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PETITIONER: STERLING FOODS, A PARTNERSHIP FIRM REPRESENTED BY ITSPARTNER

       Vs.

RESPONDENT: THE STATE OF KARNATAKA & ANR.

DATE OF JUDGMENT21/07/1986

BENCH: BHAGWATI, P.N. (CJ) BENCH: BHAGWATI, P.N. (CJ) KHALID, V. (J) OZA, G.L. (J)

CITATION:  1986 AIR 1809            1986 SCR  (3) 367  1986 SCC  (3) 469        JT 1986   155  1986 SCALE  (2)106  CITATOR INFO :  R          1987 SC 747  (1)  R          1988 SC 992  (4,6,9)  R          1989 SC 516  (17)

ACT:      Sales tax-Exigibility  to tax-Whether  shrimps,  prawns and lobsters  subjected to  processing like cutting of heads and tails,  peeling, deveining,  cleaning and freezing cease to be  the same  commodity and becomes a different commodity for the  purpose of  the section  5(3) of  Central Sales Tax Act, 1956  and therefore  exigible  to  Purchase  tax  under section 5(3)(b) read with entry 13a of Third Schedule to the Karnataka Sales Tax Act, 1957 as amended.

HEADNOTE:      The appellants  are  a  partnership  firm  carrying  on business as  dealers in  shrimps, prawns  and  lobsters  and other sea  food products.  They are  registered as  a dealer both under the Karnataka Sales Tax Act, 1957 and the Central Sales Tax  Act, 1956.  The appellants in the course of their business purchase  shrimps, prawns  and lobsters locally for the purpose of complying with orders for export and they cut the heads  and tails  of the  shrimps  prawns  and  lobsters purchased by  them, peel,  devein and  clean them  and after freezing and  packing them  in cartons,  they export them to foreign buyers  outside India under prior contracts of sale. The appellants filed their statement of monthly turnover for the month of April 1982 before the Assistant Commissioner of Commercial Taxes, Mangalore and claimed total exemption from tax in  respect of the purchase turn-over of shirmps, prawns and lobsters  under the  Karnataka Sales  Tax Act, 1957. The Assistant Commissioner of Commercial Taxes rejected the said claim by his two assessment orders and issued two notices of demand  for   Rs.52,610.71  and   Rs.44,237.88  respectively against the  appellants. The  appellants, thereupon, filed a writ petition in the High Court of Karnataka challenging all the said orders and notices of demand and sought appropriate direction, order  or writ  restraining the  respondents from imposing or collecting purchase-tax on purchase turn-over of shrimps, prawns  and lobsters  under the Karnataka Sales Tax

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Act, 1957.  The writ  petition was  dismissed  by  the  High Court, but having regard to the importance of the question 368 involved a certificate under Article 133 of the Constitution was granted by the High Court.      Allowing the appeal, the Court ^      HELD: 1.1.  In order  to attract  the applicability  of sub-section (3)  of section  5 of the Central Sales Tax Act, 1956, it  is necessary that the goods which are purchased by an assessee for the purpose of com plying with the agreement or order  for or  in relation  to export,  must be  the same goods which  are exported out of the territory of India. The words "those goods" in sub-section (3) are clearly referable to "any  goods" mentioned  in the preceding part of the sub- section and,  therefore, the goods purchased by the assessee and the goods exported by him must be the same. If by reason of any  processing to which the goods may be subjected after purchase, they  change their  identity so  that commercially they can  no longer  be regarded  as the original goods, but instead become  a new  and different  kind of goods and then they are  exported, the  purchases of original goods made by the assessee cannot be said to be purchases in the course of export.      1.2 The test which has to be applied for the purpose of determining whether  a  commodity  subjected  to  processing retains its original character and identity is as to whether the processed  commodity is  regarded in  the trade by those who deal  in it  as distinct  in identity  from the original commodity or  it is regarded, commercially and in the trade, the  same  as  the  original  commodity.  It  is  not  every processing that  brings about  change in  the character  and identity of a commodity. The nature and extent of processing may vary  from one  case to  another and indeed there may be several stages  of processing and perhaps different kinds of processing at  each stage.  With each  process suffered, the original commodity  experiences 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 recognised  as a new and distinct commodity that it can be said that a new commodity, distinct from the original. has come into being.      Sales Tax  Board v.  PIO Food Packers (1980) 3 SCR 1271 applied.      1.3 The  shrimps, prawns  and lobsters purchased by the appellants  did   not  lose  their  original  character  and identity when  they were  subjected to  processing  for  the purpose of  export. so far as commercial parlance or popular usage is concerned, they remained the same goods. 369 The dealer and the consumer regarded both as shrimps, prawns and lobsters. The only difference is that processed shrimps, prawns and  lobsters are  ready  for  the  table  while  raw shrimps, prawns  and lobsters  are not but still both are in commercial parlance,  shrimps, prawns and lobsters. The fact that they  undergo a  certain degree of processing or frozen for the purpose of preservation and transfer to other places including far off countries in the world makes no difference in character or identity as the original shrimps, prawns and lobsters. Hence,  the purchases  of raw  shrimps, prawns and lobsters by  the appellants  must be held to be purchases in the course  of export and hence exempt from liability to tax under the Karnataka Sales Tax Act, 1957 as amended. [377A-B]      East Taxes  Motor Freight  Lines v. Frozen Food Express (100) L.Ed. 917 quoted with approval.

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    1.4 Entry  13a of  the Third  Schedule to the Karnataka Act also  makes it  clear  that  even  processed  or  frozen shrimps, prawns  and lobsters  are known commercially and in the trade  as shrimps,  prawns and  lobsters. When the State Legislature excluded processed or frozen shrimps, prawns and lobsters from  the ambit  and coverage  of  Entry  13a,  its object obviously was that the last purchases of processed or frozen shrimps,  prawns and lobsters in the State should not be exigible  to State  Sales Tax  under Entry 13a. The State Legislature was not at all concerned with the question as to whether processed or frozen shrimps, prawns and lobsters are commercially the  same commodity  as raw shrimps, prawns and lobsters or  are a  different commodity.  Merely because the State Legislature made a distinction between the two for the purpose of  determining exigibility  to State  Sales Tax, it cannot be  said that  in commercial parlance or according to popular sense,  processed  or  frozen  shrimps,  prawns  and lobsters are recognised as different commodity distinct from raw shrimps,  prawns  and  lobsters.  Further  the  question whether raw  shrimps, prawns  and lobsters  after  suffering processing retain  their original  character or  identity or become a new commodity has to be determined not on the basis of a  distinction made  by the  State  Legislature  for  the purpose of exigibility to State Sales Tax because even where the commodity is the same in the eyes of the persons dealing in it  the State  Legislature may  make a classification for determining liability to sales tax.

JUDGMENT:       CIVIL  APPELLATE JURISDICTION:  Civil Appeal  No.  220 (NT) of 1986 370      From the  Judgment and  order dated 20th November, 1985 of the  Karnataka High  Court in  Writ Petition No. 27805 of 1982.      C.K. Viswanath Iyer, K.M.K. Nair and S.T. Desai for the Appellants B.R.L. Iyengar, M. Veerappa for the Respondents.      The Judgment of the Court was delivered by      BHAGWATI, C.J.  The  short  question  that  arises  for determination in  this  appeal  by  certificate  is  whether shrimps, prawns  and lobsters  subjected to  processing like cutting of heads and tails, peeling, deveining, cleaning and freezing cease  to  be  the  same  commodity  and  become  a different commodity for the purpose of the Central Sales Tax Act, 1956.  Can they  still  go  under  the  description  of shrimps, prawns  and lobsters or in other words, when we use the words  ’shrimps, prawns  and lobsters’ do they mean only raw shrimps,  prawns and  lobsters as caught from the sea or do they  also include  processed and  frozen shrimps, prawns and lobsters. This question which falls for determination in the present appeal arising out of the following facts.      The appellants  are  a  partnership  firm  carrying  on business as  dealers in  shrimps, prawns  and  lobsters  and other sea food products. The appellants  are registered as a dealer both  under the Karnataka Sales Tax Act, 1957 and the Central Sales Tax Act, 1956. The appellants in the course of their business purchase shrimps, prawns and lobsters locally for the purpose of complying with orders for export and they cut the  heads and tails of the shrimps, prawns and lobsters purchased by  them, peel,  devein and  clean them  and after freezing and  packing them  in cartons,  they export them to foreign buyers  outside India under prior contracts of sale. The appellants  filed their  statement of  monthly turn-over

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for  the   month  of   April  1982   before  the   Assistant Commissioner of  Commercial Taxes,  Mangalore  and  in  this statement of monthly turn-over, they claimed total exemption from tax  in respect  of the  purchase turn-over of shrimps, prawns and  lobsters on  the ground  that the  same had been purchased in  the course of export. The appellants relied on sub-section (3)  of section  5 of the Central Sales Tax Act, 1956 which reads as follows:           "Notwithstanding anything contained in sub-section           (1)  the  last  sale  or  purchase  of  any  goods           preceding the  sale or  purchase  occasioning  the           export of those goods out of the 371           territory of  India shall  also be deemed to be in           the course  of such  export, if  such last sale or           purchase took place after, and was for the purpose           of complying  with, the  agreement or order for or           in relation to such export." The  appellants   contended  that  since  the  purchases  of shrimps, prawns  and lobsters  had been made by them for the purpose of  complying  with  the  orders  for  export,  such purchases of  shrimps, prawns and lobsters must be deemed to be in  the course  of export  and they  were accordingly not taxable  under  the  Karnataka  Sales  Tax  Act  1957.  This contention of  the appellants  was rejected by the Assistant Commissioner of  Commercial Taxes  and on  30th July 1982 an order was  made by  the Assistant Commissioner of Commercial Taxes for  the month of April 1982 under section 12 B (2) of the Karnataka  Sales Tax  1957 assessing  the appellants  to purchase-tax and  other incidental  taxes in  respect of the purchases of  shrimps, prawns  and  lobsters  made  by  them during  the  said  period.  The  Assistant  Commissioner  of Commercial Taxes  also passed another order dated 3rd August 1982 assessing  the appellants  to  purchase-tax  and  other incidental taxes  in respect  of the  purchases of  shrimps, prawns and  lobsters made  by them  during the month of May, 1982. These two orders made by the Assistant Commissioner of Commercial Taxes were followed by issue of notices of demand for Rs.52,610.71  and Rs.44,237.88  respectively against the appellants. The  appellants thereupon  filed a writ petition in the  High Court  of Karnataka  challenging the assessment orders and  the notices  of demand  issued against  them and sought appropriate  direction, order or writ restraining the respondents from  imposing or  collecting  purchase  tax  on purchase turn-over of shrimps, prawns and lobsters under the Karnataka  Sales   Tax  Act  1957.  The  writ  petition  was dismissed by  the High  Court,  but  having  regard  to  the importance of  the question  involved, a  certificate  under Article 133  of the  Constitution was  granted by  the  High Court and  that is how the present appeal by certificate has come before us.      It is  clear on  a plain  reading of sub-section (3) of Section 5 of the Central Sales Tax Act 1956 that in order to attract the applicability of that provision, it is necessary that the  goods which  are purchased  by an assessee for the purpose of  complying with  the agreement or order for or in relation to  export,  must  be  the  same  goods  which  are exported out  of the  territory of  India. The  words "those goods" in  this subsection  are clearly  referable  to  "any goods" mentioned  in the  preceding part  of the sub-section and it is therefore obvious that the goods 372 purchased by the assessee and the goods exported by him must be the  same. If  by reason  of any  processing to which the goods may  be subjected  after purchase,  they change  their

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identity so that commercially they can no longer be regarded as  the  original  goods,  but  instead  become  a  new  and different kind  of goods  and then  they are  exported,  the purchases of  original goods  made by the assessee cannot be said to  be purchases  in the course of export. The question which therefore  arises for  consideration  is  as  to  what happens when  shrimps, prawns  and lobsters purchased by the assessee are  subjected to  the process  of cutting of heads and tails,  peeling, deveining, cleaning and freezing before export. Do  they cease  to be  the  original  commodity  and become commercially  a new commodity or do they still retain their original identity as shrimps, prawns and lobsters?      Before we  proceed to  consider this  question,  it  is necessary to  refer to  certain provisions  of the Karnataka Sales  Tax   Act,  1957  (hereinafter  referred  to  as  the ’Karnataka Act’)  which came into force on 1st October 1957. Section 5  of the  Karnataka Act  which enacts  the charging section provides  for levy  of tax on sales and purchases of various commodities  described in  the Schedules to the Act. The Third  Schedule to  the  Karnataka  Act,  as  originally enacted, enumerated  the commodities on which a single-point tax was  leviable under  subsection 3(b)  of section  5  and there were  13 entries  in this  Schedule. None  of these 13 entries included  shrimps,  prawns  and  lobsters  with  the result that  the purchases  of shrimps,  prawns and lobsters were not  exigible to  purchase tax. This position continued right from  the time  of the  original enactment  until 31st March 1973  when the  Karnataka Sales  Tax (Amendment)  Act, 1973 introduced a new Entry ’13a’ in the Third Schedule with effect from  Ist April  1973. This  entry included "shrimps, prawns and  lobsters"  in  the  Third  Schedule.  There  was another amendment  made in  the Karnataka Act in 1978 by the Karnataka Sales  Tax (Amendment)  Act, 1978 and section 9 of this Amending  Act made certain amendments in Entry 13a with retrospective effect,  so that from 1st April 1973 Entry 13a included in the Third Schedule "shrimps, prawns and lobsters other than processed or frozen shrimps, prawns and lobsters" and the  Explanation to Entry 13a provided that "processing" shall include  "all or any of the following, namely, cutting of head  or tail, peeling, deveining, cleaning or freezing". But, Entry 13a in this form continued only up to 31st August 1978 and  with effect  from 1st  September, 1978,  a further amendment was  made by  the Karnataka  Taxation and  Certain Other Laws  (Amendment) Act,  1982 and  after this amendment which was made 373 with retrospective effect from 1st September 1978, Entry 13a read:   "Shrimps, prawns  and  lobsters  other  than  frozen shrimps, prawns  and lobsters".  The amendment  made by  the 1982 Amendment  Act excluded  from the  scope and  ambit  of Entry 13a,  frozen shrimps,  prawns and lobsters and brought within the net of taxation only purchases of shrimps, prawns and lobsters other than frozen shrimps, prawns and lobsters, provided they were last purchases within the State.      It is  in  the  context  of  these  provisions  of  the Karnataka Act  that we  have to  consider  whether  shrimps, prawns and  lobsters,  when  subjected  to  the  process  of cutting of heads and tails, peeling, deveining, cleaning and freezing, retain  their original  character and  identity or become another  distinct commodity. The test which has to be applied for  the purpose  of determining whether a commodity subjected to  processing retains  its original character and identity  is  as  to  whether  the  processed  commodity  is regarded in the trade by those who deal in it as distinct in identity from  the original  commodity or  it  is  regarded,

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commercially and  in the  trade, the  same as  the  original commodity. It is necessary to point out that it is not every processing that  brings about  change in  the character  and identity of a commodity. The nature and extent of processing may vary  from one  case to  another and indeed there may be several stages  of processing and perhaps different kinds of processing at  each stage.  With each  process suffered, the original commodity  experiences 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 recognised  as a new and distinct commodity that it can be said that a new commodity, distinct from the original, has come into being. The test is whether in  the eyes of those dealing in the commodity or in commercial parlance  the processed  commodity is regarded as distinct  in   character  and  identity  from  the  original commodity vide  Sales Tax Board v. PIO Food Packers [1980] 3 SCR 1271.      It is  clear  on  an  application  of  this  test  that processed  or   frozen  shrimps,  prawns  and  lobsters  are commercially regarded  the same  commodity as  raw  shrimps, prawns and  lobsters. 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 distinct commodity.  They are  in common  parlance known  as shrimps,  prawns   and  lobsters.   There  is  no  essential difference between  raw shrimps,  prawns  and  lobsters  and processed or frozen shrimps, prawns and lobsters. 374 The dealer  and the  consumer regard both as shrimps, prawns and lobsters. The only difference is that processed shrimps, prawns and  lobsters are  ready  for  the  table  while  raw shrimps, prawns and lobsters are not, but still both are, in commercial parlance,  shrimps, prawns  and lobsters.  It  is undoubtedly true that processed shrimps, prawns and lobsters are  the  result  of  subjecting  raw  shrimps,  prawns  and lobsters to  a certain degree of processing but even so they continue to possess their original character and identity as shrimps, prawns and lobsters, notwithstanding the removal of heads and  tails, peeling,  deveining and cleaning which are necessary for  making them  fit for  the table.  Equally  it makes no  difference in  character or identity when shrimps, prawns  and   lobsters  are   frozen  for   the  purpose  of preservation and  transfer to other places including far off countries in the world. There can therefore be no doubt that processed or  frozen shrimps,  prawns and lobsters are not a new  and   distinct  commodity  but  they  retain  the  same character and  identity as  the original shrimps, prawns and lobsters.      This view  finds ample support from the decision of the Supreme Court  of the  United States  in  East  Texas  Motor Freight Lines  v. Frozen Food Express, 100 L. Ed. 917, where the question  was whether  dressed and  frozen chicken was a commercially distinct article from the original chicken. The Supreme Court  held that  it was not a commercially distinct article but was commercially and in common parlance the same article as chicken. The Supreme Court pointed out:           "Killing,  dressing  and  freezing  a  chicken  is           certainly a  change in the commodity. But it is no           more drastic  a change than the change which takes           place  in  milk  from  pasturising,  homogenizing,           adding  vitamin  concentrates,  standardising  and           bottling". and proceeded to add in words clear and explicit:

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         " .....  there is  hardly less  difference between           cotton in  the field  and cotton  at the gin or in           the bale  or between  cottonseed in  the field and           cottonseed at  the gin,  than between a chicken in           the pen  and one  that is  dressed. The ginned and           baled cotton  and the  cottonseed, as  well as the           dressed chicken,  have gone  through a  processing           stage. But  neither has been "manufactured" in the           normal sense of the word." 375 If dressed and frozen chicken is not a commercially distinct article from  the original  chicken, it  must  follow  on  a process of  analogical reasoning  that processed  and frozen shrimps,  prawns   and  lobsters   cannot  be   regarded  as commercially distinct commodity from raw shrimps, prawns and lobsters.      This conclusion  on principle  was not  disputed by the High Court  in its judgment and the High Court conceded that even after  processing such  as cutting  of heads and tails, peeling, deveining,  cleaning and  freezing, shrimps, prawns and lobsters  subjected  to  such  processing  continued  in common parlance to be called ’shrimps, prawns and lobsters’. But the  High Court  took the  view that Entry 13a after the amendment effected  in it with retrospective effect from 1st September, 1978,  made a  distinction between  raw  shrimps, prawns and  lobsters and processed or frozen shrimps, prawns and lobsters. In view of this distinction made in Entry 13a, it was  not  possible  to  hold  that  processed  or  frozen shrimps, prawns  and lobsters were the same commodity as raw shrimps, prawns and lobsters. The argument was that when the State Legislature  itself made  a distinction  between these categories  of   commodities  by  making  purchases  of  one category amenable  to sales  tax under Entry 13a and leaving out of  the scope  of taxation  under Entry  13a  the  other category, how  could it  be said  that both these categories represent the  same commodity  and there is no difference in character and  identity between  the two.  This argument, we are afraid,  is not  well-founded. It  is based  on a  total misapprehension in  regard to the true object and intendment of Entry  13a and it erroneously seeks to project that Entry in the  interpretation and  application of  Section  5  sub- section (3)  of the Central Sales Tax Act. In fact Entry 13a as amended,  supports the  argument that  even processed  or frozen shrimps,  prawns and  lobsters are known commercially and in  the trade  as ’shrimps,  prawns and lobsters’. It is because Entry  13a as it stood prior to its amendment, would have,  on  the  plain  natural  meaning  of  the  expression ’shrimps, prawns and lobsters’ included processed and frozen shrimps, prawns  and lobsters,  that it became necessary for the State  Legislature to amend Entry 13a with retrospective effect so  as to  exclude from  the scope  and ambit of that entry processed  or frozen shrimps, prawns and lobsters. Now when the  State Legislature  excluded  processed  or  frozen shrimps, prawns  and lobsters from the ambit and coverage of Entry 13a,  its object obviously was that the last purchases of processed  or frozen  shrimps, prawns and lobsters in the State should  not be exigible to State Sales Tax under Entry 13a. The State Legislature was not at all concerned with the question as to 376 whether processed or frozen shrimps, prawns and lobsters are commercially the  same commodity  as raw shrimps, prawns and lobsters or are a different commodity and merely because the State Legislature made a distinction between the two for the purpose of  determining exigibility  to State  Sales Tax, it

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cannot be  said that  in commercial parlance or according to popular sense,  processed  or  frozen  shrimps,  prawns  and lobsters are recognised as different commodity distinct from raw shrimps,  prawns and  lobsters. The question whether raw shrimps, prawns  and  lobsters  after  suffering  processing retain their  original character or identity or become a new commodity has  to be  determined  not  on  the  basis  of  a distinction made by the State Legislature for the purpose of exigibility to  State  Sales  Tax  because  even  where  the commodity is  the same in the eyes of the persons dealing in it the  State Legislature  may  make  a  classification  for determining liability  to sales  tax. This question, for the purpose of  the Central  Sales Tax Act, has to be determined on the  basis of  what is  commonly known  or recognised  in commercial parlance. If in commercial parlance and according to what  is understood  in the  trade by  the dealer and the consumer, processed  or frozen  shrimps, prawns and lobsters retain their  original character  and identity  as  shrimps, prawns and  lobsters  and  do  not  become  a  new  distinct commodity and are as much ’shrimps, prawns and lobsters’, as raw shrimps, prawns and lobsters, sub-section (3) of section 5 of  the Central  Sales Tax  Act would  be attracted and if with a view to fulfilling the existing contracts for export, the assessee  purchases raw shrimps, prawns and lobsters and processes and  freezes them,  such purchases of raw shrimps, prawns and  lobsters would  be deemed  to be  in  course  of export so as to be exempt from liability to State Sales Tax.      Here in the present case, it was not disputed on behalf of Revenue  that the  purchases of  raw shrimps,  prawns and lobsters were  made by  the appellants  for the  purpose  of fulfilling existing  contracts for  export and  after making such purchases  the appellants subjected raw shrimps, prawns and lobsters  purchased by them to the process of cutting of heads and  tails, peeling,  deveining, cleaning and freezing and exported  such processed  and frozen shrimps, prawns and lobsters in fulfilment of the contracts for export. The only argument raised  on behalf  of Revenue  was that  the  goods which were exported were not the same as the goods purchased by the  appellants because  raw shrimps, prawns and lobsters after processings ceased to be the same commodity and became a new  distinct commodity.  But, for  reasons which  we have already discussed, this argument cannot be sustained. 377 The shrimps, prawns and lobsters purchased by the appellants did not lose their original character and identity when they were subjected  to processing  for the purpose of export. So far as  commercial parlance  or popular  usage is concerned, they remained  the same goods and hence the purchases of raw shrimps, prawns  and lobsters by the appellants must be held to be  purchases in  the course  of export  and hence exempt from liability to tax under the Karnataka Sales Tax Act.      We,  accordingly,  allow  the  appeal,  set  aside  the judgment of  the High  Court as  also the Orders made by the Assistant Commissioner  of Commercial  Taxes and direct that the purchases  of raw  shrimps, prawns  and lobsters made by the appellants  for the  purpose of  fulfilling the existing contracts for  export shall  not be included in the tax-able turnover of  the appellants.  The respondents  will pay  the costs of the appeal to the appellants. S.R.                                         Appeal allowed. 378