Citation Codes

Equivalent Citations

citation codes

Case Number

O.P No. 2016 of 1987

Attorney(S)

For the Appellant: Government Pleader (S. Vijayan Nair)

Judges

K.K Usha, J.

Acts

S. 5(7) of the Kerala General Sales Tax Act Ext P3
S. 5(7) of the Kerala General Sales Tax Act, sales
sub-rule 1 of R. 8 of the Central Excise Rules,
S. 2(f), of the Central Excise and Salt Act, 1944
S. 5(7) of the Kerala General Sales Tax Act
S. 2 of the Amending Act VI of 1980.
Central Excise and Salt Act, 1944
(iv) Ss. 14 and 15 of Central Act.
CENTRAL EXCISE ACT

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Smart Summary

Judgment Summary — K.K. Usha, J.

Factual and Procedural Background

The petitioner operates units that process and sell centrifuged latex. The company purchased raw (field) latex from rubber growers, preserved it (notably with ammonia) and processed it by centrifuging with chemicals and machines to produce a concentrated latex product marketed in barrels. To store and market the centrifuged latex the petitioner purchased empty drums and issued Form No. 18 declarations stating the drums were for marketing finished products, thereby claiming concessional tax treatment under S. 5(7) of the Kerala General Sales Tax Act.

The respondent issued a show-cause notice dated 26.06.1984 alleging misuse of Form No. 18 declarations for the period 1982–83 and took the position that centrifuged latex did not qualify as a "finished product" under S. 5(7). A penalty under S. 45A was imposed and was challenged in O.P. No. 7711 of 1985. For assessment years 1983–84 to 1986–87 additional notices (Ext. P3) were issued alleging misuse of Form No. 18 in connection with purchases of empty drums. The petitioner replied (Ext. P4) asserting that centrifuged latex is commercially different from raw latex and relied upon a Government of India notification (Ext. P1) issued under sub-rule (1) of R.8 of the Central Excise Rules exempting preserved latex and latex concentrates from central excise duty; petitioner also produced Small Scale Industrial Unit registration certificates (Exts. P5 and P6).

Legal Issues Presented

Whether the product obtained after concentrating latex by centrifuging is commercially a different product from raw latex taken directly from the tree (i.e., whether centrifuged latex amounts to a "finished product").
Whether, if centrifuged latex is a commercially different finished product, the petitioner was entitled to issue Form No. 18 declarations and claim the concessional rate of sales tax under S. 5(7) of the Kerala General Sales Tax Act.
Whether respondent's notices and penal action (including the notice(s) embodied in Ext. P3 and the penalty under S. 45A) were justified in light of the characterization of centrifuged latex.

Arguments of the Parties

Petitioner's Arguments

Centrifuged latex (latex concentrate) is commercially different from raw/preserved field latex and thus constitutes a manufactured/finished product.
Form No. 18 declarations were properly issued because the drums were purchased for marketing finished products (centrifuged latex), thereby entitling the petitioner to the concessional rate under S. 5(7).
Reliance on Government of India notification (Ext. P1) under sub-rule (1) of R.8 of the Central Excise Rules which exempts preserved latex and latex concentrates from excise duty — indicating that centrifuged latex is an identifiable manufactured item that, but for the notification, would have been exigible to excise duty under S.3 of the Central Excise and Salt Act, 1944.
Registration of petitioner's two units as Small Scale Industrial Units (Exts. P5, P6) demonstrates that a manufacturing process producing latex concentrates is carried on in those units.
Relied on judicial authorities interpreting "manufacture" and asserting the commercial-distinctness test (e.g., Ujagar Prints and related decisions) to support that centrifuging constitutes manufacture.

Respondent's Arguments

Centrifuged latex is not a "finished product" within the meaning of S. 5(7) of the Kerala General Sales Tax Act; centrifuging is not a manufacturing process that converts raw latex into a commercially different commodity for purposes of that provision.
The petitioner misused Form No. 18 declarations in purchasing empty drums, justifying notices and penal action (including under S. 45A).
Relied on decisions such as Bahri Steel Wires v. Additional Commercial Tax Officer and State of Tamil Nadu v. Bharat Dairy Farm (and a judgment of this Court in T.R.C No. 15 of 1982) to support the proposition that certain processes (e.g., drawing wires, stirring cream) do not produce a distinct commercial commodity and thus are not "manufacture" for the relevant tax/statutory purposes.
The Government Pleader also submitted that reliance on the Central Excise Act and its notifications may be of limited value because each statute (Central Excise Act vs. State Sales Tax Act) has its own emphasis and statutory focus.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ujagar Prints v. Union of India, (1989) 170 ITR 317 (Constitutional Bench)	Established the prevalent test for "manufacture": whether the processes bring about changes such that the commodity is commercially no longer the original but a distinct new article.	The court adopted this commercial-distinctness test as the proper legal test to determine whether centrifuging of latex amounts to manufacture and whether centrifuged latex is commercially distinct from raw latex.
Empire Industries Ltd. v. Union of India, (1986) 162 ITR 846	Held that fabric processed (bleached, dyed, printed, finished) can emerge as a commercially different commodity constituting "manufacture."	The court referenced this earlier decision (as agreed with in Ujagar Prints) to support the proposition that processes which change commercial identity amount to manufacture; used as supporting authority for applying the commercial-distinctness test.
Bahri Steel Wires v. Additional Commercial Tax Officer, 84 STC 418	Considered whether wires drawn from taxed wire-rods created a new taxable commodity; the Court held that wires drawn from taxed rods could not be taxed again under certain sub-items.	Noted as relied upon by the respondent to argue that drawing/pulling processes do not always constitute manufacture; the court recorded the respondent's reliance but did not accept this as determinative in the present case.
State of Tamil Nadu v. Bharat Dairy Farm, 81 STC 332 (Madras High Court)	Held that stirring cream to hasten conversion into butter did not create a different commercial commodity and thus was not a manufacturing process for tax purposes.	Recorded as authority relied on by respondent for the proposition that certain processes do not produce a new commercial commodity; the court considered this line of authority but ultimately applied the commercial-distinctness test to the facts of centrifuged latex and reached a different conclusion.
Judgment of this Court in T.R.C No. 15 of 1982	Held that garbled pepper is not a different commodity from pepper (i.e., no commercial distinctness).	Noted by the court as part of the body of authorities the respondent relied upon; acknowledged but not treated as determinative for centrifuged latex.
His Majesty the King v. Planters Nut and Chocolate Co. Ltd., 1951 CLR 122 (Exchequer Court of Canada)	Principle that the ordinary commercial meaning of a product is decisive in tax/excise contexts (commercial, not purely botanical or scientific, conception governs).	Cited to illustrate the accepted approach that courts look to commercial meaning when determining whether a processed article is a distinct product; the court observed that Indian courts have followed this approach and applied it here.

Court's Reasoning and Analysis

The court framed the primary inquiry as whether centrifuging of latex constitutes a manufacturing process that yields a commercially different product from raw latex. To resolve this it applied the established commercial-distinctness test articulated in Ujagar Prints (and supported by Empire Industries): if the changes effected by the processes result in a commodity that is, in commerce, recognised as distinct and no longer the original commodity, that constitutes "manufacture."

The court examined technical and industry material (Chapter 23 of the Handbook of Natural Rubber Production in India, Rubber Research Institute of India, 1980) describing preserved field latex and latex concentration processes. The Handbook explains that:

Field latex is a colloidal dispersion prone to spontaneous coagulation and must be preserved (typically with ammonia) to suppress microbial activity for storage.
Concentration (including by centrifuging) removes a substantial quantity of serum from field latex to make the product richer in rubber content, producing greater economy in transport, higher dry rubber content preferred by industry, improved uniformity and higher purity.
Centrifuging is the process most commonly used for producing concentrated latex (over 90% of production) and the opinion recites in summary the mechanical steps of the centrifuging process and how the cream (concentrate) is separated and collected and packed in drums.

Applying the commercial-distinctness test to these facts, the court found it "difficult to accept" the respondent's contention that centrifuging is not a manufacturing process or that the centrifuged latex is the same as raw latex. The removal of serum and resulting higher rubber content, commercial uses (manufacture of foam rubber and other industrial products), manner of marketing (barrels/drums), and the industry practice described in the Handbook supported the conclusion that centrifuged latex is commercially a different product from raw latex.

Because centrifuged latex is commercially distinct, the court concluded it can be regarded as a "finished product" within the meaning of S. 5(7) of the Kerala General Sales Tax Act (as relevant to the facts of this petition). The court also observed that the respondent did not deny that the drums were purchased for storing centrifuged latex; thus the petitioner was justified in issuing Form No. 18 declarations to claim the lower rate of tax.

Holding and Implications

Holding: Ext. P3 is set aside and the original petition is allowed.

Implications and direct consequences:

The court held that centrifuged latex, as produced by the petitioner's processes, is commercially a different product from raw latex and thus can fall within the term "finished product" under S. 5(7) of the Kerala General Sales Tax Act for the purposes described in this petition.
On the facts before the court, the petitioner was justified in issuing Form No. 18 declarations for the empty drums purchased for storing centrifuged latex and thereby entitled to claim the concessional rate of sales tax under S. 5(7).
Ext. P3 (the notice(s) the court set aside) is quashed in the context of this petition and the relief sought in the original petition is granted as stated above.

The opinion does not state that it is laying down a new or binding precedent beyond applying established principles (the court applied settled tests and industry material to the facts); therefore, no novel legal doctrine was announced apart from the court's application of the commercial-distinctness test to centrifuged latex in this case.

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Padinjarekkara Agencies Ltd. v. Asst. Commissioner

K.K Usha, J.:— The question for consideration arising in this original petition is whether the product obtained at the end of the process of latex concentration by using the methods of centrifuging is commercially a different product from the latex in its form as taken directly from the tree.

2. The petitioner is engaged in the processing and sale of centrifuged latex among other activities. Normal latex collected from the rubber tree is purchased by the Page: 642company from rubber growers and the same is amoniated, preserved and later centrifuged with the aid of chemicals and centrifuging machines. The end product is used for manufacture of foam rubber and other industrial products and it is marketed in barrels. The petitioner had purchased empty drums for the purpose of storing centrifuged latex. It had issued in Form No. 18 declarations to the effect that the drums were for marketing the Company's finished products and by virtue of the provisions contained under S. 5(7) of the Kerala General Sales Tax Act, sales tax is chargeable only at the concessional rate.

3. The respondent had issued a notice on 26.06.1984 directing to show cause why penal action should not be initiated for misusing Form No. 18 declaration during the period 1982–83. Respondent had taken a stand that centrifuged latex is not finished products coming under the ambit of S. 5(7) of the Kerala General Sales Tax Act Thereafter a penalty was imposed on petitioner under S. 45 A of the Act for improper use of the Forms. The above order was under challenge before this court in O.P No. 7711 of 1985.

4. For the assessment years 1983–84 to 1986–87 also the respondent issued notice to the petitioner alleging misuse of Form No. 18 in the matter of purchase of empty drums. Ext. P3 is the copy of the notice. Petitioner gave a reply Ext. P4 pointing out that centrifuged latex is entirely different from normal latex. Reliance was also placed on a notification issued by Government of India (Ministry of Finance) in exercise of its powers under sub-rule 1 of R. 8 of the Central Excise Rules, exempting preserved latex, latex concentrate, smoke rubber sheet, crepe rubber and crump rubber under item No. 68 of the First Schedule to the Central Excise and Salt Act, 1944 from the whole of the duty of excise leviable thereon under S. 3 of the said Act It was contended that under S. 3 duty is leviable on excisable goods which are produced or manufactured in India Since centrifuged latex is an item manufactured or produced, in the normal course it would have been exigible to excise duty. It was under these circumstance, the notification dated 8.7.1983, copy of which is produced as Ext. P1 along with the original petition was happened to be issued.

5. It is contended by the petitioner that the two units belonging to the petitioner where centrifuged latex is carried on are registered as Small Scale Industrial Units as is evidenced by Exts. P5 and P6 Certificates. These certificates would also show that manufacturing process is carried on in these units, the product manufactured being latex concentrates and raw material latex.

6. It was contended on behalf of the petitioner that the principles laid down in the decisions interpreting the term ‘manufacture’ in connection with the provisions contained under Sales Tax Act; are directly applicable in the present case also so as to examine whether centrifuged latex would amount to finished products. On the basis of such contention, reliance was made by the petitioner on several decisions of the Supreme Court as well as other High Courts. In Ujagar Prints v. Union of India, Page: 643(1989) 170 ITR page 317, a Constitutional Bench of Supreme Court had occasion to consider the question whether the processes of bleaching, dyeing, printing, sizing, shrink-proofing etc., carried on in respect of cotton or man-made “grey fabric” amount to “manufacture” for purpose, and within the meaning of S. 2(f), of the Central Excise and Salt Act, 1944 before and after its amendment by S. 2 of the Amending Act VI of 1980. The general principle to be adhered to in such cases has been referred at page 341 of the above decision as follows:

“The prevalent and generally accepted test to ascertain whether there is “manufacture” is to find whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as result of the process”.

7. Agreeing with the earlier decision in Empire Industries Ltd. v. Union of India ((1986) 162 ITR 846), the Constitutional Bench took the view that the “grey fabric” after it undergoes the various processes of bleaching, dyeing, sizing, printing, finishing etc. emerges as acommercially different commodity with its own price structure, custom and other commercial incidents and that there was in that sense a “manufacture” within the meaning of S. 2(f). It is the case of the petitioner herein that the end product namely, the centrifuged latex which is received after the process is totally a different commercial commodity from the raw latex received from the tree. On the other hand, the respondent relied on certain other decisions in support of its contentions that centrifuging may not in any way be described as a manufacturing process. In Bahri Steel Wires v. Additional Commercial Tax Officer (84 STC 418), the Supreme Court considered whether a new commercial commodity has come into being as a result of M.S wires being drawn out of M.S wire rods. The Supreme Court held that M.S wires drawn out of tax suffered M.S wire rods connoted be taxed again when sold by virtue of sub-item (xv) of item (iv) Ss. 14 and 15 of Central Act. Another decision relied on by the respondent is that of, High Court of Madras in State of Tamil Nadu v. Bharat Dairy Farm (81 STC 332) where it was held that the process of stirring cream to quicken the process of conversion into butter, does not bring into existence any different commercial commodit than the original one, since no manufacturing process at all is involved in the conversion of cream into butter. In the Judgment of this Court in T.R.C No. 15 of 1982, it was held that garbled pepper is not a different commodity from pepper. The learned Government Pleader submitted that there is no merit in the reliance made by the petitioner in the provisions contained under Central Excise Act since each statute has its own emphasis.

8. In His Majesty the King v. Planters Nut and Choclate Co. Ltd., 1951 CLR (EEx) 122, while considering the question as to what constitutes a fruit or vegetable within the meaning of Excise Tax Act, the Exchequer Court of Canada took the view Page: 644that what is important is the meaning given to the word ordinarily in matters of commerce in Canada and not what would be a botanist's conception of the subject matter. Generally, this is the principle which has been followed by Indian Courts while examining whether after the process a new product has come into existence. If a commercially new product is formed, uniformly it is held that there had been a manufacturing process and the end product obtained is different from the raw materials.

9. Applying the above test, the question that has to be considered is whether the centrifugal process can be termed as a manufacturing process and whether the centrifuged latex is commercially different from raw latex. If it is so, then the centrifuged latex would come within the term finished product under S. 5(7). Chapter 23 in the Hand-book of Natural Rubber Production in India published by the Rubber Research Institute of India, in the year 1980 deals with preserved field latex and latex concentrates. In the above chapter, necessity of preserving the natural rubber latex is explained as follows:—

Natural rubber latex is a negatively charged collodial dispersion of rubber partcles in an aqueous serum. The presence of non rubber constituents like proteins, carbohydrates etc in latex makes it a suitable medium, for growth of micro-organisms. Because of the proliferation of micro-organisms, organic acids are produced and these decrease the stability of latex and eventually coagulate it. This is called spontaneous coagulation which takes place within a period of 6-12h. Hence, if latex is to be kept for longer periods, bacterial activity should be suppressed. This is accomplished by the addition of preservatives. “Various chemicals are used as preservatives among which most important is ammonia. In page 403 para. 23. 2, there is reference to preserved field latex being used as raw materials for latex concentration units. It is further stated that preserved field latex as such is not used in any other manufacturing industry. In Para. 23. 3 at page 405, the process of latex concentration is dealt with as follows:—

“The process of latex concentration involves the removal of a substantial quantity of serum from field latex, thus making latex richer in rubber content. Concentration of latex is necessary because of the following four reasons:

i) Economy in transportation;

ii) Preference for high drc by the consuming industry;

iii) Better uniformity in quality; and

vi) Higher degree of purity.

Various processes have been proposed for concentrating latex. Out of these, four have emerged as of special importance. These are evaporation, creaming, centrifuging and electrodecantation”.

10. It is further stated in Para. 23.3.3 that over 90 percent of the concentrated latex is produced by centrifuging. Several types of centrifuging machines are used for the Page: 645concentration of latex. In this process, usually latex is animated and kept overnight before being centrifuged, thus giving time for the sludge to settle down. Latex is fed to the centrifuge from a constant head device so as to ensure a constant flow through the, machine. It enters the bowl through a central feed tube and then passes through a distributor to the bottom of the bowl where it flows through a series of holes into the interior of the bowl. The cream centrifuges inwards towards the axis of rotation and then empties from the bowl through holes into a stationary gully. The skim flows outwards away from the axis of rotation and leaves the bowl through orifices which are formed by regulating screws. It passes out of the centrifuge through a second stationary gully. The cream is separately collected in a bulking rank and packed in drums. This in brief is the process of centrifuging of latex.

11. I find it difficult to accept the contentions of the respondent that the above cannot be treated as a manufacturing process and that the end product namely, centrifuged latex is the same as raw latex. I am of the view that the centrifuged latex obtained at the end of the above process is commercially a different product from the raw rubber latex. If that be so, it can come within the term of finished products under S. 5(7) of the Kerala General Sales Tax Act Respondent has no case that the drums were purchased by the petitioner not for the purpose of storing the centrifuged latex concentrate. Therefore, the petitioner was perfectly justified in issuing Form No. 18 declarations claiming that the drums were for marketing the finished products and therefore, entitled to the benefit of lesser rate of tax under S. 5(7) of the Kerala General Sales Tax Act Ext P3 is therefore, set aside and the original petition stands allowed as above.

Padinjarekkara Agencies Ltd. v. Asst. Commissioner

Judgment Summary — K.K. Usha, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondent's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Padinjarekkara Agencies Ltd. v. Asst. Commissioner

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