Full Judgment Text
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PETITIONER:
STATE OF KARNATAKA
Vs.
RESPONDENT:
B. RAGHURAMA SHETTY ETC.
DATE OF JUDGMENT24/03/1981
BENCH:
VENKATARAMIAH, E.S. (J)
BENCH:
VENKATARAMIAH, E.S. (J)
TULZAPURKAR, V.D.
SEN, AMARENDRA NATH (J)
CITATION:
1981 AIR 1206 1981 SCR (3) 280
1981 SCC (2) 564 1981 SCALE (1)571
CITATOR INFO :
D 1984 SC1870 (17)
ACT:
Karnataka Sales Tax Act, 1957 Section 6(i) Paddy-and
rice-Whether distinct commodities-Milling of Paddy-whether
involves manufacturing process-Consumption-meaning of.
HEADNOTE:
The assessees (respondents) are the owners of rice
mills and are registered dealers under the Karnataka Sales
Tax Act, 1957. In the course of their business, they
purchase paddy and after milling paddy, sell the resultant
rice. During the assessment years, the assessees purchased
paddy from agriculturists who were not liable to pay sales
tax. The assessing authority under the Act levied on the
assessee in each of these cases purchase tax on the purchase
turnover of paddy under section 6(i) of the Act. The appeals
filed by the assessees were dismissed by the Appellate
Authority except the one, holding that the conversion of
paddy into rice did not involve any manufacturing process
and that the purchase turnovers of paddy in those cases were
not liable to tax under section 6(i) of the Act. In the case
of the other assessee, the Tribunal held that the turn over
was liable to be taxed as he had manufactured milled rice
out of the paddy purchased by him.
The appellant filed revision petitions in the High
Court and the assessee filed revision petition in the last
case. The High Court after holding that the turn overs in
question were not liable to tax under section 6(i) of the
Act dismissed the petitions filed by the appellant and
allowed the petition of the last assessee. The High Court
granted a certificate of fitness to this Court.
The appellant argued that the sale price of paddy which
is a taxable commodity having not been subjected to tax
under section 5, the assessees were liable to tax under
section 6(i) of the Act as they had consumed it in the
manufacture of rice which was a different commodity for
sale. The respondent argued that they had not consumed paddy
when they produced rice from it by merely carrying out the
process of dehusking at their mills.
Allowing the appeals,
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^
HELD: 1. (i) Paddy and rice are two distinct
commodities. The milling of paddy involves a manufacturing
process. [284 B]
(ii) The levy in question is not impermissible even
though paddy and rice are liable to be taxed at a single
point, as in fact there is no double taxation on the same
commodity. [286 F-G]
281
Ganesh Trading Co. Karnal v. State of Haryana and Anr.
32 S.T.C. 623, Babu Ram Jagdish Kumar and Co. v. The State
of Punjab and Anr. 44 S.T.C. 159 affirmed.
2. Consumption in the true economic sense does not mean
only use of goods in the production of consumer goods or
final utilisation of consumer goods by consumers involving
activities like eating of food, drinking of beverages,
wearing of clothes or using of an automobile by its owner
for domestic purposes. A manufacturer also consumes
commodities which are ordinarily called raw materials when
he produces semi-finished goods which have to undergo
further processes of production before they can be
transformed into consumer goods. At every such intermediate
stage of production, some utility or value is added to goods
which are used as raw materials and at every such stage the
raw materials are consumed. [284 D-E]
3. At every stage of production there is consumption of
goods even though at the end of it there may not be final
consumption of goods but only production of goods with
higher utility which may be used in further productive
processes. [285 B-B]
M/s. Anwar Khan Mahboob Co. v. The State of Bombay and
Ors. [1961] 2 S.C.R. 709 at pp. 715-716; Economics (Tenth
Edition 1976) at page 168 by Professor Paul A. Samuelson,
referred to.
In the instant case, the assessees had consumed that
paddy purchased by them when they converted it into rice
which is commercially a different commodity for sale. The
case of assessees therefore, squarely falls under section
6(i) the Act. [286 C]
State of Tamil Nadu v. M. K. N. Kandaswami etc. etc.
[1976] 1 S.C.R. 38, Ganesh Prasad Dixit v. Commissioner of
Sales Tax [1969] 3 S.C.R. 490, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1801-
1805 of 1975.
From the Judgments and Orders dated the 27th January
and 3rd February 1975 of the Karnataka High Court at
Bangalore in STRPs. Nos. 14, 15 19, 26 & 32 of 1974.
N. Nettar for the Appellant.
J. Ramamurthy and Miss R. Vaigai for the Respondent.
Ex-parte Respondents in CAs 1801-1803 & 1805/75.
The Judgment of the Court was delivered by
VENKATARAMIAH, J. The question which arises for
consideration in these appeals by certificate is whether the
respondents (here-
282
inafter referred to as ’the assessees’) are liable to pay
purchase tax under section 6(i) of the Karnataka Sales Tax
Act, 1957 (hereinafter referred to as ’the Act’) on the
turnover consisting of the price paid by them for purchasing
paddy for the purpose of converting it into rice for sale,
in their respective rice mills.
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The assessees are owners of rice mills in the State of
Karnataka and are registered dealers under the Act. In the
course of their business, they purchase paddy and after
milling paddy sell the resultant rice. During the assessment
years, the assessees purchased paddy from agriculturists who
were not liable to pay sales tax. The assessing authority
under the Act levied on the assessee in each of these cases
purchase tax on the purchase turnover of paddy under section
6(i) of the Act. The appeals filed by the assessees against
the said assessments were dismissed by the appellate
authority. The Karnataka Sales Tax Appellate Tribunal
allowed the appeals filed by the assessees against the
orders of the appellate authority except the one filed by
the assessee who is the respondent in Civil Appeal No. 1805
of 1975 holding that the conversion of paddy into rice did
not involve any manufacturing process and that the purchase
turnovers of paddy in those cases were not liable to tax
under section 6(i) of the Act. In the case of the assessee
who is the respondent in Civil Appeal No. 1805 of 1975, the
Tribunal held that the turnover was liable to be taxed as he
had manufactured boiled rice out of the paddy purchased by
him. Aggrieved by the decisions of the Tribunal, the State
Government filed revision petitions before the High Court
under section 23(1) of the Act in the first four cases and
the assessee filed a revision petition in the last case. The
High Court after holding that the turnovers in question were
not liable to tax under section 6(i) of the Act dismissed
the petitions filed by the State Government and allowed the
petition of the assessee who is the respondent in Civil
Appeal No. 1805 of 1975. Thereafter the High Court granted
by a common order a certificate of fitness in all these
cases to prefer appeals before this Court to the State
Government. On the basis of said certificate, these appeals
have been filed by the State Government against the orders
of the High Court. Since these appeals involve a common
question of law, they are disposed of by this common
judgment.
The relevant part of section 6 of the Act reads:
"6. Levy of purchase tax under certain
circumstances.- Subject to the provisions of sub-
section (5) of
283
section 5, every dealer who in the course of his
business purchases any taxable goods in circumstances
in which no tax under section 5 is leviable on the sale
price of such goods and,
(i) either consumes such goods in the manufacture
of other goods for sale or otherwise or disposes of
such goods in any manner other than by way of sale in
the state,
or
(ii)........................
shall be liable to pay tax on the purchase price of
such goods at the same rate at which it would have been
leviable on the sale price of such goods under section
5."
The contention of the State Government before the High
Court was and before us is that the sale price of paddy
which is a taxable commodity having not been subjected to
tax under section 5 the assessees are liable to tax under
section 6(i) of the Act as they had consumed it in the
manufacture of rice which was a different commodity for
sale. The assessees’ contention which was accepted by the
High Court is that paddy and rice being the same it cannot
be said that they had manufactured ’other goods’ out of
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paddy and hence section 6(i) is not attracted.
Paddy and rice have been held to be different
commodities by this Court in Ganesh Trading Co., Karnal v.
State of Haryana & Anr. in which it is observed thus:
"Now, the question for our decision is whether it
could be said that when paddy was dehusked and rice was
produced its identity remained. It was true that rice
was produced out of paddy but it is not true to say
that paddy continued to be paddy even after dehusking.
It had changed its identity. Rice is not known as
paddy. It is a misnomer to call rice as paddy. They are
two different things in ordinary parlance. Hence quite
clearly when paddy is dehusked and rice produced, there
has been a change in the identity of the goods".
284
The above view has been followed by this Court in Babu
Ram Jagdish Kumar and Co. v. The State of Punjab & Ors.
It is unfortunate that the High Court as well as the
Tribunal have tried to distinguish the decision of this
Court in Ganesh Trading Co.’s case (supra) on insubstantial
grounds, a detailed reference to which is unnecessary We
reiterate the view expressed in the above two cases and hold
that paddy and rice are two distinct commodities and that
the milling of paddy involves a manufacturing process.
There is no merit in the submission made on behalf of
the assessees that they had not consumed paddy when they
produced rice from it by merely carrying out the process of
dehusking at their mills. Consumption in the true economic
sense does not mean only use of goods in the production of
consumers’ goods or final utilisation of consumers’ goods by
consumers involving activities like eating of food, drinking
of beverages, wearing of clothes or using of an automobile
by its owner for domestic purposes. A manufacturer also
consumes commodities which are ordinarily called raw
materials when he produces semi-finished goods which have to
undergo further processes of production before they can be
transformed into consumers’ goods. At every such
intermediate stage of production, some utility or value is
added to goods which are used as raw materials and at every
such stage the raw materials are consumed. Take the case of
bread. It passes through the first stage of production when
wheat is grown by the farmer, the second stage of production
when wheat is converted into flour by the miller and the
third stage of production when flour is utilised by the
baker to manufacture bread out of it. The miller and the
baker have consumed wheat and flour respectively in the
course of their business. We have to understand the word
’consumes’ in section 6(i) of the Act in this economic
sense. It may be interesting to note that this is the basis
of the levy of ’Value Added Tax’, popularly called as VAT,
which is levied as an alternative to tax on turnover in some
Western countries. The difference between ’Value Added Tax’,
and tax on the turnover of sales or purchases is explained
by Professor Paul A. Samuelson in his book entitled
’Economics’ (Tenth Edition, 1976) at page 168 thus:
"A turnover tax simply taxes every transaction
made: wheat, flour, dough, bread, VAT is different
because it does not include in the tax on the miller’s
flour that part of its
285
value which came from the wheat he bought from the
farmer. Instead, it taxes him only on the wage and
salary, cost of milling, and on the interest, rent,
royalty, and profit cost of this milling stage of
production. (That is, the raw material costs used from
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earlier stages are subtracted from the miller’s selling
price in calculating his "value added" and the VAT tax
on value added........ )"
At every stage of production, it is obvious there is
consumption of goods even though at the end of it there may
not be final consumption of goods but only production of
goods with higher utility which may be used in further
productive processes.
While construing the word ’consumption’ which was found
in the Explanation to Article 286(1)(a) as it stood prior to
its deletion by the Constitution (Sixth Amendment) Act,
1956, this Court in M/s. Anwarkhan Mahboob Co. v. The State
of Bombay & Ors. observed thus:
"The Act of consumption with which people are most
familiar occurs when they eat, or drink or smoke. Thus,
we speak of people consuming bread, or fish or meat or
vegetables, when they eat these articles of food; we
speak of people consuming tea or coffee or water, when
they drink these articles; we speak of people consuming
cigars or cigarettes or bidis, when they smoke these.
The production of wealth, as economists put it,
consists in the creation of "utilities". Consumption
consists in the act of taking such advantage of the
commodities and services produced as constitutes the
"utilization" thereof. For each commodity, there is
ordinarily what is generally considered to be the final
act of consumption. For some commodities, there may be
even more than one kind of final consumption. Thus
grapes may be "finally consumed" by eating them as
fruits; they may also be consumed by drinking the wine
prepared from "grapes". Again, the final act of
consumption may in some cases be spread over a
considerable period of time. Books, articles of
furniture, paintings may be mentioned as examples. It
may even happen in such cases, that after one consumer
has performed part of the final act of consumption,
another portion of the final act
286
of consumption may be performed by his heir or
successor-in-interest, a transferee, or even one who
has obtained possession by wrongful means. But the fact
that there is for each commodity what may be considered
ordinarily to be the final act of consumption, should
not make us forget that in reaching the stage at which
this final act of consumption takes place the commodity
may pass through different stages of production and for
such different stages, there would exist one or more
intermediate acts of consumption."
Applying the above test, it has to be held that the
assessees had consumed the paddy purchased by them when they
converted it into rice which is commercially a different
commodity.
Since it is not disputed that the sales of paddy, which
is a taxable commodity, in favour of the assessees had not
suffered tax under section 5 in view of the circumstances in
which they had taken place and it is held that the assessees
had consumed paddy in the manufacture of rice which was a
different commercial commodity for sale, the case of the
assessees squarely falls under section 6(i) of the Act. The
charge under section 6(i) should, therefore, be given due
effect. This view is in accord with the opinion of this
Court in State of Tamil Nadu v. M. K. Kandaswami etc. etc.
and in Ganesh Prasad Dixit v. Commissioner of Sales-tax,
where provisions corresponding to section 6(i) of the Act
arose for consideration.
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It is next contended that since the assessees would be
exposed to double taxation both as buyers of paddy and as
sellers of rice we should hold that the levy in question is
impermissible because paddy and rice are liable to be taxed
at a single point. No provision is shown to us which bars
such taxation when the commodities are different. In fact,
in this case there is no double taxation on the same
commodity. A similar contention was rejected by this Court
in the case of Babu Ram Jagdish Kumar (supra) thus:
"We may at this stage refer to one other
subsidiary argument urged on behalf of the appellants.
It is argued that because paddy and rice are not
different kinds of goods
287
but one and the same, the inclusion of both paddy and
rice in Schedule C to the Act would amount to
imposition of double taxation under the Act. There is
no merit in this contention also because the assumption
that paddy and rice are one and the same is erroneous.
In Ganesh Trading Co., Karnal v. State of Haryana
(1973) 32 S.T.C. 623 (S.C.), arising under the Act,
this Court has held that although rice is produced out
of paddy, it is not true to say that paddy continued to
be paddy even after dehusking; that rice and paddy are
two different things in ordinary parlance and,
therefore, when paddy is dehusked and rice produced,
there is a change in the identity of the goods."
In the result these appeals are allowed, the judgments
of the High Court against which these appeals are filed are
set aside and the turnover in question in each case is held
to be taxable under section 6(i) of the Act. There shall,
however, be no order as to costs.
N.K.A. Appeals allowed
288