State of Karnataka vs M.K. Agrotech Ltd.

State is before us raising the following questions of law;

a. Whether in the facts and circumstances of the case, the tribunal was right in giving a finding that the process involved in the extraction of Soya

bean Oil by solvent extraction process resulting in the end products of de-oiled Soya bean cake and Soya bean Oil from Soya bean seeds is not a

manufacturing process and levy of tax is not attracted u/s 6 of the KST Act on the purchase turnover of soya bean seeds?

b. Whether in the facts and circumstances of the case, the order of the tribunal is justifiable in holding that the soya bean seeds and the de-oiled

soya bean cake are not different commodities?

c. Whether the tribunal is justified in giving a finding that the levy of tax is not attracted on the sale of de-oiled soya bean cake which is obtained

from soya bean seeds purchased from the registered dealers as first dealer under the provisions of the KST Act?

Facts in brief are as under;

Respondent is a dealer registered under the provisions of the KST Act 1957. The respondent is engaged in the manufacture of refined edible oil.

For the assessment years 1998-99, 1999-2000, 2000-01 and 2001-02. The assessing authority has concluded the assessment levying purchase

tax on URD purchase of Soya bean seeds u/s 6 of the Act and levied tax on de-oiled soya bean cake as first dealer and has determined the total

and taxable turnover at Rs. 66,46,88,178/-, Rs. 18,29,28,139/- for the assessment year 1998-99, Rs. 26,37,39,371/- Rs. 11,66,26,740/- for the

assessment years 1999-2000, Rs. 32,47,46,741/-, Rs. 12,53,70,651/- for the assessment year 2000-01, Rs. 55,08,38,397/- and Rs.

24,73,94,059/- for the assessment year 2001-02 respectively. These assessment orders were challenged before the first appellate authority and

the first appellate authority allowed the appeal in part for the assessment year 1998-99 and dismissed the appeals preferred against the assessment

orders for the assessment years 1999-2000, 2000-01, 2001-02 confirming that the process of extracting oil by applying solvent extraction

process to soya bean seeds is a manufacturing process. Second appeals were filed by the assessee. Same stood allowed. It is in these

circumstances, State is before us.

Smt Sujatha, learned Counsel would invite our attention to the material facts to say that there is manufacturing in the case on hand for the

purpose of purchase tax in terms of the statute. She would say that the seed is converted as oil cake and that therefore the state is entitled to levy

of tax on the peculiar facts of this case. She would rely on a few judgments in support of her submission. Per contra, Sri. Rabinathan, learned

Counsel would support the order by contending that the seed and the cake are one and the same and that therefore the tribunal is justified in

passing the impugned order.

After hearing, we have carefully perused the material on record.

The only question that requires to be considered is as to whether the tribunal was justified in holding that levy of tax is not attracted on the

purchase turnover of soya bean seeds in the case on hand. This Court also has to decide as to whether the tribunal is justified in holding that the

soya bean seeds or de-oiled soya bean cakes are not different commodities. The assessing officer has chosen to hold against the assessee in the

case on hand. The assessing officer would hold that purchase tax is leviable on the facts and circumstances of this case and that no exemption is

possible or permissible in the case on hand. When the same was challenged in appeal, the appellate authority would hold that the soya bean seeds

and de-oiled soya bean cake are different commodities and the tax levied by the assessing authority does not require an interference. The same

was challenged before the tribunal and tribunal after hearing, has chosen to frame several questions and thereafter has chosen to answer in favour

of the assessee. According to the tribunal, the lower authorities are not correct in treating soya bean cake and de-oiled soya bean cake as different

commodities. Let us see as to whether this finding is sustainable or not on the facts of this case. Section 6 of the Act would provide for levy of tax

under certain circumstances;

Section 6. Levy of purchase tax under certain circumstances: subject to the provisions of Sub-section (5) of Section 5 every dealer who in the

course of his business purchases any taxable goods in circumstances no tax u/s 5 is leviable on the sale price of such goods and,

(I) either consumes such goods in the manufacture of other goods for sale or otherwise or consumes otherwise, or disposes of such goods in any

manner other than by way of sale in the State, or

(II) dispatches them to place outside the State except as a direct result of sale or purchases in the course of interstate trade or commerce;

shall be liable to pay tax on the purchase price of such goods at the same rate at which it would have been leviable on the sale price of such goods

u/s 5.

The sum and substance of Section 6 is that in the event of consumption of purchased goods, the purchase tax is leviable. Admittedly, the case on

hand, soya bean seeds are purchased and the same is used for the purpose of extraction of oil. After extraction of oil, it is seen that soya bean

cake / extraction is available. The tribunal holds that no tax is leviable. Case laws are not wanting in this regard.

The Madras High Court in Deputy Commissioner of Commercial Taxes Vs. R. Kuppuswamy Chettiar, has chosen to consider a similar case

with reference to ground nut/fried ground nut kernel. The Madras High Court noticed the definition of oil seeds at page 589 and thereafter the

Madras High Court noticed the judgment of the Supreme Court in Avadh Sugar Mills Ltd. Vs. The Sales Tax Officer, Sitapur and Another, . The

Supreme Court in Avadh Sugar Mills Ltd. Vs. The Sales Tax Officer, Sitapur and Another, would say that a seed is one, which germinates. It is

not disputed that the ground nut germinates hence it is undoubtedly a seed. The next question is whether it is generally used in the manufacture of

oil. Here again, there can be hardly any doubt that ground nut is mostly used for the manufacture of groundnut oil which is used in the manufacture

of dalda and other cooking media. Groundnut is one of the items which is mostly used in this country for the manufacture of cooking media. The

Madras High court after noticing this dictum of the Supreme Court would hold as under;

It is seen from these decisions that in order to be a seed, it must be one which germinates on sowing. In order to be an oil seed, the test to be

applied is whether it is generally used for the manufacture of oil. It is only those commodities which are in commercial circles dealt with as oil seeds

that are covered by the entry and not every seed from which by some process or other oil could be extracted. If we apply these decisions,

certainly �fried groundnut kernel'' could not be held to be an oil-seed. When it is fried, the germinating property in the groundnut kernel is lost.

Most of the oil content, if not all, is also lost by frying. In commercial parlance also, friend ground nut is not dealt with as an oil seed. We are,

therefore, of the view that fried ground nut kernel could not be treated as oil-seed liable to single point tax as declared goods under item 6 of the

second schedule to the Tamil Nadu General Sales Tax Act, and it is liable to multi point tax at 2 1/2%.

The Madras High Court in 1970 (25) STC 53 Mad would hold that only oil seeds which without subjecting to such processing, yield non-

volatile oils would come within the ambit of the entry in Section 14 of the Central Sales Tax Act, 1956. The word ''seed'' in the phrase ''oil-seed''

must retain its meaning, that, it can be sown and will, on sowing, germinate. An article which while being a seed is capable also of yielding oil can

be described as an ''oil-seed''.

The Supreme Court has considered ''manufacturing'' in M/s. Aspinwall and Co. Ltd Vs. The Commissioner of Income Tax, Ernakulam, in para

13 and 14 of its order as under;

The word ''manufacture'' has not been defined in the Act. In the absence of a definition of the word ''manufacture'' it has to be given a meaning

as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving

such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and

different article then it would amount to a manufacturing activity.

This Court while determining as to what would amount to a manufacturing activity held in Deputy Commissioner of Sales Tax (Law), Board of

Revenue (Taxes), Ernakulam Vs. Pio Food Packers, that the test for determination whether manufacture can be said to have taken place is

whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognised in

the trade as a new and distinct commodity. It was observed (page 65):

Commonly, manufacture is the end result of one or more process through which the original commodity is made to pass. The nature and extent of

processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at

each stage. With each process suffered, the original commodity experiences a 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 recognised as a new and

distinct article that a manufacture can be said to take place.

In the light of the judgment of the Supreme Court, what is clear to us is that it cannot be said that there is no manufacturing at all in the case on

hand, as is sought to be made out by the assessee. There exists manufacture. Similarly, the argument that the seeds and the cakes are one and the

same, in terms of the finding, is also not acceptable to us. Since after manufacturing, the seeds cease to exist and it loses the character of a seed in

terms of the judgment of the Supreme Court in 1976 (38) STC 587 SC. Hence we are of the view that the tribunal is (sic) correct in rejecting the

contention of the State.

The learned Counsel for the assessee would rely on a Berger Paints India Ltd. Vs. Commissioner of Income Tax, Calcutta, , in support of his

submission. In the said case, the apex court was considering with regard to the effect of non-challenging of an order passed by the tribunal. That

stands on a different footing. In the said case it was noticed that the department has not challenged the law laid down by the High Court in the case

of one assessee and the same was accepted, but the same was not accepted in the case of the other assessee. It was in those circumstances, the

apex court ruled that if the revenue has not challenged the correctness of the law laid down by the High Court and has accepted in the case of one

assessee, then it is not open to the revenue to challenge its correctness in the case of the other assessees without just cause.

In the case on hand, State would contend that the decision of the Supreme court in Berger Paints India Ltd. Vs. Commissioner of Income Tax,

Calcutta, stands on a different footing and certain material aspects were not brought to the notice of the tribunal. It was a case of default and in that

situation, the State cannot be prevented from challenging the subsequent decision in the light of better facts as has been done in the case on hand.

The dictum of the Supreme Court in Berger Paints India Ltd. Vs. Commissioner of Income Tax, Calcutta, is not available to the given situation.

(1980) 46 STC 405 SC is pressed into service with regard to the acceptance of soya bean seed being not different from soya bean cake. We

have carefully seen the said judgment. That was a case in which the court was considering the issue as to whether the ''desiccated coconut''

prepared out of coconut purchased within State after paying tax would not be liable to pay Central Excise tax on the sales turnover u/s 8 of the

Act. The court noticed the entry ''oil seed'' for the said purpose in the said case. The facts in that case stands on entirely different footing. Even

otherwise, that was a case in which the court was considering the ''purchase tax'' in terms of Section 6 of the KST Act. The said judgment is not

available to the assessee.

Assessee also relies on a latest Division Bench judgment of this Court in STA 87/1997 DD 19-1-2005. In the said case this Court noticed

several aspects of the matter and thereafter it ruled in favour of the assessee. In that very judgment itself the Division Bench has noticed the

question of ''consumption'' by a detailed order with reference to several case laws. The court ruled that ''consumption'' in the economic sense does

not mean only use of goods in the production of consumer goods or final utilisation of consumer goods by consumers. It also means ''used up'',

spent, etc. The goods purchased should be consumed, the consumption should be in the process of manufacture and the result must be the

manufacture of other goods. The court further noticed in para 26 as under:

...the parties did not place any material before us to demonstrate how the sunflower oil cake and groundnut oil cake are in any way different from

de-oiled sunflower cake and ground nut oil cake. Therefore the only way we need to understand these commodities is the way in which they are

understood in common parlance and in trade circles. The oil cake contains a certain percentage of oil and several other ingredients. When these

commodities are subjected to processing of extraction of oil some quantum of oil is removed, but they continue to remain as oil cakes with lesser

content of oil and the original commodity is not used in the manner as to cease exist or cease to be available in that form for sale or purchase to

attract levy of tax u/s 6 of the Act. An article which is commonly and generally known as oil cake could not loose its identity merely because the

purchasing dealer utilise the same for extraction of oil and therefore, the essential ingredients required to attract the levy of purchase tax u/s 6 of the

Act are not satisfied and accordingly, it requires to be held that there is no consumption of oiled sunflower cake and oiled groundnut oil cake in the

manufacture of other goods for sale nor there is any consumption otherwise, since even after extraction of oil, the oiled sunflower cake and oiled

ground nut oil cake continue to remain as oil cake with lesser quantity of oil and therefore they continue tor remain the same commodity.

The facts in that case stand totally on a different footing from the present set of facts. That was a case in which the court was considering the sun-

flower oil cake vis-a-vis ground-oil cake. Whereas in the present case, it is seeds V. cake. In these circumstances, the said judgment is not

available to the assessee in the present set of circumstances.

In the given circumstances, we are satisfied that the tribunal has committed a serious error in accepting the case of the assessee and that the

State is right in levying the tax u/s 6 of the Act.

In the result, we accept this appeal, the order of the tribunal is set aside. Questions of law are answered in favour of the revenue and against

the assessee.