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 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
appeals.
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
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
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
58/1991.”
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
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 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
“manufacture”.”
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.
.............................J.
[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
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 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
appeals.
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
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
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
58/1991.”
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
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 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
“manufacture”.”
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.
.............................J.
[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
