we quote Section 5A of the  1963 Act which reads as follows: "5A. Levy of purchase tax. \026 (1) Every dealer who,  in the course of his business, purchases from a  registered dealer or from any other person any  goods, the sale or purchase of which is liable to tax  under this Act, in circumstances in which no tax is  payable under sub-sections (1), (2), (3), (4) or (5) of  Section 5 and either.

(a) consumes such goods in the manufacture of  other goods for sale or otherwise; or

(b) uses or disposes of such goods in any manner  other than by way of sale in the State;"

5.      A short question which arises for determination in this  civil appeal is : whether the above process amounts to  consumption/use of red oil in the manufacture of sandalwood  as contended on behalf of respondent-Department.

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6.      Shri Soli J. Sorabjee, learned senior counsel appearing  on behalf of the appellant, submits that the removal of  impurities by process of filtration does not amount to  consumption/use in the manufacture of sandalwood oil in  terms of Section 5A of the 1963 Act.  Learned counsel submits  that the assessee has paid tax on the final product, namely,  sandalwood oil sold locally (SEE: averments made by the  assessee in that connection in the synopsis of the civil appeal  paper book).  Learned counsel submits that process of  purification is not manufacture.  In this connection it is  submitted that the basic structure and composition of the red  oil remains same even after the purification process and,  therefore, the Department has erred in treating red oil and  sandalwood oil as two separate and distinct commodities.  On  the question whether such purification process amounts to  manufacture or not, learned counsel places reliance on several  judgments of this Court in support of his contention.

7.      Per contra, Shri T.L.V. Iyer, learned senior counsel  appearing on behalf of the Department, submits that red oil  and sandalwood oil are two separate and distinct commodities.   Learned counsel submits that red oil containing impurities  has no value in the market.  According to learned counsel, it is  only the sandalwood oil which has market value.  Learned  counsel further submits that Section 5A of the 1963 Act has  been enacted by the Legislature as it wanted to bring, within  the scope of purchase tax, items purchased from unregistered  dealers without payment of tax for consumption/use.  In this  connection, learned counsel places reliance on the Amending  Act 3 of 1990 by which Section 5A stood amended to bring  within the scope of purchase tax items purchased from  unregistered dealer without payment of tax for "use".   According to learned counsel, in the present case red oil is a  raw-material, that it has been purchased by the assessee and  it has been consumed/used in the manufacture of sandalwood  oil (final product) and, therefore, assessee is liable to pay  purchase tax on purchase turnover of red oil under Section  5A(1)(a) or (b) of the 1963 Act.

8.      We find merit in this civil appeal filed by the assessee.  At  the outset, it may be stated that process of purification is not  in dispute.  The entire process of purification has been  discussed by the Tribunal in its judgment.  The said process  eliminates impurities.  In the present case we are required to  consider the words "consumes such goods (red oil) in the  manufacture of other goods for sale or otherwise (sandalwood  oil)".  These words find place in Section 5A(1)(a) of the 1963  Act.  When raw-material is converted into a final product one  of the important tests to be applied to ascertain whether the  process of conversion amounts to manufacture is : whether  the raw-material is subsumed into the final product.  In this  case, the highest fact-finding body is Appellate Tribunal under  the 1963 Act.  After examining the process, it has come to the  conclusion that sandalwood oil (final product) can be brought  back to the original State, namely, red oil by adding  impurities, therefore, the process is reversible.  Therefore, red  oil is not subsumed into sandalwood oil.  Keeping in mind this  basic test, it is clear that red oil is not consumed/used in the  manufacture of sandalwood oil.  Hence, Section 5A(1)(a) or (b)  of the 1963 Act has no application.

9.      In the case of M/s. Tungabhadra Industries Ltd. v. The  Commercial Tax Officer, Kurnool \026 1961 (2) SCR 14, the

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question which arose for determination was : whether  hydrogenated groundnut oil continues to be groundnut oil  notwithstanding the hydrogenation process.  It was held that  hydrogenation process eliminated impurities and, therefore, in  its essential nature there was no change amounting to  manufacture.  We quote hereinbelow relevant portion of the  said judgment which reads as follows: "When raw groundnut oil is converted into refined  oil, there is no doubt processing, but this consists merely  in removing from raw groundnut oil that constituent part of  the raw oil which is not really oil. The elements removed in  the refining process consist of free fatty acids,  phosphotides and unsaponifiable matter. After the removal  of this non-oleic matter therefore, the oil continues to be  groundnut oil and nothing more. The matter removed from  the raw groundnut oil not being oil cannot be used, after  separation, as oil or for any purpose for which oil could be  used. In other words, the processing consists in the non- oily content of the raw oil being separated and removed,  rendering the oily content of the oil 100 per cent. For this  reason refined oil continues to be groundnut oil within the  meaning of Rules 5(1)(k) and 18(2) notwithstanding that  such oil does not possess the characteristic colour, or  taste, odour etc. of the raw groundnut oil."

10.     The judgment of this Court in the case of Tungabhadra  industries Ltd. (supra) has been considered once again by  this Court in the case of Shyam Oil Cake Ltd. v. Collector of  Central Excise, Jaipur \026 (2005) 1 SCC 264.  We quote  hereinbelow para 18 of the said judgment in the case of  Shyam Oil Cake Ltd. (supra) which reads as follows:  

"18. Thus, this Court has held that prior to refining, it  was raw groundnut oil and after refining even though the  characteristic colour, taste and odour may have changed it  remained groundnut oil. In other words, this Court held  that there was no manufacture of a new and distinct  commodity."

11.     Section 5A(1)(a) of the 1963 Act is similar to Section  7A(1)(a) of the Tamil Nadu General Sales Tax Act, 1959.  That  Section 7A(1)(a) of the Tamil Nadu General Sales Tax Act, 1959  came for interpretation before the Madras High Court in the  case of The State of Tamil Nadu v. Subbaraj and Co. \026  (1981) 47 STC 30 in which it was held that the very use of the  word "consume" contemplates that the goods purchased  should have been devoured or exhausted in the process of  manufacture with the result, its identity must have been  completely lost.          12.     The "test of irreversibility" is an important criterion to  ascertain as to when a given process amounts to manufacture.   In the present case that test is not satisfied.  In the present  case, the Tribunal has examined the process and has come to  the conclusion that by adding impurities to the sandalwood oil  the product could become red oil once again.  In the  circumstances, it cannot be said that red oil and sandalwood  oil are two separate and distinct products as held by the High  Court overruling the judgment of the Tribunal.

13.     One more aspect needs to be mentioned.  According to  the impugned judgment of the High Court, even assuming for  the sake of argument that Section 5A(1)(a) of the 1963 Act is

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not applicable still in any event alternatively Section 5A(1)(b)  stood attracted.

14.     The said reasoning in the impugned judgment is  erroneous.  Section 5A(1)(b) is quoted hereinabove.  In that  section the words used are "uses or disposes of such goods in  any manner other than by way of sale in the State".    The said  words "uses or disposes of" signifies the test of irreversibility.   However, as stated above, the Tribunal is the highest fact- finding authority under the Act which has examined the  process and has held that the test of irreversibility is not  applicable as sandalwood oil can be brought back to the  original state of red oil by adding impurities. (SEE: page no.66  of the civil appeal paper book).

15.     For the aforestated reasons, we are of the view that there  is no infirmity in the judgment of the Tribunal and that the  High Court had erred in interfering with the said judgment.   

16.     Before concluding we quote hereinbelow the last  paragraph of the impugned judgment of the High Court which  reads as follows: "We do not know on what basis the Tribunal has assumed  that in order to attract liability under Section 5A  manufacture of a product should be done with the use of  chemicals.  We are constrained to observe that the finding  of the Tribunal is patently absurd and perverse.  We  therefore allow the Tax Revision cases, reversing the  orders of the Tribunal, upholding levy of tax under Section  5A of the Act on the purchase turnover of red oil by  respondents-assessees for all the years."

17.     To say the least, in tax matters courts have to keep in  mind distinction between approach and principle.  Courts  have to go by the principle involved in the fiscal legislation.   Keeping in mind the distinction between these two concepts,  we are of the view that the High Court was not justified in  making the observation which is underlying hereinabove.  The  decision of the Tribunal is objective.  It is based on the correct  formulation of the test of irreversibility involved in the process  of manufacture and, therefore, the High Court was not  justified in observing that the finding of the Tribunal was  patently absurd and perverse.   

18.     We may, however, refer to the judgment of this Court in  the case of Burmah-Shell Oil Storage and Distributing Co.  of India Ltd., Beglaum v. Belgaum Borough Municipality,  Belgaum \026 AIR 1963 SC 906 on which heavy reliance is  placed by Shri T.L.V. Iyer, learned senior counsel appearing on  behalf of the respondent-Department.  In that case  proceedings commenced against the Municipality under Article  226 of the Constitution to prohibit the Municipality from  charging octroi from Burmah-Shell on its products brought  inside the octroi limits for sale.  The products were petroleum  products.  They were brought inside the Municipality area for  use or consumption by itself or for sale to its dealers.  The said  company had paid octroi on its products brought within the  octroi limits of the Municipality including the goods not  consumed by itself but sold to others.  At this stage, it may be  mentioned that by the impugned amendment the Municipality  Act stood amended to include the word "sale" in the  description of octroi.  The company contended that the tax  could not be collected on goods which were merely sold but  not consumed inside the octroi limits.  It was urged on behalf  of the company that the words "consumption or use" must be

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contrasted with the word "sale".  In support of this contention,  the company referred to Entry 49 of List II of Government of  India Act, 1935, and also to Entry 52 of the State List in the  Constitution.  It is in this context that this Court examined the  word "consumption" vide paras 19 and 20 which are quoted  hereinbelow: "19. The history of these two taxes clearly shows that  while terminal taxes were a kind of octroi which were  concerned only with the entry of goods in a local area  irrespective of whether they would be used there or not;  octrois were taxes on goods brought into the area for  consumption, use or sale. They were leviable in respect of  goods put to some use or other in the area but only if they  were meant for such user. When the Government of India  Act, in its Scheduled Tax Rules, mentioned "octrois", it  intended to give the power to levy taxes in this well- understood sense, namely, on the entry of goods in a local  area for consumption, use or sale. The Boroughs Act,  which was enacted in 1925 mentioned only "consumption  and use." Ever since its enactment, no dispute seems to  have been raised by any person that goods brought in for  sale were exempt from octrois. All persons who brought  the goods apparently paid this tax without objection. It  was only in 1954 when the Legislature seeking to bring the  description of octroi in the Municipal Act in line with the  Constitution included the word "sale" also, that the dispute  was raised by persons who were affected, and they were  some of the persons who had paid the tax before, even  though the word "sale" was not there. Of course, the  conduct of the tax-payer is not determinative of the  meaning of the words "consumption or use." But it shows  how the term was always understood. The word  consumption in its primary sense means the act of  consuming and in ordinary parlance means the use of an  article in a way which destroys, wastes or uses up that  article. But in some legal contexts, the word  "consumption" has a wider meaning. It is not necessary  that by the act of consumption the commodity must be  destroyed or used up. The word "consumption" occurs in  explanation to sub-Article 1 of Article 286 of the  Constitution. In explaining the ambit of that word this  Court observed in The State of Bombay v. The United  Motors (India) Ltd. ([1953] S.C.R. 1069, 1084), as follows  :-  "The expression "for the purpose of consumption in  that State" must, in our opinion, be understood as  having reference not merely to the individual  importer or purchaser but as contemplating  distribution eventually to consumers in general  within the State."  20. It is not the immediate person who brings the goods  into a local area who must consume them himself, the act  of consumption may be postponed or may be performed  by someone else but so long as the goods have been  brought into the local area for consumption in that sense,  no matter by whom, they satisfy the requirements of the  Boroughs Act and octroi is payable. Added to the word  "consumption" is the word "use" also. There may be  certain commodities which though put to use are not ’used  up’ in the process. A motor-car brought into an area for  use is not used up in the same sense as food-stuffs. The  two expressions use and consumption together therefore,  connote the bringing in of goods and animals not with a  view to taking them out again but with a view to their  retention either for use without using them up or for

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consumption in a manner which destroys, wastes or uses  them up. In this context, the word "consumption", as has  been shown above, must receive a larger meaning than  merely the act of consuming in the generally understood  sense. Recently, in M/s. Anwarkhan Mahboob Co. v. The  State of Bombay (1961) 1 SCR 709 at p.715: AIR 1961 SC  213 at p. 216, while dealing with the Explanation to Article  286(1), this Court observed as follows :-  "In answering that question it is unnecessary and  indeed inexpedient to attempt an exhaustive  definition of the word "consumption" as used in the  explanation to Art. 286 of the Constitution. The act  of consumption with which people are most familiar  occurs when they eat, or drink or smoke. Thus, we  speak of people consuming bread, or fish or meat or  vegetables, when they eat these articles or food; we  speak of people consuming tea or coffee or water or  wine, when they drink these articles; we speak of  people consuming cigars or cigarettes or bidis, when  they smoke these. The production of wealth, as  economists put it, consists in the creation of  "utilities." Consumption consists in the act of taking  such advantage of the commodities and services  produced as constitutes the ’utilization’ thereof. For  each commodity, there is ordinarily what is generally  considered to be the final act of consumption. For  some commodities, there may be even more than  one kind of final consumption. Thus grapes may be  "finally consumed" by eating them as fruits; they  may also be consumed by drinking the wine  prepared from "grapes". Again, the final act of  consumption may in some cases be spread over a  considerable period of time. Books, articles of  furniture, paintings may be mentioned as examples.  It may even happen in such cases, that after one  consumer has performed part of the final act of  consumption, another portion of the final act of  consumption may be performed by his heir or  successor-in-interest, a transferee, or even one who  has obtained possession by wrongful means. But the  fact that there is for each commodity what may be  considered ordinarily to be the final act of  consumption, should not make us forget that in  reaching the stage at which this final act of  consumption takes place the commodity may pass  through different stages of production and for such  different stages, there would exist one or more  intermediate acts of consumption............ In the  absence of any words to limit the connotation of the  word "consumption" to the final act of consumption,  it will be proper to think that the constitution-makers  used the word to connote any kind of user which is  ordinarily spoken of as consumption of the particular  commodity."          19.     We are of the view that the judgment of this Court in  Burmah-Shell (supra) has no application.  Firstly, in that case  the Court was concerned with the interpretation of Entries in  the Legislative Lists.  It is well-settled that Entries in the  Legislative Lists have to be read in the widest possible sense.   The Entries in the Legislative Lists demarcates an area/field  within which the competent Legislature is entitled to enact  laws.  We are not concerned with interpretation of Entries in  the Legislative Lists, therefore, the said judgment has no  application to the facts of the present case.  Secondly, as can

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be seen from para 20, this Court has itself clarified that the  word "consumption" in the Explanation to Article 286 of the  Constitution as it stood before the Constitution (Sixth  Amendment) Act, 1956 has to be read in a manner different  from the act of consumption in the generally understood  sense.  For both the aforestated reasons, the judgment of this  Court in Burmah-Shell (supra) has no application to the  present case.            20.     Shri T.L.V. Iyer, learned counsel, also places heavy  reliance on the judgment of this Court in the case of State of  Karnataka v. B. Raghurama Shetty and Others \026 (1981) 2  SCC 564.   He places reliance on paragraphs 8 and 9 which  are quoted hereinbelow: "8. There is no merit in the submission made on behalf of  the assessees that they had not consumed paddy when  they produced rice from it by merely carrying out the  process of dehusking at their mills. Consumption in the  true economic sense does not mean only use of goods in  the production of consumers’ goods or final utilisation of  consumers’ goods by consumers involving activities like  eating of food, drinking of beverages, wearing of clothes or  using of an automobile by its owner for domestic purposes  manufacturer also consumes commodities which are  ordinarily called raw materials when he produces semi- finished goods which have to undergo further processes of  production before they can be transformed into consumers’  goods. At every such intermediate stage of production,  some utility or value is added to goods which are used as  raw materials and at every such stage the raw materials  are consumed. Take the case of bread. It passes through  the first stage of production when wheat is grown by the  farmer, the second stage of production when wheat is  converted into flour by the miller and the third stage of  production when flour is utilised by the baker to  manufacture bread out of it. The miller and the baker have  consumed wheat and flour respectively in the course of  their business. We have to understand the word  ’consumes’ in Section 6(i) of the Act in this economic  sense. It may be interesting to note that this is the basis  of the levy of ’Value Added Tax’, popularly called as VAT,  which is levied as an alternative to tax on turnover in some  Western countries. The difference between ’Value Added  Tax’, and tax on the turnover of sales or purchases is  explained by Professor Paul A. Samuelson in his book  entitled ’Economics’ (Tenth Edition, 1976) at page 168  thus : A turnover tax simply taxes every transaction  made : wheat, flour, dough, bread, VAT is  different because it does not include in the tax  on the miller’s flour that part of its value which  came from the wheat he bought from the  farmer. Instead, it taxes him only on the wage  and salary, cost of milling, and on the interest,  rent, royalty, and profit cost of this milling  stage of production. (That is, the raw material  costs used from earlier stages are subtracted  from the miller’s selling price in calculating his  "value added" and the VAT tax on value  added....)

9. At every stage of production, it is obvious there is  consumption of goods even though at the end of it there  may not be final consumption of goods but only production  of goods with higher utility which may be used in further

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productive processes."

        21.     In our view the said judgment has no application as in  that case this Court came to the conclusion that paddy and  rice are two different commodities.  It was further held on facts  that the assessee had consumed paddy in the manufacture of  rice.  It is in this context that after coming to the conclusion  that paddy and rice are two different commodities that this  Court has examined the word "consumption" in the economic  sense.  In the present case, as stated hereinabove, by adding  of impurities sandalwood oil becomes red oil.  Therefore, there  was no consumption of red oil in the manufacture of  sandalwood oil.  Further, it may be noted that the Explanation  to Article 286(1)(a) of the Constitution, as it stood prior to the  Constitution (Sixth Amendment) Act, 1956, used the word  "consumption" in the Explanation to the said Article.   However, after the Constitution (Sixth Amendment) Act, 1956  w.e.f. 11.9.1956 the said Explanation to Article 286(1)(a) of the  Constitution is omitted.  For the aforestated reasons, the  judgment of this Court in the case of B. Raghurama Shetty  (supra) has no application.

22.     Accordingly, the civil appeal filed by the assessee stands  allowed and the impugned judgment of the High Court dated  21.12.06 is set aside with no order as to costs.