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PETITIONER: STATE OF KARNATAKA

       Vs.

RESPONDENT: B. RAGHURAMA SHETTY ETC.

DATE OF JUDGMENT24/03/1981

BENCH: VENKATARAMIAH, E.S. (J) BENCH: VENKATARAMIAH, E.S. (J) TULZAPURKAR, V.D. SEN, AMARENDRA NATH (J)

CITATION:  1981 AIR 1206            1981 SCR  (3) 280  1981 SCC  (2) 564        1981 SCALE  (1)571  CITATOR INFO :  D          1984 SC1870  (17)

ACT:      Karnataka Sales  Tax Act,  1957 Section  6(i) Paddy-and rice-Whether distinct  commodities-Milling of  Paddy-whether involves manufacturing process-Consumption-meaning of.

HEADNOTE:      The assessees  (respondents) are  the  owners  of  rice mills and  are registered  dealers under the Karnataka Sales Tax Act,  1957.  In  the  course  of  their  business,  they purchase paddy  and after  milling paddy, sell the resultant rice. During  the assessment  years, the assessees purchased paddy from  agriculturists who  were not liable to pay sales tax. The  assessing authority  under the  Act levied  on the assessee in each of these cases purchase tax on the purchase turnover of paddy under section 6(i) of the Act. The appeals filed by  the assessees  were  dismissed  by  the  Appellate Authority except  the one,  holding that  the conversion  of paddy into  rice did  not involve  any manufacturing process and that the purchase turnovers of paddy in those cases were not liable to tax under section 6(i) of the Act. In the case of the  other assessee, the Tribunal held that the turn over was liable  to be  taxed as  he had manufactured milled rice out of the paddy purchased by him.      The appellant  filed revision  petitions  in  the  High Court and  the assessee  filed revision petition in the last case. The  High Court  after holding  that the turn overs in question were  not liable  to tax  under section 6(i) of the Act dismissed  the petitions  filed  by  the  appellant  and allowed the  petition of  the last  assessee. The High Court granted a certificate of fitness to this Court.      The appellant argued that the sale price of paddy which is a  taxable commodity  having not  been subjected  to  tax under section  5, the  assessees were  liable to  tax  under section 6(i)  of the  Act as  they had  consumed it  in  the manufacture of  rice which  was a  different  commodity  for sale. The respondent argued that they had not consumed paddy when they  produced rice  from it by merely carrying out the process of dehusking at their mills.      Allowing the appeals,

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^      HELD:  1.   (i)  Paddy   and  rice   are  two  distinct commodities. The  milling of  paddy involves a manufacturing process. [284 B]      (ii) The  levy in  question is  not impermissible  even though paddy  and rice  are liable  to be  taxed at a single point, as  in fact  there is  no double taxation on the same commodity. [286 F-G] 281      Ganesh Trading  Co. Karnal v. State of Haryana and Anr. 32 S.T.C.  623, Babu  Ram Jagdish Kumar and Co. v. The State of Punjab and Anr. 44 S.T.C. 159 affirmed.      2. 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 involving activities like  eating  of  food,  drinking  of  beverages, wearing of  clothes or  using of  an automobile by its owner for  domestic   purposes.  A   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  consumer 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. [284 D-E]      3. At every stage of production 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  productive processes. [285 B-B]      M/s. Anwar  Khan Mahboob Co. v. The State of Bombay and Ors. [1961]  2 S.C.R.  709 at  pp. 715-716; Economics (Tenth Edition 1976)  at page  168 by  Professor Paul A. Samuelson, referred to.      In the  instant case,  the assessees  had consumed that paddy purchased  by them  when they  converted it  into rice which is  commercially a  different commodity  for sale. The case of  assessees therefore,  squarely falls  under section 6(i) the Act. [286 C]      State of  Tamil Nadu  v. M.  K. N. Kandaswami etc. etc. [1976] 1  S.C.R. 38,  Ganesh Prasad Dixit v. Commissioner of Sales Tax [1969] 3 S.C.R. 490, referred to.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos. 1801- 1805 of 1975.      From the  Judgments and  Orders dated  the 27th January and 3rd  February  1975  of  the  Karnataka  High  Court  at Bangalore in STRPs. Nos. 14, 15 19, 26 & 32 of 1974.      N. Nettar for the Appellant.      J. Ramamurthy and Miss R. Vaigai for the Respondent.      Ex-parte Respondents in CAs 1801-1803 & 1805/75.      The Judgment of the Court was delivered by      VENKATARAMIAH,  J.   The  question   which  arises  for consideration in these appeals by certificate is whether the respondents (here- 282 inafter referred  to as  ’the assessees’)  are liable to pay purchase tax  under section  6(i) of the Karnataka Sales Tax Act, 1957  (hereinafter referred  to as  ’the Act’)  on  the turnover consisting of the price paid by them for purchasing paddy for  the purpose  of converting it into rice for sale, in their respective rice mills.

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    The assessees  are owners of rice mills in the State of Karnataka and  are registered  dealers under the Act. In the course of  their business,  they purchase  paddy  and  after milling paddy sell the resultant rice. During the assessment years, the assessees purchased paddy from agriculturists who were not  liable to  pay sales  tax. The assessing authority under the  Act levied on the assessee in each of these cases purchase tax on the purchase turnover of paddy under section 6(i) of  the Act. The appeals filed by the assessees against the  said   assessments  were  dismissed  by  the  appellate authority.  The   Karnataka  Sales  Tax  Appellate  Tribunal allowed the  appeals filed  by  the  assessees  against  the orders of  the appellate  authority except  the one filed by the assessee  who is the respondent in Civil Appeal No. 1805 of 1975  holding that  the conversion of paddy into rice did not involve  any manufacturing process and that the purchase turnovers of  paddy in  those cases  were not  liable to tax under section  6(i) of  the Act. In the case of the assessee who is  the respondent in Civil Appeal No. 1805 of 1975, the Tribunal held that the turnover was liable to be taxed as he had manufactured  boiled rice  out of the paddy purchased by him. Aggrieved  by the  decisions of the Tribunal, the State Government filed  revision petitions  before the  High Court under section  23(1) of  the Act in the first four cases and the assessee filed a revision petition in the last case. The High Court after holding that the turnovers in question were not liable  to tax  under section  6(i) of the Act dismissed the petitions  filed by the State Government and allowed the petition of  the assessee  who is  the respondent  in  Civil Appeal No.  1805 of  1975. Thereafter the High Court granted by a  common order  a certificate  of fitness  in all  these cases to  prefer appeals  before this  Court  to  the  State Government. On  the basis of said certificate, these appeals have been  filed by  the State Government against the orders of the  High Court.  Since these  appeals involve  a  common question of  law,  they  are  disposed  of  by  this  common judgment.      The relevant part of section 6 of the Act reads:           "6.   Levy   of   purchase   tax   under   certain      circumstances.-  Subject  to  the  provisions  of  sub-      section (5) of 283      section 5,  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 and,           (i) either  consumes such goods in the manufacture      of other  goods for  sale or  otherwise or  disposes of      such goods  in any  manner other than by way of sale in      the state,                              or           (ii)........................      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."      The contention  of the State Government before the High Court was  and before  us is  that the  sale price  of paddy which is  a taxable  commodity having  not been subjected to tax under  section 5  the assessees  are liable to tax under section 6(i)  of the  Act as  they had  consumed it  in  the manufacture of  rice which  was a  different  commodity  for sale. The  assessees’ contention  which was  accepted by the High Court  is that  paddy and rice being the same it cannot be said  that they  had manufactured  ’other goods’  out  of

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paddy and hence section 6(i) is not attracted.      Paddy  and   rice  have   been  held  to  be  different commodities by  this Court  in Ganesh Trading Co., Karnal v. State of Haryana & Anr. in which it is observed thus:           "Now, the  question for our decision is whether it      could be said that when paddy was dehusked and rice was      produced its  identity remained.  It was true that rice      was produced  out of  paddy but  it is  not true to say      that paddy  continued to be paddy even after dehusking.      It had  changed its  identity. Rice  is  not  known  as      paddy. It is a misnomer to call rice as paddy. They are      two different  things in ordinary parlance. Hence quite      clearly when paddy is dehusked and rice produced, there      has been a change in the identity of the goods". 284      The above  view has been followed by this Court in Babu Ram Jagdish Kumar and Co. v. The State of Punjab & Ors.      It is  unfortunate that  the High  Court as well as the Tribunal have  tried to  distinguish the  decision  of  this Court in  Ganesh Trading Co.’s case (supra) on insubstantial grounds, a  detailed reference  to which  is unnecessary  We reiterate the view expressed in the above two cases and hold that paddy  and rice  are two  distinct commodities and that the milling of paddy involves a manufacturing process.      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.  A  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 285      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

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    earlier stages are subtracted from the miller’s selling      price in  calculating his "value added" and the VAT tax      on value added........ )"      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 productive processes.      While construing the word ’consumption’ which was found in the Explanation to Article 286(1)(a) as it stood prior to its deletion  by the  Constitution  (Sixth  Amendment)  Act, 1956, this  Court in M/s. Anwarkhan Mahboob Co. v. The State of Bombay & Ors. observed thus:           "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  of food; we      speak of  people consuming tea or coffee or water, 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 286      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."      Applying the  above test,  it has  to be  held that the assessees had consumed the paddy purchased by them when they converted it  into rice  which is  commercially a  different commodity.      Since it is not disputed that the sales of paddy, which is a  taxable commodity,  in favour of the assessees had not suffered tax under section 5 in view of the circumstances in which they had taken place and it is held that the assessees had consumed  paddy in  the manufacture  of rice which was a different commercial  commodity for  sale, the  case of  the assessees squarely  falls under section 6(i) of the Act. The charge under  section 6(i)  should, therefore,  be given due effect. This  view is  in accord  with the  opinion of  this Court in  State of  Tamil Nadu v. M. K. Kandaswami etc. etc. and in  Ganesh Prasad  Dixit v.  Commissioner of  Sales-tax, where provisions  corresponding to  section 6(i)  of the Act arose for consideration.

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    It is  next contended that since the assessees would be exposed to  double taxation  both as  buyers of paddy and as sellers of  rice we should hold that the levy in question is impermissible because  paddy and rice are liable to be taxed at a  single point.  No provision  is shown to us which bars such taxation  when the  commodities are different. In fact, in this  case there  is  no  double  taxation  on  the  same commodity. A  similar contention  was rejected by this Court in the case of Babu Ram Jagdish Kumar (supra) thus:           "We  may   at  this   stage  refer  to  one  other      subsidiary argument  urged on behalf of the appellants.      It is  argued that  because  paddy  and  rice  are  not      different kinds of goods 287      but one  and the  same, the inclusion of both paddy and      rice  in   Schedule  C  to  the  Act  would  amount  to      imposition of  double taxation  under the Act. There is      no merit in this contention also because the assumption      that paddy  and rice are one and the same is erroneous.      In Ganesh  Trading Co.,  Karnal  v.  State  of  Haryana      (1973) 32  S.T.C. 623  (S.C.), arising  under the  Act,      this Court  has held that although rice is produced out      of paddy, it is not true to say that paddy continued to      be paddy  even after dehusking; that rice and paddy are      two  different   things  in   ordinary  parlance   and,      therefore, when  paddy is  dehusked and  rice produced,      there is a change in the identity of the goods."      In the  result these appeals are allowed, the judgments of the  High Court against which these appeals are filed are set aside  and the turnover in question in each case is held to be  taxable under  section 6(i)  of the Act. There shall, however, be no order as to costs. N.K.A.    Appeals allowed 288