Full Judgment Text
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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