State of Tamil Nadu vs Bharat Dairy Farm

Dr. A.S. Anand, C.J.—Would the conversion of cream into butter by stirring, amount to a process of manufacture attracting the levy of

purchase tax u/s 7A of the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as ""the Act"") ? This is the only question which

requires our consideration in these revision petitions filed by the Revenue against the orders of the Sales Tax Appellate Tribunal (Additional

Bench), Coimbatore, dated November 28, 1979, passed in C.T.A. Nos. 252 and 309 of 1979 and C.T.M.P. Nos. 230 and 212 of 1979. The

circumstances in which this question arises are as follows :

The assessee in both these revision petitions is one and the same dealer, Bharat Diary Farm. The assessee sold butter converted from cream

purchased by it. The sale of butter was reflected by the assessee in its returns and the accounts. The assessment in T.C.R. No. 586 of 1981 relates

to the assessment year 1976-77 while the assessment in T.C.R. No. 857 of 1981 relates to the assessment year 1977-78.

The assessee had reported its taxable turnover for 1976-77 as Rs. 43,611.75 in the A1 return filed by it. The accounts were called and

checked. An inspection by the Special Deputy Commercial Tax Officer (ST), Erode, at the business premises led to the recovery of two exercise

note books and two pocket note books. Investigation revealed that for the assessment year 1976-77, there was purchase of cream for Rs.

68,701/-, which was not covered by purchase bills. According to the Revenue, the assessee had suppressed the purchase of cream in its returns.

Consequently, assessment u/s 7A of the Act was made and the total and taxable turnover of the assessee was worked out at Rs. 1,23,216.75.

Penalty u/s 12(3) of the Act was also proposed.

For the assessment year 1977-78, the assessee had filed the A1 return showing sales turnover of butter and curd from April 1, 1977 to July 24,

1977, at Rs. 4,710/- and from July 25, 1977 to March 31, 1978, as Rs. 34,593. According to the assessing authority, the purchase of cream

amounting to Rs. 1,13,499/-, which was not supported by any purchase bills, had been suppressed. Since the sales of butter and curd were

exempted from tax with effect from July 25, 1977, the taxable turnover of the assessee was worked out at Rs. 6,280/- by adding to the turnover

furnished by the assessee of Rs. 4,710/- and amount of Rs. 1570/- by way of one-third for ""defects and probable omissions"". The turnover liable

to tax u/s 7A of the Act in respect of the purchases of cream was calculated at Rs. 1,13,499/-. Thus, the total taxable turnover was worked out at

Rs. 1,19,779/- and penalty, both u/s 12(3) and Section 22(2) of the Act was also levied. The assessing authority did not accept the argument of

the assessee that the cream which had been converted into butter by stirring, was not a commodity different than butter and that since no

manufacturing process was involved in converting cream into butter, levy u/s 7A of the Act was not warranted. The assessing authority held butter

and cream to be separate commodities.

Aggrieved by the orders of assessment, the assessee preferred appeals in respect of both the assessment years before the Appellate Assistant

Commissioner. The assessee disputed the best judgment assessment made by the assessing authority. It was pleaded before the appellate authority

that the assessee only purchased milk from villagers and got cream out of it and after processing it converted the same into butter. It was asserted

that milk being exempt from tax, there could be no liability u/s 7A of the Act in respect of the cream obtained from that milk by natural process. In

the alternative, it was argued that even if it be held that the assessee had purchased cream from the villages, the levy u/s 7A of the Act was not

attracted because purchase of butter had been accounted for and no manufacturing process whatsoever was involved in converting cream into

butter. There was no dispute that sales tax on butter had been paid by the assessee. The Appellate Assistant Commissioner, after examining the

record, observed :

The contention of the appellants that the purchases of butter as accounted for by them in their accounts were only with reference to the purchase

of cream as in the recovered records and receipt of butter as reflected in their accounts would completely agree with the quantity of cream

accounted for in the records recovered but for the loss due to the process of conversion of cream into butter, has got force. The purchase of

cream as reflected in the records recovered are found to be accounted for purchases, as the appellants have straightway accounted for the

purchases of cream as the purchases of butter.

The Appellate Assistant Commissioner, after recording the above finding of act, proceeded to examine the process by which cream is converted

into butter. He opined that if cream, taken out of milk, is left as such, it would turn into butter after a few days by itself and if, for commercial

convenience, stirring is done to quicken the process of conversion of cream into butter it could not be said that there was any manufacturing

process involved in the conversion of cream into butter. The appellate authority, accordingly, held that there was no liability on the assessee to tax

u/s 7A of the Act and consequently, the turnover assessed u/s 7A of the Act was set aside. The penalty u/s 12(3) was also set aside. The addition

made by the assessing authority at 33 per cent for ""omissions and defects"" was not interfered with, but was assessed at 20 per cent of the sales

turnover. The levy of penalty u/s 22(2) of the Act was, however, maintained.

Aggrieved by the orders of the Appellate Assistant Commissioner, the assessee went up in Appeal before the Sales Tax Appellate Tribunal

(Additional Bench), Coimbatore, basically questioning the levy of penalty u/s 22(2) of the Act. The Revenue did not contest the orders of the

appellate authority and did not file any appeal. However, while the appeals of the assessee were pending before the Tribunal, the Revenue also

filed two applications seeking enhancement of the assessment. The Tribunal dismissed both the appeals as well as the enhancements applications

by the order impugned in these revision petitions.

We have heard learned counsel for the parties.

The assessee, as already noticed, is a dealer in butter. In the course of its business, it purchased cream, which was converted into and sold as

butter. For both the assessment years, the cream purchased by the assessee was not reflected in the accounts as purchase of cream, though the

same was reflected as purchases of butter, which was sold and sales tax was paid thereon. There is no dispute that the receipt of butter, as

reflected in the accounts of the assessee, completely tallied with the quantity of cream reflected in the recovered records, except to the extent of

the loss due to the process of conversion of cream into butter. There is also no controversy about the fact that the assessee has straightway

accounted for the purchase of cream as the purchase of butter. Both these factual bases are amply borne out from the findings recorded by the

appellate authority. Did the conversion of cream into butter involve any manufacturing process ? On facts, the assessing authority, the Appellate

Assistant Commissioner as well as the learned Tribunal have returned concurrent findings that cream is only the prior stage of butter and that in the

conversion of cream into butter, no manufacturing is done in the process. It was noticed by the Appellate Assistant Commissioner that if cream is

left for a few days, it would, by the natural process itself, get converted into butter and if in order to quicken the process of conversion some

stirring is done, it cannot amount to process of manufacture. We agree with the finding recorded by the authorities and hold that cream is only a

prior stage of butter and its conversion by stirring or churning into butter does not involve any manufacturing process.

Faced with this situation and since the Revenue had not filed any appeal against the findings recorded by the Appellate Assistant

Commissioner, the learned Additional Government Pleader (Taxes) argued that since cream and butter, as found by the assessing authority, are

two separate commodities, levy of purchase tax u/s 7A of the Act was attracted, as the new commodity butter, had come into existence by the

consumption of cream by the process of stirring. We cannot agree, Section 7A is both a charging as well as a remedial provision and has, as its

main object, to plug leakage and prevent evasion of tax. It would come into operation, inter alia, if it is shown that the goods purchased by a

dealer, in the course of his business, whether from a registered dealer or from any other person, which have not suffered tax u/s 3, 4 or 5 of the

Act, as the case may be, have been (a) consumed in the manufacture of other goods for sale or otherwise, or (b) disposed of in any manner other

than by way of sale in the State, or (c) have been despatched to a place outside the State, except as a direct result of sale or purchase in the

course of inter-State trade or commerce. Section 7A of the Act would be attracted if all the above noted ingredients are cumulatively satisfied.

Thus, it would be seen that tax would be levied on the purchase of goods within the State in respect of which no tax has already been levied either

at the sale point or at the purchase point under the Act on any dealer who, inter alia, consumes such goods in the process of manufacture of other

goods. The rate of tax payable on such purchase would be at the rates mentioned in Sections 3, 4 and 5 of the Act, as the case may be. Where the

conditions imposed by Section 7A of the Act for creating the charge are satisfied, the purchase turnover of the dealer has to be included in the total

turnover and if it exceeds the statutory turnover limits, the dealer is liable to pay tax. Since all the authorities below have concurrently found that in

the conversion of cream into butter, no process of manufacture at all was involved and that cream was not consumed when butter was converted

our of it, it necessarily follows that the levy of tax u/s 7A of the Act cannot be attracted to the facts of the instant case. Where cream is left for a

few days it would, on its own, get converted into butter and if stirring is done in order to quicken the process of conversion, it cannot by any

stretch of imagination be said to be a process of manufacture in which the cream may be said to have been consumed in the manufacture of butter,

producing a different commodity. Unless the conversion takes the new commodity to the point where commercially it can no longer be recognised

as the original article, no manufacture can be said to take place. Where there is no essential difference in identity between the original commodity

and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. Cream and butter are not

two different or separate commodities. They are the two forms of the same commodity and no process of manufacture is involved in the

conversion of cream into butter. There is no essential difference in the identity between cream and butter and, therefore, it is futile to contend that

cream gets consumed in the process of manufacture of butter. There is no merit in the submission that the process of stirring of cream brings into

existence a different commercial commodity. The identity of cream does not get devoured or exhausted by its conversion into butter, which is only

the next stage of cream. The Legislature consciously used the expression ""consumes"" in Section 7A(1)(a) of the Act in contradistinction to the

expression ""use"", implying loss of original identity.

In State of Tamil Nadu v. Indodan Milk Products - 1980 (45) S.T.C. 498, a Division Bench of this Court accepted the submission that

condensed milk, obtained by a process of dehydrating the milk or taking the water out of the milk, so that the milk could, with added

preservatives, stand for a long time, would continue to be only milk and thus exempt from tax under the Act. The court negatived the contra

submission that merely because some process was employed to convert milk into condensed milk, it would bring into effect a different commercial

commodity.

In Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Pio Food Packers, , the Supreme Court found that if

there is no essential difference in identity between the original commodity and the processed article, it would not be possible to say that one

commodity has been consumed in the manufacture of another, even if it had undergone a degree of processing. After reviewing a number of

judgments, the court held that when pineapple fruit is processed into pineapple slices for the purpose of being sold in sealed cans, there is no

consumption of the original pineapple fruit for the purpose of manufacture, even though a degree of processing is involved in preparing pineapple

slices for the original fruit. The court held that the commodity continued to possess its original identity notwithstanding the removal of inedible

portions, slicing, adding of sugar and preservatives and thereafter canning it.

It would, at this stage, be also profitable to refer to the judgment of the Supreme Court in Sterling Foods, A Partnership Firm represented by

its Partner Shri Ramesh Dalpatram Vs. State of Karnataka and Another, . Bhagwati, C.J., speaking for the court observed that when raw shrimps,

prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, divining, cleaning and freezing, they do not cease to be

shrimps, prawns and lobsters and such processed goods are commercially regarded the same commodity as raw shrimps, prawns and lobsters,

and there is no essential difference between raw shrimps, prawns and lobsters and the processed or frozen shrimps, prawns and lobsters. The

court considered in depth as to when it could be said that by reason of processing of the goods they have changed their identity to an extent that

commercially those goods cannot be regarded as the original goods. The Bench opined :

The test which has to be applied for the purpose of determining whether a commodity subjected to processing retains its original character and

identity is as to whether the processed commodity is regarded in the trade by those who deal in it as distinct in identity from the original commodity

or it is regarded, commercially and in the trade, the same as the original commodity. It is necessary to point out that it is not every processing that

brings about change in the character and identity of a commodity. The nature and extent of processing may vary from one case to another and

indeed there may be several stages of processing and perhaps different kinds of processing at each stage. With each process suffered, the original

commodity experiences change. But it is only when the change or a series of changes take the commodity to the point where commercially it can

no longer be regarded as the original commodity but instead is recognised as a new and distinct commodity that it can be said that a new

commodity, distinct from the original, has come into being. The test is whether in the eyes of those dealing in the commodity or in commercial

parlance the processed commodity is regarded as distinct in character and identity from the original commodity.

Applying the test, as enunciated by the Apex Court, to the facts of the present case, the conclusion becomes irresistible that cream, when

converted into butter, cannot be said to so charge its identity that commercially it can no longer be regarded as the original article. There is indeed,

no essential difference between cream and butter. The process of stirring cream to quicken the process of conversion into butter, does not bring

into existence any different commercial commodity than the original one. Since no manufacturing process at all is involved in the conversion of

cream into butter, as has also been found by all the authorities below, it follows that there is no consumption of ""cream"" in the process of converting

it into ""butter"" and, therefore, the provisions of Section 7A of the Act cannot be attracted to the instant case. The answer to the question, therefore,

posed in the earlier part of this judgment, has to be in the negative and we so answer it. The Tribunal, therefore, was right in holding the Section 7A

of the Act was not applicable to the facts and circumstances of the instant cases. We, accordingly, do not find any cause to interfere with the order

of the Tribunal.

In the view that we have taken, we refrain from expressing any opinion as to whether the purchase in this case was of milk and not of cream

and since milk is exempt, the cream obtained from the exempted item would also be exempt. No factual basis for the submission is available on the

record. No evidence was let in before the authorities below to show that what was actually purchased by the assessee was milk and not cream.

On the contrary, we find that the authorities proceeded to deal with the cases and the assessee also understood its case in the manner that what

was purchased by the assessee was cream and not milk. We, therefore, do not deal with that aspect of the case and in fairness to the learned

counsel for the assessee record that he also submitted that the said question be left open to be decided in a proper case at the appropriate time.

In the result, both the revision petitions fail and are dismissed, but without any order as to cost.