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B.P Oil Mills Ltd. v. Sales Tax Tribunal And Others
Factual and Procedural Background
The appellant is a dealer engaged in purchasing crude oils (linseed, castor, mustard) at Agra, Uttar Pradesh, and refining them by alkaline treatment, bleaching and deodorising for sale as refined oil. Having already paid purchase tax on crude oil, the appellant sought clarification under Section 35 of the U.P. Trade Tax Act, 1948 (“the Act”) on whether additional sales tax was payable on the refined oil and, if so, at what rate. The Commissioner of Sales Tax held on 19-6-1985 that sales tax was payable at 4%. The Sales Tax Tribunal dismissed the appellant’s appeal, and the Allahabad High Court rejected the writ petition under Article 226 of the Constitution. The present appeal was preferred before the Supreme Court by special leave.
Legal Issues Presented
- Whether the conversion of crude oil into refined oil constitutes “manufacture” under Section 2(e-1) read with Section 3(3)(b)(iii) of the Act, thereby attracting sales tax on the subsequent sale of refined oil.
- Whether the appellant, having paid tax on the purchase of crude oil, can be subjected to a further levy (multistage taxation) on the sale of the refined product.
- The applicable rate of tax if liability is established.
Arguments of the Parties
Appellant's Arguments
- Refined oil retains its basic character as “oil”; the refining process does not amount to “manufacture” of a new commodity, so Section 3(3)(b)(iii) is inapplicable.
- Cited Tungabhadra Industries, Sterling Foods and Shiv Datt & Sons to assert that processing which does not create a commercially distinct product is not “manufacture”.
- Contended that imposition of tax on the sale after having already paid tax on purchase amounts to impermissible double taxation.
Respondent-State's Arguments
- Section 2(e-1) expressly includes “processing” within “manufacture”; therefore, the nature of the final product’s identity is irrelevant once processing occurs.
- The Act expressly permits multistage taxation under Section 3(3)(b)(ii) & (iii); consequently, payment of purchase tax does not bar sales tax on the finished product.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Tungabhadra Industries Ltd. v. CTO, AIR 1961 SC 412; (1961) 2 SCR 14 | Refined (hydrogenated) groundnut oil retains identity as groundnut oil; the case turned on commodity identity, not on “manufacture”. | Distinguished; noted that the expressions “manufacture” and “processing” were not in issue there, hence not applicable to present statutory context. |
| Sterling Foods v. State of Karnataka, (1986) 3 SCC 469 | Processed shrimps/prawns/lobsters remain the same commodity; applied “commercial parlance” test. | Distinguished; unlike seafood, crude oil after extensive refining does not retain its earlier character, hence case offers no aid to appellant. |
| State of Maharashtra v. Shiv Datt & Sons, 1993 Supp (1) SCC 222 | For concession under “resale”, batteries purchased and sold without fresh manufacture were the same goods. | Distinguished on two grounds: different statutory context (“resale”) and minimal processing compared to radical change in crude to refined oil. |
| Chowgule & Co. (P) Ltd. v. Union of India, (1981) 1 SCC 653 | Defined “processing” as any operation that prepares a commodity for market, causing change of some degree. | Relied upon; Court used the definition to hold that refining crude oil squarely falls within “processing”, hence “manufacture”. |
| CST v. Pio Food Packers, 1980 Supp SCC 174; (1980) 3 SCR 1271 | Earlier ruling on commodity identity adopted in Sterling Foods. | Referenced indirectly via Sterling Foods; not determinative of present issue. |
Court's Reasoning and Analysis
1. The Court compared Section 3(3)(b)(iii) with the expansive definition of “manufacture” in Section 2(e-1), which includes “processing, treating or adapting any goods”. Refining crude oil involves alkaline treatment, bleaching and deodorising—operations that fall squarely within “processing”.
2. Drawing on Chowgule & Co., the Court reiterated that any processing preparing goods for market constitutes “processing”, regardless of its extent, and leads to a perceptible change in the commodity. Applying this standard, refined oil is a product “manufactured” from crude oil.
3. The precedents cited by the appellant were held inapposite because they addressed commodity identity in different statutory settings without interpreting “manufacture” or because the processing there was minimal.
4. On the contention of double taxation, the Court observed that Section 3(3)(b)(ii)–(iii) expressly authorises multistage taxation: tax may be levied on both purchase of inputs and sale of goods manufactured from those inputs. Hence, prior payment of purchase tax offers no immunity from sales tax.
Holding and Implications
APPEAL DISMISSED.
The appellant is liable to pay sales tax at 4% on the turnover of refined oil despite having paid purchase tax on crude oil. The decision affirms that extensive refining amounts to “manufacture” under the U.P. Trade Tax Act and clarifies that multistage taxation under Section 3(3)(b)(ii)–(iii) is permissible. No costs were awarded, and the ruling does not announce a new legal doctrine but reinforces the statutory interpretation of “manufacture” to include significant processing activities.
M.K Mukherjee, J.— The appellant carries on business in the manufacture and sale of oils at Agra in the State of Uttar Pradesh (U.P). As a part of their business, they purchase crude oil of different varieties such as linseed oil, castor oil, mustard oil and, after refining, sell as refined oil. The refinement is brought about by first treating the oil with an alkali to remove the acid contents, then bleaching it with absorbent cotton or activated carbon and lastly deodorising it with steam.
2. To ascertain whether they were liable to pay tax on the sale of refined oil as they had already paid tax for purchase of the crude oil and, if so, what would be the rate thereof, the appellant approached the Commissioner of Sales Tax, U.P invoking the provisions of Section 35 of the U.P Trade Tax Act, 1948 (“Act” for short). By his order dated 19-6-1985, the Commissioner held that the appellant was liable to pay sales tax notwithstanding the fact that they had paid tax on the purchase of the crude oil and that the rate of tax would be 4%. Assailing the order of the Commissioner, the appellant preferred an appeal before the Sales Tax Tribunal which was dismissed. They then approached the Allahabad High Court by filing a petition under Article 226 of the Constitution of India which was also dismissed. Hence this appeal by special leave.
3. Mr Swarup, the learned counsel appearing for the appellant, firstly submitted that they were not liable to pay tax on the sale of refined oil, for even after refinement, it continues to retain its basic character as oil. According to Mr Swarup, mere processing of the crude oil for its conversion into refined oil cannot be said to be “manufacture” of new goods so as to make the appellant liable for tax thereupon under Section 3(3)(b)(iii) of the Act. In support of his contention, he relied upon the judgments of this Court in Tungabhadra Industries Ltd. v. CTO AIR 1961 SC 412, (1961) 2 SCR 14; Sterling Foods v. State of Karnataka (1986) 3 SCC 469 and State of Maharashtra v. Shiv Datt & Sons 1993 Supp (1) SCC 222.
4. In response, Mr Misra, appearing for the respondent-State, submitted that the appellant was liable to pay tax on the refined oil inasmuch the meaning of the word “manufacture” in Section 2(e-1) of the Act clearly envisages any sort of processing. Therefore, he contended, the question whether the crude oil maintained its character as oil even after refinement was redundant.
5. Under Section 2(e-1) of the Act, “manufacture” means producing, making, mining, collecting, extracting, altering, ornamenting, finishing or otherwise processing, treating or adapting any goods; but does not include such manufacture or manufacturing processes as may be prescribed. Section 3 of the Act, so far as it is relevant for our purposes reads as under:
“Liability to tax under the Act.—(1) Subject to the provisions of this Act, every dealer shall, for each assessment year, pay a tax at the rates provided by or under Section 3-A or Section 3-D on his turnover of sales or purchases or both, as the case may be, which shall be determined in such manner as may be prescribed.
(2) No dealer shall, except as otherwise provided in Section 18, be liable to tax under sub-section (1) if, during the assessment year, the aggregate of his turnover of—
(a)-(d)***
(3) Nothing in sub-section (2) shall apply in respect of—
(b) the sale by a dealer of—
(ii) goods purchased or imported by furnishing and declaration or certificate prescribed under any provision of this Act; and
(iii) goods manufactured by him by using the goods referred to in sub-clause (i) or sub-clause (ii).
(4)-(5)***”
6. When the provisions of the above section are read in juxtaposition with the definition of the word “manufacture”, it is abundantly clear that a dealer will be liable to pay tax on sale of any goods he manufactures by processing the goods he purchased by complying with the requirements of clause (ii) above.
7. The word “processing” has, however, not been defined under the Act but it has been the subject-matter of interpretation by this Court in various cases including that of Chowgule & Co. (P) Ltd. v. Union of India (1981) 1 SCC 653. Taking a cue from the definition of the word “process” in the Webster's Dictionary, this Court observed therein that where any commodity is subjected to a process or treatment with a view to its development or preparation for the market, it would amount to processing. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but in each process suffered, the commodity would experience a change. This Court further observed that whatever be the means employed for carrying out the processing operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes processing. Viewed in the context of the above meaning given to the word “processing” by this Court, there cannot be any manner of doubt that the nature and extent of the process to which the crude oil is subjected to make it refined oil brings the latter within the meaning of the expression “goods manufactured” in Section 3(3)(b)(iii) of the Act so as to make the appellant liable to pay tax on its sale.
8. Coming now to the decisions relied upon by Mr Swarup, we find that none of them has any manner of application to the facts of the instant case. In Tungabhadra Industries AIR 1961 SC 412, (1961) 2 SCR 14 the sole question that came up for consideration was whether consequent upon its conversion to hydrogenated oil by improving its quality, groundnut oil lost its identity. In answering this question in the negative, this Court held that refined groundnut oil (hydrogenated oil) continues to be groundnut oil notwithstanding that such oil does not possess the characteristic colour, or taste, odour etc. of the raw groundnut oil. Indeed, the controversy in that case centred round the interpretation of the expression “groundnut oil” appearing in the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. Neither the expression “manufacture” nor the expression “processing” directly came up for interpretation in that case. In Sterling Foods (1986) 3 SCC 469 the question that arose for determination was whether shrimps, prawns and lobsters subjected to processing like cutting of heads and tails, peeling, deveining, cleaning and freezing cease to be the same commodity and become a different commodity within the meaning of Section 5 of the Central Sales Tax Act, 1956. In answering the above question, this Court applied the “commercial parlance” test and relying upon its earlier judgment in CST v. Pio Food Packers 1980 Supp SCC 174, (1980) 3 SCR 1271 held that processed shrimps, prawns and lobsters are not a new and distinct commodity but they retain the same character as the original shrimps, prawns and lobsters even after the processing. This case is of no assistance to the appellant for unlike the above commodity, the crude oil does not at all retain its earlier character after processing.
9. In Shiv Datt and Sons 1993 Supp (1) SCC 222 the question was whether the dealer was entitled to the concession provided in Section 8 of the Bombay Sales Tax Act, 1959 of such part of their turnover as represented the resale of batteries purchased by them from a registered dealer. Interpreting the meaning of the word “resale” under Section 2(26), and the word “manufacture” in that Act and the nature of process applied by the dealer before their sale, this Court held that basically speaking, the goods purchased by the dealer from the manufacturers as well as the goods sold by the former are one and the same for nothing was done to the goods afresh which had not been done already. The above case also does not come in aid of the appellant: firstly, because it considered the definition of “manufacture” (which, of course, is identical with its definition under the Act) in the context of “resale” of goods as defined in that Act and secondly, because of the nature and extent of the process which the crude oil undergoes to radically change itself to marketable refined oil.
10. The other contention raised by Mr Swarup was that they had purchased the crude oil after payment of tax and hence they cannot be made liable to pay tax again for its sale. This contention has to be stated only to be rejected for the Act expressly provides imposition of multistage taxation under clauses (ii) and (iii) of Section 3(3)(b) of the Act.
11. For the foregoing discussion, the appeal fails and is hereby dismissed. There will be no order as to costs.
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