Supreme Court of India
THE ADDITIONAL COMMISSIONER OF COMMERCIAL TAXES, BANGALOREversusAYILI STONE INDUSTRIES ETC. ETC.
- Citation
- 2016 INSC 967
- Decided
- 18 October 2016
- Disposal
- Appeal(s) allowed
- Bench
- DIPAK MISRA
Holding
Polished granite stones/slabs and granite tiles are distinct commodities; tiles fall under Entry 8 of Part T of the second schedule and the assessment must be re‑adjudicated.
Summary
The Additional Commissioner of Commercial Taxes allowed exemption on sales of polished granite stones, but later reopened the assessment and disallowed the exemption, contending that polished and unpolished granite fall under separate entries of the Karnataka Sales Tax Act. The assessee argued that polished granite stones and tiles are distinct commodities, with tiles falling under Entry 8 of Part T of the second schedule, not Entry 17(i) of Part S. The Supreme Court examined whether the transformation of granite into tiles creates a new commercial product and whether the assessing officer had properly applied the schedule entries. It held that polished granite slabs and granite tiles are different commodities; tiles, produced by a distinct process, are covered by Entry 8, not Entry 17(i). The Court found the assessing officer had not made a proper enquiry and remitted the matter for fresh adjudication. The appeals were allowed, the High Court orders set aside, and the case sent back to the assessing officer.
Issues considered
- Whether polished granite stones and granite tiles constitute the same commodity for purposes of exemption under the Karnataka Sales Tax Act.
- Whether the assessing officer correctly applied Entry 17(i) of Part S and ignored Entry 8 of Part T in disallowing the exemption.
- Whether the process of cutting and polishing granite into tiles amounts to manufacture attracting sales tax.
- Whether the reassessment and revocation of the earlier exemption order were procedurally valid.
Legislation cited
- Central Sales Tax Act, 1956
- Karnataka Sales Tax Act, 1957s. 12-A(1), s. 21(2), s. 24(1), s. 5, s. 6B
Subjects
sales tax exemptiongranite tilescommodity distinctionKarnataka Sales Tax Actre‑assessmentmanufacturing activityschedule entriescommercial identity
Judgment
[2016] 11 S.C.R. 129
THE ADDITIONAL COMMISSIONER OF A
COMMERCIAL TAXES, BANGALORE
v.
AYILI STONE INDUSTRIES ETC. ETC.
(Civil Appeal Nos. 1983-2039 of2016) B
OCTOBER 18, 2016
[DIPAK MISRA AND SHIVA KIRTI SINGH, JJ.]
Karnataka Sales Tax Act, 1957 - Second schedule [Part S,
Entry 17(i) and Part T, Entry 8]; and ss. 5, 6B - Exemption from
sales tax - Polished and unpolished granite stones and Tiles -
c
Assessing authority allowed exemption on polished granite stone
but later re-opened the assessment - On reassessment, Assessing
authority disallowed exemption on ground that polished and
unpolished granite stones have separate entries in the Entry 17(i)
of part S of second schedule - Propriety of - Held: There is a D
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 - The process involved is extremely
E
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 which carves out
tiles as a different commodity - A finding has to be arrived at by
carrying out due enquiry, without which, a final conclusion cannot
be reached - Matter accordingly remitted back to Assessing officer F
for re-adjudication.
Allowing the appeals, the Court
HELD: 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 G
of the second schedule appended to the Karnataka Sales Tax
Act, 1957, 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
H
129
130 SUPREME COURT REPORTS f2016l 11 S.C.R.
A Assessing Officer while framing the assessment order has
referred to Entry l 7(i) of Part S but without any elaboration on
Entry 8 in Part-T. 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
B
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
C due enquiry and for that purpose appropriate exercise has to be
undertaken. In the absence of that, a final conclusion cannot be
reached. [Para 28) (148-A-D]
Mis. Vishwakarma Granites v. Commissioner of
Commercial Taxes W.P. No. 13803/05 decided on 21st
D June, 2006 by Karnataka High Court; Poonam Stone
Processing Industries v. Deputy Commissioner of
Commercial Taxes, Gulbarga STC Vol. 94 page 182;
Foredge Granite Pvt. Ltd. v. State of Karnataka STRP
No. 58/1991 decided on 12.12.1994 by Karnataka
High Court; State of Karnataka v. Goa Granites 2006
E (60) Kar.L.J. 110; Chowgale and Company Pvt. Ltd.
v. Union of India AIR (1981) SC 1014 : 1981 (2)
SCR 271; Aman Marble Industries Pvt. Ltd. v. CCE,
Jaipur (2005) 1 SCC 279; Sterling Foods v. State of
Karnataka (1986] 63 STC 239; Delhi Cloth and
F General Mills Ltd., vs. State of Rajasthan (1980) 46
STC 256; Rajasthan SEE v. Associated Stone Industries
(2000) 6 SCC 141: 2000 (3) SCR 1179; Cloth and
General Mills Co. Ltd. AIR 1963 SC 791 : 1963 Suppl.
SCR 586; CCE v. Rajasthan State Chemical Works
(1991) 4 sec 473: 1991 (1) Suppl. SCR 124 ; ITO,
G Udaipur v. Arihant Tiles & Marbles Pvt. Ltd. (2010) 2
SCC 699: 2009 (16) SCR21; CITv. N.C. Budharaja
& Co. 1994 Supp (1) sec 280 : 1993 (2) Suppl. SCR
185 - referred to.
Case Law Reference
H STC Vol. 94, page 182 referred to Para3
ADDITIONAL COMMNR. OF COMMERCIAL TAXES, 131
BANGALORE v. AYILI STONE INDUSTRIES
2006 (60) Kar.L.J. 110 referred to Para3 A
19~1. (2) SCR 271 referred to Para3
(2Q05) 1 sec 219 referred to Para 7
119861 63 STC 239 referred to Para 13
(1980) 46 STC 256 referred to Para 15
B
2000 (3) SCR 1179 referred to Para 20
1963 Suppl. SCR 586 referred to Para 21
1991 (1) Suppl. SCR 124 referred to Para 21
20Q9 (16) SCR 21 referred to Para 22
1993 (2) Suppl. SCR 185 referred to Para 26 c
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. I 983-
2039 of2016.
From the Judgment and Order dated 04.12.2012 of the High Court
ofKarnataka Circuit Bench at Dharwad in STA No. 574-575, 581-586,
543-549, 550-555, 556-557, 558-561, 562-567, 568-573, 576, 577-580, D
587-590, 591-597, 598-599of2011.
Basava Prabhu S. Patil, Sr. Adv., V. N. Raghupathy, Anirudh
Sanganeria, Chinmay Deshpande, Parikshit Angadi, Advs., for the
Appellant.
Bhargava V. Desai, Ms. Saumya M_ehrotra, Advs., for the E
Respondent.
The Judgment of the Court was delivered by
DIPAK MISRA, J. I. 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 F
Section 24(1) of the Karnataka Sales Tax Act, 1957 (for brevity, "the
Act"), on 4•h 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( I) of the Act whereby the revisional authority has opined that there
had been an erroneous order in the appeal causing loss to the State G
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 H
132 SUPREME COURT REPORTS f2016l ll S.C.R.
A 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
B 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
c 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( I) 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
D 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 ofunpolished 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
E preferred an appeal before the appellate authority. After referring to the
decision in Mis. Vis/1w"k"rm" Grnnites v. Commissioner of
Commerci"l Taxes 1, it opined that the orders passed under Section
12A of the Act deserves to be set aside and accordingly allowed the
appeals.
F 3. The revisional authority referred to the decision in
Vtsliwakarma Granites (supra) wherein the High Court had considered
the judgments rendered in Poon"m Stone Processing Industries v.
Deputy Commissioner of Commercial Taxes, Gu/harga~. Foredge
Granite Pvt. Ltd. v. State of Karn"taka 3, S1<1te of K"rn"t"k" v. Go"
G Gr"nites', C/wwg"le (Ind Comp"ny Pvt. Ltd. v. l.[nion of lndi<t5 and
came to hold as follows:-
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
' 2006 (60) Kar.L.J. 110
H ' AIR 1981SC1014
ADDITIONAL COMMNR. OF COMMERCIAL TAXES, BANGALORE 133
v. AYIU STONE INDUSTRIES [DIPAK MISRA, J.]
"8. In view of the clear dictum laid down by the Division Bench A
of this Court in the case ofForedge Granite Pvt. Ltd., this Court
deems fitto hold that the activity of cutting and polishing ofrough
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 amendmentto Section
B
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 Mis. Foredge Granite's case cited supra. c
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 D
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 Mis. 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 E
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
68 of KST Act.
10. It is not disputed that the assessment orders in these matters F
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 ActNo.5 of2002 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 G
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 ofraw granite or rough granite stone is not a
relevant issue in the case at hand. Thereafter, he concluded thus:- H
134 SUPREME COURT REPORTS [2016] 11 S.C.R.
A "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."
B
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:-
c "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
D stones and granite chips (Entry l 7(i), (ii) and (iii)/part S/second
schedule and it does not covers granite tiles all. Ther~ 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
E appear as per entry 8(i), (ii) & (iii) of part T of second schedule
to KST Act I 957, all other tiles are classified as under.
"(iv) Other tiles not covered by items 1-4-88to31-3-96 Fifteen
percent
(i), (ii) and (iii) above
F
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
G
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
H stone or block are distinct and separate commercial products
ADDITIONAL COMMNR. OF COMMERCIAL TAXES, BANGALORE 135
v. AYIU STONE INDUSTRIES [D!PAK MISRA, J.]
and are also separately classified in the respective entries A
explained above". ·
6. The High Court in appeal posed the question that arose for
consideration in the fo.llowing terms:-
" Whether the rough granite purchased by a dealer and the sale,
the same after cutting and polishing into .granite tiles, whether B
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 Anutn Marble Industries c
Pv_l Ltd. v. CCE, Jaipur6,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 D
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 E
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
F
authority referred to Entry 17(i) of Part S of the Second Schedule, which
is as follows:-.
"Entry No.I ((i) of Part "S" of the second Schedule, appended
to the K.S.T. Act, 1957, which relates to granite stones reads as
under
SI. No. l 7(i) G
I 7(i) Granite stones
(a) Polished
(b) Unpolished
(c) Chips"
• (2005) 1 sec 279 H
136 SUPREME COURT REPORTS f20161 11 S.C.R.
A I 0. 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
B
stated in Vis/1wakarma Gmnites (supra). In Vis/1wakarma 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
c penalty were called in question. The said circular was under Section 3-
A(2) of the Act in pursuance of certain observations made in Po01um1
Stone Processing lntlustries (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
D 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
E 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 Vis/1wakarma 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
F 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 Poon<mr
Stone Processing lntlustries (supra):-
"3. On the question whether the petitioner was engaged in a
G 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. Jl
is stated therein that the petitioner purchases rough granite blocks
and with the help of the machines run by electrical energy in his
H unit, cut the granite into required sizes and thickness and polishes
ADDITIONALCOMMNR.OFCOMMERCIAL TAXES, BANGALORE 137
v. AYILI STONE INDUSTRIES [DIPAK MISRA, J.]
the same to the requirement of the customers and sells the same. A
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
B
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 c
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
D
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
E
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 Vis/1wakarma Grmrites (supra) had
referred to the authority in Goa Granites (supra). In Goa Granites' F
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 G
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 Kamataka 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 stond prior
H
138 SUPREME COURT REPORTS (2016] 11 S.C.R.
A 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 w~at 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
B 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 Sterli11g Foods
v. State of Kamataka 7 wherein it has been held thus:-
"The test which has to be applied for the purpose of determining,
c whether a commodity subjected to processing retains its original
character and identity is as to whether the processed conimod ity
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
D 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
E 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, <;listinct from the original has come into
being. The test is, whether. in the eyes of those dealing in the
F 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:-
G
"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."
H ' (1986] 63 STC 239
ADDITIONALCOMMNR.OFCOMMERCIAL TAXES, BANGALORE 139
v. AYILI STONE INDUSTRIES [DlPAK MISRA, J.]
15. Thereafter, the Court has referred to De/Iii Cloth and Gener<1/ A
Mills Ltd., vs. State of Ra]astltan 8 , wherein the Court has stated, that
"it was fairly wel I 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
B
legislative intention when the statute was enacted". Thereafter, the
Division Bench observed:-
"The question for consideration is, whether this polished tiles
obtained out ofrough 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
c
Act that what is sold in only rough granite blocks to an industrial
unit, which is an I 00% export oriented unit. lt 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. D
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 forthe diminishing size. 1n aid of their
assertion, they had placed reliance on the observations made by
this Court in the case ofM/s Foredge Granite Pvt. Ltd. vs. The E
State of Karnataka and Another (STRP.No.5811991). 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 F
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. G
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
8
(1980) 46 STC 256 H
140 SUPREME COURT REPORTS [2016] II S.C.R.
A 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,
B
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
Kamataka Appellate Tribunal, by rejecting the appeal filed by
c 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."
Andagain:-
"On these set of facts, this Court has stated that the stones are
D 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
E 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."
F
16. The Division Bench distinguished the finding recorded in
Foredge Grat1ite (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
G Sterlit1g Foods (supra), appiied 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
H polished and exported as tiles, the rough granite blocks ceased
ADDITIONAL COMMNR. OF COMMERCIAL TAXES, BANGAWRE 141
v. AYIU STONE INDUSTRIES [DIPAK MISRA, J.)
to be granite blocks and become a distinct and different A
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
B
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 c
smaller blocks or cut sizes of granite blocks to the exporter and
ifthat 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
D
exporting the cut sizes of granite blocks, cuts them info 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, E
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
ill> 'tiles' and in commercial parlance, they are treated as different
F
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 G
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 Div.ision Bench held:-
"Chemical composition of them may continue to remain as stones H
142 SUPREME COURT REPORTS [2016111 S.C.R.
A 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
B
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 ofrequired
size, the dealer shall not supply him with rough granites. The
c 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
D
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:-
E
" We further add that the Apex Court in the case of Sterling
Food.s v. The State ofKamataka(l986) 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,
F 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
G 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 Visllwakarma Granites (supra) the High Court
distinguished the Division Bench decision by opining that it was not
H specifically dealing with the issue of manufacture and further it was
ADDITIONAL COMMNR. OF COMMERCIAL TAXES, BANGALORE 143
v. AYIU STONE INDUSTRIES [DIPAK MISRA, J.]
adverting to the exigibility of tax under Section 5(3) of the CST Act. A
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 A111a11 Marble
(supra). The two-Judge Bench was dealing with the issue whether the
cutting of marble blocks into marble slabs amounts to manufacture for B
the purpose of the Central Excise Act. In that context, the Couit referred
to the authority in Rajastlum SEB v. Associated Stone lnclustries9 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 c
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 D
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. E
14 7-48, 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 pa11 to analyse F
what has been stated in Associated Stone I11d11stries (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 ofRajasthan Electricity
G
(Duty) Act, 1962. The Court referred to the authorities in Union of
India v. Delhi Cloth and General Mills Co. Ltd. 10 , CCE v. Rajltstlwn
State Chemical Works 11 , wherein it has been held that pumping of brine
• (2000) 6 sec 141
10
AIR 1963 SC 791
11
(1991) 4 sec 473 H
144 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 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
Rajastlian 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
B 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".
c
22. At this stage, we think it appropriate to refer to comparatively
a recent pronouncement in ITO, Udaipur v. Arilumt 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
D 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-fA of
the Income Tax Act, 1961, as it stood at the material time. Thus,
manufacture or production was required to be understood within Section
E 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;
F (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;
G
(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
H " (20IOJ 2 sec 699
ADDITIONALCOMMNR.OFCOMMERCIAL TAXES, BANGALORE 145
v. A YILI STONE lNDUSTRJES [DIPAK MISRA, J .]
requirement in prefect angles by edge cutting machine and multi- A
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 Comt, however, referred to the authority in Associated B
Stone Industries (supra). Analysing the same, the Court observed:-
"12. The basic controversy which.arose for determination in
Rajasthan SEE 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". c
While disposing of the matter, this Court, vide paras I and I 0,
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 D
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 Comt, after examining various
judgments of this Court on the connotation of the word
"manufacture"."
E
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 Rajastllan 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 F
to the principle stated in Ama11 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,
G
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
H
146 SUPREME COURT REPORTS f2016] 11 S.C.R.
A 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."
B 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
c 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 ce1tainly an
activity which will come in the category of "manufacture" or
D "production" under Section 80-IA of the Income Tax Act."
26. The Court referred to the decision in C/Tv. N.C. Bm/lumtj"
& Co. 13 and ruled thus:-
, "25. Applying the above tests laid down by this Court in
E Budharaja case to the facts of the present cases, we are of the
view that blocks conve1ted 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
F 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
G 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.
H " 1994 Supp (I) sec 280
ADDITIONAL COMMNR. OF COMMERCIAL TAXES, BANGALORE 14 7
v. A YIU STONE INDUSTRIES [DIPAK MISRA,J.]
As stated above, each of the respondents is paying excise duty, A
some of the respondents are job-workers and the activity
undertaken by them has been recognised by vari_ous 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
B
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 Rajastlw11 SEB's
c
case as well as in A.man Marble (supra). In the case at hand, though
the High Court in the impugned order posed the question correctly and
placed reliance on A.man Marble (supra), yet it has not correctly applied
the principle in the correct perspective. In A.man Marble (supra) the
Court has held that it was not possible to accept that excavation of D
stones and thereafter cutting and polishing them into slabs resulted in a
manufacture of goods. The decision in Foredge Gnmite (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 Gnt11ites E
(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 F
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
G
1-4-96 to 31-3-98 Twelve percent
1-4-98 to 31-3-01 Ten percent
1-4-0 I to 31-03-02 Twelve percent
1-4-02 to 31-5-03 Fifteen percent
From 1-6-2003 (Sixteen percent)"
H
148 SUPREME COURT REPORTS r20l 6] 11 S.C.R.
A 28. There is a distinction between polished granite stone or slabs
and tiles. Ifa polished granite stone is used in a building for any purpose,
it will come under Entry l 7(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
B
has not been gone into. The Assessing Officer while framing the
assessment order has referred to Entry I 7(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
c 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
D 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
E costs.
Ankit Gyan Appeals allowed.
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