Full Judgment Text
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOs. 1983-2039 OF 2016
[Arising out of SLP(C) NOs. 9733-9789 OF 2014]
The Additional Commissioner of
Commercial Taxes, Bangalore ...Appellant(s)
Versus
Ayili Stone Industries Etc. Etc. ...Respondent(s)
J U D G M E N T
Dipak Misra, J.
These appeals, by special leave, assail the common
judgment and order passed by the High Court of Karnataka
JUDGMENT
in STA No. 574-575/2011 and other connected matters
preferred under Section 24(1) of the Karnataka Sales Tax
th
Act, 1957 (for brevity, “the Act”), on 4 December, 2012
whereby it has overturned the order dated 25.02.2011
passed by the Additional Commissioner of Commercial
Taxes, Zone-I, Bangalore in a batch of suo motu revisions
under Section 12-A(1) of the Act whereby the revisional
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2
authority has opined that there had been an erroneous
order in the appeal causing loss to the State exchequer and
accordingly issued notices to the concerned assesses
requiring them to participate in the revision petitions and
file written objections and put forth their stand availing the
opportunity of being heard. As the factual score in all the
cases has the colour of similitude barring the numerical
figures and the arithmetical computations, we shall advert
to the facts in the appeal where “Ayili Stone Industries” is
the respondent-assessee.
2. The respondent-assessee is a dealer under the Act as
well as the Central Sales Tax Act, 1956 (for short, ‘CST Act’)
and is engaged in the business of manufacturing and
trading in granite stone. The assessing authority finalised
JUDGMENT
the assessment for certain assessment years allowing
exemption on polished granite stone on the basis that
polished granite stones were produced from out of the tax
suffered from rough granite blocks. Thereafter, the
assessing authority reopened the assessment. While
passing the order of reassessment, the Assessing Officer
opined certain amount had been allowed exemption as
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second sale mentioning in the order of assessment that the
granite stones sold within the State were polished out of
unpolished granite blocks locally purchased on demand of
sales tax. The said authority referred to Entry No. 17(1) of
Part S of second schedule appended to the Act which relates
to granite stones, namely, (a) polished, (b) unpolished and
(c) chips. The Assessing Authority observed that the
polished and unpolished granite stones are under separate
entries in the said schedule and such being the case,
treating of sale of polished granite sold within the State
which are obtained out of unpolished granite stones as sales
inasmuch as they are suffered sales tax was not correct
and, therefore, the exemption had been granted
erroneously. Being aggrieved by the aforesaid order, the
JUDGMENT
assessee preferred an appeal before the appellate authority.
After referring to the decision in M/s. Vishwakarma
1
Granites v. Commissioner of Commercial Taxes , it
opined that the orders passed under Section 12A of the Act
deserves to be set aside and accordingly allowed the
appeals.
1 st
W.P. No. 13803/05 decided on 21 June, 2006 by Karnataka H.C.
Page 3
4
3. The revisional authority referred to the decision in
Vishwakarma Granites (supra) wherein the High Court
had considered the judgments rendered in Poonam Stone
Processing Industries v. Deputy Commissioner of
2
Commercial Taxes, Gulbarga , Foredge Granite Pvt. Ltd.
3
v. State of Karnataka , State of Karnataka v. Goa
4
Granites , Chowgale and Company Pvt. Ltd. v. Union of
5
India and came to hold as follows:-
“8. In view of the clear dictum laid down by the
Division Bench of this Court in the case of
Foredge Granite Pvt. Ltd., this Court deems fit to
hold that the activity of cutting and polishing of
rough granite block will not amount to
manufacturing activity and that the polished
granite stones could be imposed Sales Tax for the
second time prior to 1-4-2002 i.e., prior to
amendment to Section 6B of KST Act. Thus, the
circular in so far as it relates to clause-3(a) is
concerned, as extracted above is just and proper.
However, the impugned Circular in so far as it
relates clause-3(b) is concerned, is not proper
inasmuch as the same is opposed to the dictum
laid down by the Division Bench of this Court in
the case of M/s. Foredge Granite’s case cited
supra.
JUDGMENT
9. The Commissioner has referred to Part-S entry
No. 17 of II schedule to the Karnataka Sales Tax
at 1957 to hold that the polished and unpolished
granite stones are separate commodities. But he
2
STC Vol. 94 page 182
3
STRP No. 58/1991 decided on 12.12.1994
4
2006 (60) Kar.L.J. 110
5
AIR 1981 SC 1014
Page 4
5
has failed to appreciate the fact that merely
because entry No.17, para-5 to II Schedule refers
to polished and unpolished granites under two
separate heads, it cannot be said that the
polished and unpolished granites are two
separate commodities, as has been held by the
Division Bench of this Court in the case of M/s.
Foredge Granite Pvt. Ltd. As the granite block is
already taxed at the time of its first sale and the
subsequent sale of cut and polished granite
stones derived from the original granite block
cannot be treated as the first sale and that
therefore, tax could not be levied on the polished
granite stones u/s. 5-A and 5-B of the Act prior
to amendment of Section 6B of KST Act.
10. It is not disputed that the assessment orders
in these matters are prior to 01.04.2002, on
which date, Section 6-B of the Act is amended
and the provision relating to levy of re-sale tax is
submitted. Thus, the provision of Section 6-B of
the Act as introduced by Act No.5 of 2002 with
effect from 01.04.2002 is not applicable to the
matters on hand, inasmuch as, the transactions
involved in the cases on hand are much prior to
the said amendment.”
JUDGMENT
4. After noting the said decision, the revisional authority
opined, the question as to whether there is manufacturing
activity involved in obtaining granite tiles out of raw granite
or rough granite stone is not a relevant issue in the case at
hand. Thereafter, he concluded thus:-
“The issue is whether granite tile obtained out of
raw granite stone results in separate and distinct
commercial product from raw granite stones
which is liable to tax as first dealer. As rough
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granite and granite tiles are separate and distinct
as well as different commercial products, granite
tiles obtained out of rough granite stones are
liable to tax as first dealer.”
5. The said authority produced a passage from the
judgment in Goa Granites (supra) which we shall refer to at
a later stage. It has also reproduced passages from Foredge
Granite (supra) and formed an opinion which is to the
following effect:-
“The aforesaid discussions clearly establish that
the appeal order is erroneous causing loss of
revenue to the state exchequer. It is also clear
that granite tiles cannot be classified under entry
17(1) of para S of second schedule to KST Act
1957 as observed by the learned re-assessing
authority. This entry covers granite stones in the
form of polished granite stones, unpolished
granite stones and granite chips (Entry 17(i), (ii)
and (iii)/part S/second schedule and it does not
covers granite tiles all. There is separate entry in
case of tiles located at entry 8 in part T of second
schedule to KST Act 1957. At entry 8(iv), the
granite tiles are covered. After classifying certain
tiles under which granite tiles do not appear as
per entry 8(i),(ii) & (iii) of part T of second
schedule to KST Act 1957, all other tiles are
classified as under.
JUDGMENT
“(iv) Other tiles not covered by items 1-4-88 to
31-3-96 Fifteen percent
(i), (ii) and (iii) above
1-4-96 to 31-3-98 Twelve percent
1-4-98 to 31-3-01 Ten percent
1-4-01 to 31-03-02 Twelve percent
1-4-02 to 31-5-03 Fifteen percent
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From 1-6-2003 (Sixteen percent)
The granite tiles are covered under the aforesaid
entry in entry 8(iv) of part T of second schedule to
KST Act 1957. Thus, the rough granite stone and
granite tiles obtained out of rough granite stone
or block are distinct and separate commercial
products and are also separately classified in the
respective entries explained above”.
6. The High Court in appeal posed the question that
arose for consideration in the following terms:-
“Whether the rough granite purchased by a
dealer and the sale, the same after cutting and
polishing into granite tiles, whether such a
process amount to manufacture and that the said
product constitute a different commodity to
attract Sales Tax U/s.5 of the Sales Tax Act?”
7. As the impugned order would show, the High Court
after passing the question referred to the authority in Aman
6
Marble Industries Pvt. Ltd. v. CCE, Jaipur , reproduced
JUDGMENT
paragraph 4 of the said judgment and thereafter referred to
a passage from Foredge Granite (supra) and opined that
cutting the granite blocks into small sizes and polishing
them does not amount to manufacturing process to attract
sales tax under Section 5 of the Act. However, the High
Court observed whether the transactions attract tax under
Section 6B can be looked into and considered by the
6
(2005) 1 SCC 279
Page 7
8
Assessing Officer after giving opportunity to the parties, and
consequently allowed the appeals.
8. We have heard Mr. Basava Prabhu S. Patil, learned
senior counsel for the appellants and Mr. Bhargava V.
Desai, learned counsel for the respondents.
9. The factual matrix as noticeable is that the assessing
authority has allowed the exemption on sale of polished
granite stones on the foundation that the same is produced
from out of granite slabs that had suffered tax as rough
granite blocks. After the assessment, the concerned
authority referred to Entry 17(i) of Part S of the Second
Schedule, which is as follows:-
“Entry No.17(i) of Part “S” of the second Schedule,
appended to the K.S.T. Act, 1957, which relates
to granite stones reads as under
JUDGMENT
Sl. No. 17(i)
17(i) Granite stones
(a) Polished
(b) Unpolished
(c) Chips”
10. After reference to the said Entry, the assessing
authority expressed the view that polished and unpolished
granite stones have separate entries in the said schedule
and, therefore, treating of said sale of polished granite stone
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9
within the State which is obtained out of unpolished granite
stone as sales suffered would not be correct. The appellate
authority, as noted earlier, has founded its opinion on the
principle stated in Vishwakarma Granites (supra). In
Vishwakarma Granites (supra), the challenge was to the
circular No. 19/03-04 (KSA.CR.128/2000-01) dated
11.11.2003 issued by the Commissioner of Commercial
Taxes in Karnataka Bangalore (hereinafter referred to
‘Commissioner’ for short) and consequent assessment
orders and the orders levying penalty were called in
question. The said circular was under Section 3-A(2) of the
Act in pursuance of certain observations made in Poonam
Stone Processing Industries (supra) which reads as
follows:-
JUDGMENT
“Cuddaph, Shahabad and marble are stones of
special value in the market and the marketable
quality of these stones is enhanced by polishing
and cutting. But the substance of the material is
not altered. The article is made more presentable
and attractive for the benefit of the users and it
cannot be said that the activity is a
manufacturing activity.”
11. Thereafter, the Division Bench referred to various
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aspects of the circular. It was contended before the High
Court that the activity of the assessee in cutting and
polishing of granite stone will not come within the meaning
of manufacturing activity and the circular had been issued
on an erroneous notion. The High Court in Vishwakarma
Granites (supra) has noted that in Poonam Stone
Processing Industries (supra) the issue as to whether the
act of cutting and polishing of granite stone amounts to
manufacturing activity was not considered as the Division
Bench had held that the said question was unnecessary to
be decided in the writ appeal. It is worthy to note what has
been stated in Poonam Stone Processing Industries
(supra):-
“3. On the question whether the petitioner was
engaged in a manufacturing activity or not, the
Tribunal has considered the same in great detail
in para 13 of its order. The Tribunal has taken
into consideration the nature of the business
carried on. It is stated therein that the petitioner
purchases rough granite blocks and with the help
of the machines run by electrical energy in his
unit, cut the granite into required sizes and
thickness and polishes the same to the
requirement of the customers and sells the same.
In support of his case, the learned counsel for the
petitioner pointed out the objections filed by him
before the Revisional Authority and also produced
a brochure before us indicating the nature of the
JUDGMENT
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activities carried on by him. Neither a perusal of
the objections filed by the petitioner nor the very
attractive brochure produced before us would
convince us to come to a different conclusion
from the finding given by the Tribunal. The
Tribunal has looked into the material and correct
perspective. The stones are larger granite blocks
purchased by the petitioner, even when cut to the
sizes to the requirement of the customers
including as regards its thickness or polishing it
continues to be granite block. May be a smaller
or thinner size, but it would continue to be a
granite block however polished it may be. Even
though it may be used as a building material, the
granite block does not cease to be a granite block.
Therefore, no manufacturing activity is involved.
The finding recorded in this regard is perfectly in
order.
5. Merely cutting a rough block of granite into
different sizes to the requirement of the
customers would not involve any manufacturing
activity. In that view of the matter, we do not
think the view taken by the Tribunal is wrong in
any manner. In the view we have taken
non-production of the valuation certificate in this
case does not assumes any significance”.
JUDGMENT
[underlining is ours]
12. The High Court in Vishwakarma Granites (supra)
had referred to the authority in Goa Granites (supra). In
Goa Granites’ case the Division Bench of the High Court
posed the following two questions which required
determination by the High Court:-
“I. Whether the Tribunal was right in holding that
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the polished tiles obtained out of rough granite
blocks are to be reckoned as the same goods or
commercially new commodities for allowing
exemption under Section 5(3) of the CST Act,
1956?
II. Whether the ratio of the decision of this
Hon’ble Court in the case of Foredge Granite v.
State of Karnataka in STRP.No.58/1991 rendered
with reference to Entry 17 of Part ‘S’ of the
Second Schedule to Karnataka Sales Tax Act, as
it stood prior to 1.4.1991 was applicable to the
facts of the case of the assesses?”
13. While discussing, the Court took note of the fact that
what is sold or supplied by the dealer-assessee, registered
both under the Act and CST Act, is rough granite block to
an 100% export-oriented unit and it is also not in dispute
that what is exported by the export-oriented unit is polished
and thin slices of tiles made out of big rough granite blocks
supplied by the assessee. The Division Bench referred to
JUDGMENT
7
Sterling Foods v. State of Karnataka wherein it has
been held thus:-
“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 necessary to point out that it is not every
7
[1986] 63 STC 239
Page 12
13
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 recognized 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.”
14. While proceeding with the analysis, the Division Bench
posed a question which we think it apt to reproduce:-
“In other words, whether the rough granite
blocks, which were sold were the very goods,
which were exported? To be further precise, the
controversy in this revision petition is about the
identity of the goods purchased and identity of
the goods sold.”
JUDGMENT
15. Thereafter, the Court has referred to Delhi Cloth and
8
General Mills Ltd., vs. State of Rajasthan , wherein the
Court has stated, that “it was fairly well settled that the
words or expressions must be construed in the sense in
which they are understood in the trade, by the dealer and
8
(1980) 46 STC 256
Page 13
14
consumer. It is they who are concerned with it and it is the
sense in which they understand it that constitutes the
definitive index of the legislative intention when the statute
was enacted”. Thereafter, the Division Bench observed:-
“The question for consideration is, whether this
polished tiles obtained out of rough granite
blocks would amount to export of “those goods”,
which had been sold by the assessee? It is the
specific case of the assessee before all the
authorities under the Act that what is sold in
only rough granite blocks to an industrial unit,
which is an 100% export oriented unit. It is also
its case that the export unit by using heavy
machinery, cut these rough granite blocks in to
thin pieces and thereafter, they have been
polished and exported not as granite blocks but
as polished tiles. Under these circumstances,
they are of the view that they are entitled to get
exemption from payment of tax under the Act,
since the commodity supplied and the commodity
exported are one and the same, except for the
diminishing size. In aid of their assertion, they
had placed reliance on the observations made by
this Court in the case of M/s Foredge Granite
Pvt. Ltd. vs. The State of Karnataka and Another
(STRP.No.58/1991). At the outset, we should
notice in this case, firstly, that sub-section (3) of
Sec. 5 of the CST Act did not fall for consideration
of this Court. The issue that was raised in the
said decision was, mere cutting a rough block of
granite into different sizes to the requirement of
the customer would involve any manufacturing
activity? The facts which were noticed by the
Court in that case was, that the petitioner had
purchased rough granite blocks and with the
help of the machines run by electrical energy in
its unit, cuts the granites into required sizes and
JUDGMENT
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thickness and polishes the same to the
requirement of the customers and sells the same.
The case of the assessee before the
assessing authority was that the business activity
of the petitioner is a manufacturing activity and
therefore, would be entitled to the benefit of the
notification dated 15/16.10.1981, which provided
for exemption from payment of tax under the KST
Act, 1956, in respect of goods manufactured and
sold by new industrial unit. The assessing
authority had allowed the claim of the dealer and
had granted exemption from payment of sale tax,
treating the business activity of the petitioner as
a manufacturing activity and therefore, entitled to
certain incentives and concession flowing from
the notification. This order of the assessing
authority was revised by the revisional authority
by invoking the provisions of Section 21(2) of KST
Act and the order so passed was confirmed by the
Karnataka Appellate Tribunal, by rejecting the
appeal filed by the assessee. It is the correctness
or otherwise of this order was called in question
by the assessee before this Court in Revision
Petition 58/1991.”
And again:-
JUDGMENT
“On these set of facts, this Court has stated that
the stones are large granite blocks purchased by
the petitioner and even when cut into the sizes to
the requirement of the customers including as
regards its thickness or polishing, it continues to
be a granite block. May be a smaller or thinner
size, but it would continue to be granite block
however polished it may be. Even though it may
be used as a building material, the granite block
does not cease to be a granite block and
therefore, no manufacturing activity is involved.
The conclusion the Court has reached is, mere
cutting a rough block of granite into different
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sizes to the requirement of the customers would
not involve any manufacturing activity.”
16. The Division Bench distinguished the finding recorded
in Foredge Granite (supra) as the question that arose
before it pertained to whether the export of polished granite
tiles obtained out of rough granite blocks would amount to
export of “those goods” which had been sold and supplied.
The Court again referred to the principles stated in Sterling
Foods (supra), applied the said test and proceeded to
opine:-
“If this test is applied, neither in common
parlance nor in commercial parlance, sliced, thin,
polished tiles cannot be regarded as the rough
granite blocks. When rough granite blocks are
subjected to process of cutting, slicing into
required size and polished and exported as tiles,
the rough granite blocks ceased to be granite
blocks and become a distinct and different
commercial commodity from the original
commodity. In the trade circle, they are not
considered as one and the same commodity. If
the purchaser goes to the market to buy the
polished tiles, he will not be given the rough
granite blocks. Converse of this is also an
indication that they do not retain their identity as
rough granite blocks when they are cut/sliced,
polished as tiles and therefore, for the purpose of
Section 5(3) of the CST Act, it cannot be said that
the goods sold or supplied were those goods,
which were exported. The granite stones are
extracted from the quarry and they are cut into
small and large blocks. If they are cut or sawn to
JUDGMENT
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very specific dimension and sold either as smaller
blocks or cut sizes of granite blocks to the
exporter and if that exporter exports those small
cut sizes of granite blocks, it can definitely be
said, that what is sold and what is exported are
one and the same commodity. But in the present
case, the facts noticed by the fact finding
authorities is that, the exporter before exporting
the cut sizes of granite blocks, cuts them into
slices to the actual size of tiles, polishes or effects
honing process, which is similar to polishing and
the end result is a tile that has a stain or patina
finish or polish finish. If it was a case of mere
cutting or sawing to a specific dimension and
beveled edges are polished, it could be a case of
export of the same goods and therefore, eligible
for tax exemption under Sec. 5(3) of the Act. In
our view, the ‘tiles’ are not simply cut or sawn of
a granite blocks. They undergo further
processing of cutting into thin slices, and process
of polishing and emerge as ‘tiles’ and ready to be
sold as ‘tiles’ and in commercial parlance, they
are treated as different commodity altogether.
Even if we have to adopt a value added test, then
also, in our view, there is substantial
transformation of the original commodity into
different commercial commodity. Therefore, what
is sold and what is exported is not “those goods”
or the “same goods”, which is eligible for
exemption under Sec. 5(3) of the Act. While
considering the issues involved in this revision
petition, we are not considering whether any
manufacturing activity is involved while rough
granite blocks are cut/sliced into thin pieces as
tiles and polished or honed.”
JUDGMENT
17. Eventually, the Division Bench held:-
“Chemical composition of them may continue to
remain as stones when they were supplied and
cut into thin sizes, polished and sold as tiles, but
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in common parlance or in commercial parlance or
in trade circles or in value added percentage test,
in our view, they are not understood as one and
the same commodity. The rough granites are
processed to an extent that they no more remain
as granites but as tiles ready to be used in
building construction and other activities. By this
process, there is value addition to the goods.
There would be price variation between the rough
granite block and cut and polished tiles. Even in
the trade circles, when a customer asks for
polished tiles of required size, the dealer shall not
supply him with rough granites. The converse of
this transaction is also an indicative factor how
the trade circles understands the difference
between rough granite blocks and polished
granite tiles. Therefore, in our view, for the
purpose of Sec. 5(3) of the CST Act, 1956, it
cannot be said that what is supplied or sold are
those goods which are exported. Accordingly, the
assesses is not eligible to claim exemption from
payment of tax under the Act, on the ground that
the sale of granite blocks to an 100% exported
unit is a sale in the course of export or deemed
sale to be in the course of export.”
18. The decision in Foredge Granite (supra) was
JUDGMENT
distinguished by observing that:-
“We further add that the Apex Court in the case
of Sterling Foods v. The State of Karnataka(1986)
63 STC 239 has observed that “the character or
identity of the 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 determining liability to sales tax.
This question for the purpose of the Central Sales
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Tax Act, has to be determined on the basis of
what is commonly known or recognized in
commercial parlance”. Therefore, in our view, for
deciding the issue raised in this revision petition,
reference to Entry 17 of Part ‘S’ of Second
Schedule to the KST Act is wholly irrelevant.”
19. In Vishwakarma Granites (supra) the High Court
distinguished the Division Bench decision by opining that it
was not specifically dealing with the issue of manufacture
and further it was adverting to the exigibility of tax under
Section 5(3) of the CST Act. The Court distinguished the
two concepts, namely, the “manufacture” and the
recognised test of “common parlance”.
20. Now, we may look at what has been held in Aman
Marble (supra). The two-Judge Bench was dealing with the
issue whether the cutting of marble blocks into marble slabs
JUDGMENT
amounts to manufacture for the purpose of the Central
Excise Act. In that context, the Court referred to the
authority in Rajasthan SEB v. Associated Stone
9
Industries and reproduced a passage from the same which
is as follows:-
“This apart, excavation of stones from a mine and
thereafter cutting them and polishing them into
slabs did not amount to manufacture of goods.
9
(2000) 6 SCC 141
Page 19
20
The word ‘manufacture’ generally and in the
ordinary parlance in the absence of its definition
in the Act should be understood to mean bringing
to existence a new and different article having a
distinctive name, character or use after
undergoing some transformation. When no new
product as such comes into existence, there is no
process of manufacture. Cutting and polishing
stones into slabs is not a process of manufacture
for the obvious and simple reason that no new
and distinct commercial product came into
existence as the end product still remained stone
and thus its original identity continued.”
and this position was further reiterated as
follows: (SCC pp. 147-48, para 16)
“It is also not possible to accept that
excavation of stones and thereafter cutting and
polishing them into slabs resulted in any
manufacture of goods.”
21. At this juncture, it becomes imperative on our part to
analyse what has been stated in Associated Stone
JUDGMENT
Industries (supra). In the said case, the issue that arose
for consideration was whether pumping out water from a
mine comes within the meaning of manufacture,
production, processing or repair of goods as to claim
exemption from duty under notification issued under
Section 3 of Rajasthan Electricity (Duty) Act, 1962. The
Court referred to the authorities in Union of India v. Delhi
Page 20
21
10
Cloth and General Mills Co. Ltd. , CCE v. Rajasthan
11
State Chemical Works , wherein it has been held that
pumping of brine and lifting of raw material constituted
processes in or in relation to the manufacture. In the said
case, the Court adverted to the facts in Rajasthan State
Chemical Works (supra) and ultimately concluded thus:-
“In conclusion, it is said that if any operation in
the course of manufacture is so integrally con-
nected with the further operations which result in
the emergence of manufactured goods and such
operation is carried on with the aid of power, the
process in or in relation to the manufacture must
be deemed to be one carried on with the aid of
power. Pumping out water, excavation of stones
and cutting and polishing them into slabs cannot
be said to be integrally connected in the manu-
facturing of goods”.
22. At this stage, we think it appropriate to refer to
comparatively a recent pronouncement in ITO, Udaipur v.
JUDGMENT
12
Arihant Tiles & Marbles Pvt. Ltd. In the said case, the
assessee was engaged in the business of
manufacture/production of polished slabs and tiles which
the assessee exported (partly). The question that arose for
consideration is whether conversion of marble blocks by
10
AIR 1963 SC 791
11
(1991) 4 SCC 473
12
(2010) 2 SCC 699
Page 21
22
sawing into slabs and tiles and polishing amounts to
“manufacture or production of article or thing” so as to
make the respondent assessee(s) entitled to the benefit of
Section 80-IA of the Income Tax Act, 1961, as it stood at the
material time. Thus, manufacture or production was
required to be understood within Section 80-IA of the
Income Tax Act, 1961. The Court analysed the various
steps that is undertaken to reproduce the details of
step-wise activity undertaken by the assessee. The Court
reproduced the same:-
“( i ) Marble blocks excavated/extracted by the
mine owners being in raw uneven shapes have to
be properly sorted out and marked;
( ii ) Such blocks are then processed on single
blade/wire saw machines using advanced
technology to square them by separating waster
material;
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( iii ) Squared up blocks are sawed for making
slabs by using the gang saw machine or
single/multi-block cutter machine;
( iv ) The sawn slabs are further reinforced by way
of filling cracks by epoxy resins and fibre netting;
( v ) The slabs are polished on polishing machine;
the slabs are further edge cut into required
dimensions/tiles as per market requirement in
prefect angles by edge cutting machine and
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multi-disc cutter machines;
( vi ) Polished slabs and tiles are buffed by shiner.”
23. Thereafter, the three-Judge Bench analysed the
distinction/difference between production and manufacture.
We need not advert to the same. The Court, however,
referred to the authority in Associated Stone Industries
(supra). Analysing the same, the Court observed:-
“12. The basic controversy which arose for
determination in Rajasthan SEB case was whether the
activity of pumping out water from the mines came
within the meaning of the words “manufacture”,
“production”, “processing or repair of goods”. While
disposing of the matter, this Court, vide paras 1 and
10, stated that the specific case of the company was
that the electrical energy was consumed for pumping
out water from mines to make mines ready for mining
activity. This aspect is very important. It needs to be
highlighted that the case of the company was that
pumping out water from mines to make the mines
ready for mining activity came within the ambit of the
term “manufacture”. This argument was rejected by
this Court, after examining various judgments of this
Court on the connotation of the word “manufacture”.”
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24. After so analysing, the Court observed the said
decision had no application to the facts of the case, for only
activity which came up for consideration in Rajasthan SEB
case was the activity of pumping out water from a mine in
order to make the mine functional. The Court opined that
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the controversy it was dealing with, the said activity was not
required to be considered. Thereafter, the three-Judge
Bench adverted to the principle stated in Aman Marble
(supra). The Court distinguished the same by holding that
the word “production” was not under consideration before
the Court in the said case and thereafter noted that in the
said case it had been held that cutting of marble blocks into
slabs did not amount to manufacture. Explaining the
dictum in the said case, the Court observed:-
“In our view, the judgment of this Court in Aman
Marble Industries (P) Ltd. also has no application
to the facts of the present case. One of the most
important reasons for saying so is that in all such
cases, particularly under the excise law, the
Court has to go by the facts of each case. In each
case one has to examine the nature of the activity
undertaken by an assessee. Mere extraction of
stones may not constitute manufacture.
Similarly, after extraction, if marble blocks are
cut into slabs per se will not amount to the
activity of manufacture.”
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25. Thereafter, the Court proceeded to deal with the
process undertaken by the assessee and in that context
stated:-
“In the present case, we are not concerned only
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with cutting of marble blocks into slabs. In the
present case we are also concerned with the
activity of polishing and ultimate conversion of
blocks into polished slabs and tiles. What we find
from the process indicated hereinabove is that
there are various stages through which the
blocks have to go through before they become
polished slabs and tiles. In the circumstances, we
are of the view that on the facts of the cases in
hand, there is certainly an activity which will
come in the category of “manufacture” or
“production” under Section 80-IA of the Income
Tax Act.”
26. The Court referred to the decision in CIT v. N.C.
13
Budharaja & Co. and ruled thus:-
“25. Applying the above tests laid down by this
Court in Budharaja case to the facts of the
present cases, we are of the view that blocks
converted into polished slabs and tiles after
undergoing the process indicated above certainly
results in emergence of a new and distinct
commodity. The original block does not remain
the marble block, it becomes a slab or tile. In the
circumstances, not only is there manufacture but
also an activity which is something beyond
manufacture and which brings a new product
into existence and therefore, on the facts of these
cases, we are of the view that the High Court was
right in coming to the conclusion that the activity
undertaken by the respondent assessees did
constitute manufacture or production in terms of
Section 80-IA of the Income Tax Act, 1961.
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26. Before concluding, we would like to make one
observation. If the contention of the Department
is to be accepted, namely, that the activity
13
1994 Supp (1) SCC 280
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undertaken by the respondents herein is not
manufacture, then, it would have serious revenue
consequences. As stated above, each of the
respondents is paying excise duty, some of the
respondents are job-workers and the activity
undertaken by them has been recognised by
various government authorities as manufacture.
To say that the activity will not amount to
manufacture or production under Section 80-IA
will have disastrous consequences, particularly in
view of the fact that the assessees in all the cases
would plead that they were not liable to pay
excise duty, sales tax, etc. because the activity
did not constitute manufacture.”
27. We have reproduced in extenso from the aforesaid
authority, though the exposition of law arose under a
different enactment. The three-Judge Bench has explained
the principle stated in Rajasthan SEB’s case as well as in
Aman Marble (supra). In the case at hand, though the
High Court in the impugned order posed the question
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correctly and placed reliance on Aman Marble (supra), yet
it has not correctly applied the principle in the correct
perspective. In Aman Marble (supra) the Court has held
that it was not possible to accept that excavation of stones
and thereafter cutting and polishing them into slabs
resulted in a manufacture of goods. The decision in
Foredge Granite (supra) had been restricted to the concept
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of polished granite block. The revisional authority, as we
perceive, has applied the test of separate and distinct
commercial product that comes into existence from granite
stones and for the said purpose, it has relied on the
pronouncement in Goa Granites (supra). We have
copiously referred to Goa Granites (supra). It has drawn a
distinction between the slabs and tiles. Entry 17(i) of Part S
of the Act deals with polished granites, unpolished granites
and chips. The tiles come under Entry 8 in part T of the
second schedule to the Act. At Entry 8(iv), the tiles are
covered. It is noticeable that in Entry 8, certain tiles have
been classified under Entry 8(i) (ii) and (iii) of Part T. Under
Entry 8(iv) further tiles are classified. It is as under:-
“(iv) Other tiles not covered by items 1-4-88 to
31-3-96 Fifteen percent
(i), (ii) and (iii) above
1-4-96 to 31-3-98 Twelve percent
1-4-98 to 31-3-01 Ten percent
1-4-01 to 31-03-02 Twelve percent
1-4-02 to 31-5-03 Fifteen percent
From 1-6-2003 (Sixteen percent)”
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28. There is a distinction between polished granite stone or
slabs and tiles. If a polished granite stone is used in a
building for any purpose, it will come under Entry 17(i) of
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Part S of the second schedule, but if it is a tile, which comes
into existence by different process, a new and distinct
commodity emerges and it has a different commercial
identity in the market. The process involved is extremely
relevant. That aspect has not been gone into. The Assessing
Officer while framing the assessment order has referred to
Entry 17(i) of Part S but without any elaboration on Entry 8.
Entry 8 carves out tiles as a different commodity. It uses
the words “other titles”. A granite tile would come within the
said Entry if involvement of certain activities is established.
To elaborate, if a polished granite which is a slab and used
on the floor, it cannot be called a tile for the purpose of
coming within the ambit and sweep of Entry 8. Some other
process has to be undertaken. If tiles are manufactured or
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produced after undertaking some other activities, the
position would be different. A finding has to be arrived at
by carrying out due enquiry and for that purpose
appropriate exercise has to be undertaken. In the absence
of that, a final conclusion cannot be reached.
29. In view of the aforesaid, we allow the appeals, set aside
the orders passed by the High Court and all the authorities
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and remit the matter to the Assessing Officer to
re-adjudicate the matter keeping in view the observations
made hereinabove. There shall be no order as to costs.
.............................J.
[Dipak Misra]
............................ J.
[Shiva Kirti Singh]
New Delhi;
October 18, 2016
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