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Wednesday, October 19, 2016

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 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 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 and remit the matter to the Assessing Officer to re-adjudicate the matter keeping in view the observations made hereinabov

                        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)


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 in  STA  No.  574-575/2011  and  other
connected matters preferred under Section 24(1) of the Karnataka  Sales  Tax
Act, 1957 (for brevity, “the Act”), on 4th 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  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 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 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 assessee preferred an appeal before  the  appellate
authority.  After referring to the decision in M/s. Vishwakarma Granites  v.
Commissioner of Commercial Taxes[1], it opined that the orders passed  under
Section 12A of the Act deserves to be set aside and accordingly allowed  the
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
Commercial Taxes,  Gulbarga[2],  Foredge  Granite  Pvt.  Ltd.  v.  State  of
Karnataka[3], State of Karnataka v. Goa Granites[4],  Chowgale  and  Company
Pvt. Ltd. v. Union of India[5] 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.

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 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.”

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  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.

“(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)

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 Marble Industries  Pvt.  Ltd.  v.
CCE, Jaipur[6], reproduced 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 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
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
“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

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 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:-
“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  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 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”.
                                                       [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  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 Sterling Foods  v.
State of Karnataka[7] 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  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.”

15.   Thereafter, the Court has referred to Delhi Cloth  and  General  Mills
Ltd., vs. State of Rajasthan[8], 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
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 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

And again:-
“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 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 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.”

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  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  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 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 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 Industries[9] 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.  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

“It is also not possible to accept that excavation of stones and  thereafter
cutting and polishing  them  into  slabs  resulted  in  any  manufacture  of

21.   At this juncture, it becomes imperative on our part  to  analyse  what
has been stated in Associated Stone 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  Cloth  and  General
Mills Co. Ltd.[10], CCE v. Rajasthan State Chemical  Works[11],  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 connected 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 manufacturing of goods”.

22.   At this stage, we think it appropriate to  refer  to  comparatively  a
recent pronouncement in  ITO,  Udaipur  v.  Arihant  Tiles  &  Marbles  Pvt.
Ltd.[12]  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 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;

(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 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

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
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.”

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  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. Budharaja &  Co.[13]
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.

26. Before concluding, we  would  like  to  make  one  observation.  If  the
contention of the Department is to be accepted, namely,  that  the  activity
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 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  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)”

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 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
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 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.

                                                              [Dipak  Misra]

                                             ............................ J.
                                                         [Shiva Kirti Singh]
New Delhi;
October 18, 2016
[1]     W.P. No. 13803/05 decided on 21st June, 2006 by Karnataka H.C.
[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
[6]     (2005) 1 SCC 279
[7]     [1986] 63 STC 239
[8]    (1980) 46 STC 256
[9]     (2000) 6 SCC 141
[10]    AIR 1963 SC 791
[11]    (1991) 4 SCC 473
[12]    (2010) 2 SCC 699
[13]    1994 Supp (1) SCC 280

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