The Commissioner of Sales Tax vs Swastik Trading Company

D.Y. Chandrachud,J.

This appeal by the Revenue u/s 27 of the Maharashtra Value Added Tax Act, 2002, raises the following substantial questions of law:

Whether the Maharashtra Sales Tax Tribunal was right in holding that the products known as "mouth freshener" and "mukhwas" are classifiable under Schedule Entry C-91 and liable to tax at the rate of 4% and not classifiable under schedule entry E-I, with a rate of tax of 12.5%;

If the answer to question No. 1 is in the negative under which Schedule entry are the products "mouth freshener" and "mukhwas" classifiable and what shall be the rate of tax on such products.

The appeal is admitted and with the consent of Counsel for the Appellant and the Respondent is taken up for hearing and final disposal.

The Respondent is a registered dealer under the Maharashtra Value Added Tax Act, 2002 ("the Act"). The Respondent purchases spices such as fennel seeds, sesame seeds, oil seeds, cumin, cloves, cardamom, black pepper and dried ginger which are then subjected to a process of manufacture. The final product is sold in pouches as mukhwas or a mouth freshener. Literally speaking, the word mukhwas is comprised of two elements: ''mukh'' being mouth and ''was'' being fragrance.

The Respondent moved the Commissioner of Sales Tax u/s 56, seeking a determination of three issues:

(i) Whether the process of preparing a mouth freshener by mixing fried spices with salt, sugar and other like material amounts to a manufacturing process u/s 2(15);

(ii) Whether the purchases of spices from registered dealers and the sale of mukhwas amounts to a resale u/s 2(22); and

(iii) What would be the appropriate classification of the final product, namely, ''mukhwas'' in the Schedule to the Act and what would be the appropriate rate of tax.

The Commissioner by his order dated 22 May 2006 came to the conclusion that (i) The process adopted by the Respondent amounts to the manufacture of a new and different commodity distinct in identity from the constituents that are involved in its making; (ii) The activity of the Respondent involving the purchase of spices from registered dealers and the sale of mukhwas does not amount to a resale of the purchases made from registered dealers and is a manufacturing activity; and (iii) The product of the Respondent falls for classification under Entry E-1 of the Schedule to the Act, attracting a duty of 12.5%.

The Respondent carried the matter in appeal before the Sales Tax Tribunal. By its judgment dated 16 January 2010, the Tribunal affirmed the findings of the Commissioner on the first two issues and came to the conclusion that the activity engaged in by the Respondent amounts to the manufacture of a commercially distinct article and in purchasing spices from the registered dealers and selling its final product, the Respondent is not engaged in a resale within the meaning of the Act. The Tribunal, however, allowed the appeal filed by the Respondent on the issue of classification and came to the conclusion that the final product to which the appeal related would fall for classification as "spices of all varieties and forms" under Entry C-91 of the Schedule thereby attracting a tax of 4%.

At the outset, before we deal with the rival submissions, it would be necessary to record that the ambit of this appeal is confined to the issue of classification. Counsel appearing on behalf of the Respondent has stated before the Court that the appeal be heard and disposed of on the admitted basis that (i) The activity engaged in by the Respondent amounts to a manufacturing process; and (ii) A distinct and separate commercial commodity emerges as a result of the activity.

Counsel appearing on behalf of the Appellant challenges the correctness of the judgment of the Tribunal on the issue of classification and submits that (i) It is well settled that in determining the issue of classification, the Court must be guided by the common parlance test; (ii) Though the Respondent purchases spices in the first instance, a manufacturing process is involved in which the spices are combined with other ingredients, including salt, sugar and flavouring substances to produce a commercially distinct article which cannot be regarded as spices; (iii) Entry C-91 of the Schedule which comprehends within its purview, spices of all varieties and forms must nonetheless comprehend products which in common parlance are regarded as spices and would not include mouth fresheners manufactured by the Respondent. The products, in the present case, involve inter alia the process of roasting and frying which the Respondent has now conceded, involves a manufacturing process.

On the other hand, Counsel appearing on behalf of the Respondent while submitting that admittedly the process engaged in by the Respondent does involve manufacture and as a result of which a separate commercially distinct commodity comes into existence, stated that (i) Entry C-91 of the Schedule comprehends spices in all its varieties and forms; (ii) Notwithstanding the involvement of a manufacturing process, the final product continues to retain the description of spices; (iii) The relevant entries in the Value Added Tax are wider in their connotation than under the Bombay Sales Tax Act, 1959. Entry C-91, specifically adverts to spices in all their forms and varieties. This would comprehend the final products of the Respondent. Counsel relied upon a judgment of the Supreme Court in The State of Gujarat v. Sakarwala Brothers. 1967 19 STC 24

The rival submissions now fall for determination.

The order passed by the Commissioner contains a reference in paragraph 3 to ten products, with reference to which the Respondent sought a determination. Each of those products and the nature of the activity is described as follows:

Variali (roasted) mouth freshener: The applicant purchases fennel seeds from registered dealers. Then the product is roasted manually and proportionate amount of turmeric and salt are mixed for preservation for a longer period. Then the said product is packed and marketed for sale as a mouth freshener.

Jamnagari Mukhwas mouth freshener: The applicant purchases fennel seeds, dhana dal, sesamum seeds, ajwain, suwa, turmeric and salt. The above seeds and dal are roasted manually and proportionate quantum of salt and turmeric powder are added to the mixture for preservation purposes. Then the product is sold in pouches as per Mukhwas.

Ganga Jamnuna mouth freshener: The applicant purchases dhana dal and fennel seeds. The said seeds and dal are roasted manually in a frying pan and proportionate quantum of salt and turmeric are added to the mixture for its longer preservation. The final mixture is packed in a pouch and sold as Mukhwas.

Gulab mukhwas: The product is processed by mixing proportionate quantum of fennel seeds, dhana dal, sesamum seeds, sugar, betel nuts and permitted flavours. The processed product is sold as a mouth freshener.

Fennel seeds coated with sugar: The applicant purchases fennel seeds from registered dealers. Proportionate quantum of sugar in liquid form is coated to the roasted fennel seeds. The product is packed and sold as mukhwas.

Pipal Chatpata mouth freshener: The product is processed by mixing proportionate quantum of pipal, cumin seed, harde, amchur, pepper, sunth, black salt and sat nimbu. The product is sold as a mouth freshener.

Gilly Gilly mouth freshener: The product is processed by mixing proportionate quantum of gulkand, betel nuts, fennel seeds and flavouring material. The processed product is sold as a mouth freshener.

Jiragoli Sp. mouth freshener: The applicant purchases cumin seed, black pepper, sunth, dry mango, sat nimbu. Proportionate quantum of the above materials is mixed with sugar and the processed product is then sold as a mouth freshener.

Orangevati mouth freshener: The applicant purchases cumin seed, black pepper, sunth, dry mango, gulkand, cassia and clove. Proportionate quantum of the above material is mixed with black salt and permitted flavours. The product is then sold as a mouth freshener.

Culcutta Mitha Pan mouth freshener: The applicant purchases betel leaves, sweetened rose petals, fennel seeds, cardamom, cloves, sandal flavour, silver foil. The above materials are mixed proportionately and the final product is sold as a mouth freshener."

Entry C-91 of the Schedule to the Maharashtra Value Added Tax Act, 2002 was effect :

Act

Spicesentry

Description of goods

Rate of tax

MVAT Act

C91 (effective during 01.04.2005 to 30.04.2005)

Spices of all varieties and forms including cumin seed, aniseed, turmeric and dry chillies.

4%

C91 (effective during 01.05.2005 to 31.03.2006)

Spices of all varieties and forms including cumin seed, hing (asafoetida), aniseed, saffron, pepper and poppy seeds.

49%

C91 (effective from 01.04.2006).

(a) Spices of all varieties and forms including cumin seed, hing (asafoetida), aniseed, saffron, pepper and poppy seeds.

(b) Chillies, turmeric, tamarind, coriander seeds, fenugreek and parsley (suva) whether whole or powdered.

The issue before the Court is as to whether the expression "spices of all varieties and forms" would comprehend within its sweep, the ten products of the Respondent which have broadly been described as mouth fresheners or mukhwas. In determining the issue of classification, the Court is guided by the meaning of the expression "spices" in common parlance. The scope of the entry E-91 is broad because it comprehends spices in all their varieties and forms. The expression "of all varieties forms" broadens the ambit of the entry. See in this connection Trutuf Safety Glass Industries Vs. Commissioner of Sales Tax, U.P., The issue, however, is whether the product of the Respondent can be regarded as constituting spices in all its varieties and forms.

The expression "spice" has been defined in Webster''s Third New International Dictionary (Unabridged Edition) to mean "any of various aromatic vegetable products (as pepper, cinnamon, nutmeg, mace, allspice, ginger, cloves) used in cookery to season food and to flavor foods". Spices essentially are a group of vegetable products rich in essential oils and aromatic principles, and which, because of their characteristic taste, are mainly used as condiments. Advanced Law Lexicon by P. Ramanatha Aiyar, 3rd Edition Volume 4 page 4436

In determining the issue which falls for consideration in this appeal, the Court is guided by the law laid down by the Supreme Court to which it would be necessary to turn. In A.P. Products Vs. State of Andhra Pradesh and Others, the Appellant purchased spices such as cumin seed, fenugreek, cinnamon and caraway from registered dealers and produced masala powder by mixing and grinding all these spices together. The Appellant claimed that tax having been paid on the spices on their first sale, the sale of masala powder was not subjected to further sales tax under the Andhra Pradesh General Sales Tax Act, 1957. A Bench of two Learned Judges of the Supreme Court placed extensive reliance on the law enunciated in an earlier judgment of four Judges of the Court in State of Tamil Nadu Vs. Pyare Lal Malhotra and Others, which was reiterated in Rajasthan Roller Flour Mills Association and another Vs. State of Rajasthan and others, The principle of law as enunciated in the earlier decision was thus:

Sales tax law is intended to tax sales of different commercial commodities and not to tax the production or manufacture of particular substances out of which these commodities may have been made. As soon as separate commercial commodities emerge or come into existence, they become separately taxable goods or entities for purposes of sales tax. Where commercial goods, without change of their identity as such goods, are merely subjected to some processing or finishing or are merely joined together, they may remain commercially the goods which cannot be taxed again, in a series of sales, so long as they retain their identity as goods of a particular type.

In the context of the case which came up for consideration in A.P. Products, the Supreme Court held thus:

It is an admitted position that the ingredients which are used in preparation of masala after grinding and mixing lose their own identity and character and a new product separately known to the commercial world comes into existence. According to the ratio in State of Tamil Nadu Vs. Pyare Lal Malhotra and Others, sales tax is intended to tax sales of different commercial commodities and not to tax the production or manufacture of particular substances out of which these commodities may have been made. Since separate commercial commodities emerge into existence, they become separately taxable goods or entities for the purpose of sales tax.

The Court held that masala powder which was prepared after grinding and mixing various spices and condiments in certain proportion was a commercially different commodity liable to be taxed.

In Commercial Taxes Officer Vs. Jalani Enterprises, the issue was whether jaljira which was manufactured by the Respondent was only an appetizer and not a masala and, therefore, liable to sales tax of 10% under the Rajasthan Sales Tax Act, 1994 and not at the rate of 16% falling under entry 184 of a notification dated 29 March 2001. The judgment of the Supreme Court emphasizes once again that when spices are ground together and mixed, that gave rise to a new product which has a commercially distinct identity. The individual spices which are ingredients in the manufacture of the final product are different commercial commodities. The Supreme Court held thus:

Each one of the contents of the product referred to above and relied upon by the High Court would indicate that most of the items used in the manufacture of jaljira are nothing else but spices. They are ground and mixed. When spices are ground and mixed, it gives rise to a new product, which is a mixed masala. Different ingredients are used in preparation of masala after grinding and mixing several ingredients and when they are so ground they lose their own identity and character and a new product separately known to the commercial world comes into existence. Sales tax is levied on sale of commercial commodities, therefore, individual spices could be termed as different commercial commodities. When they are ground and mixed they give rise to a separate commercial commodity altogether which could be taxed separately.

Apart from the above mentioned decisions of the Supreme Court, there is a judgment of a Division Bench of the Gujarat High Court in Patel Dhana-dal Industries Vs. General Manager and Dy. Industries Commissioner and Others, to which a reference has been made on behalf of the Revenue during the course of the submission. The Petitioner manufactured Dhana Dal which according to it, was used as mukhwas or a mouth freshener in a small quantity. The issue was as to whether the Petitioner was entitled to the benefit of an exemption notification. The case of the Revenue was that the Petitioner was a Spice Mill and was, therefore, outside the purview of the exemption. Mr. Justice SB. Majmudar (as His Lordship then was), while delivering the judgment of the Gujarat High Court cited with approval the decision of T.K. Basu, J. sitting as a Learned Single Judge at the Calcutta High Court in Netai Mohan Saha Vs. The State of West Bengal and Others, in which the Learned Judge had held that "spices are nothing but an ingredient which adds flavour to food". The Learned Judge referred to the Shorter Oxford Dictionary where the expression "spice" was defined as "aromatic or pungent vegetable substances used to flavour food". The Gujarat High Court held that the item manufactured by the Petitioner could be regarded as a spice and its activity as a Spice Mill only if Dhana Dal was used as an item for flavoring food. On the contrary, the product of the Petitioner was a mouth freshener which is used after meals are taken and commercially would never be treated as a spice:

In the Notification Annexure A/2 the table pertaining to excluded industries does mention spice mill. Giving the common parlance meaning to the item spice as laid down by aforesaid Calcutta decision with which we concur, it becomes obvious that the item manufactured by the Petitioner could be treated as a spice and the petitioner''s activity will be treated as that of spice mill only when it is shown that the Dhana-Dal manufactured by the Petitioner is used as an item for flavouring food. It is obvious that this test could not be answered by the petitioner''s industry. Dhana-Dal is never used as an ingredient for flavouring food. On the contrary it is used as a mouth freshener after the meals are taken and food is consumed. Thus, it flavours the mouth rather than the food. Consequently, in the commercial world Dhana-Dal would never be treated as a spice. It is used as mouth freshener singly by itself or along with and being added to betel leaves or pan after the meals. Consequently it cannot be said by any stretch of imagination that the Dhana Dal manufactured at Petitioner''s factory would make the Petitioner-industry a "spice mill".

The Respondent before us purchases spices which are subjected to a manufacturing process. Admittedly, a commercially distinct article emerges in the case of each of the ten products as a result of the manufacturing process. The manufacturing process involves in certain cases, the roasting or frying of spices to which several other additives are added including sugar, salt, or as the case may be, flavouring substances. The final product is one in the manufacture of which spices are used as ingredients. But the final product cannot be regarded as a spice nor for that matter as one which falls within the description of the expression "spices of all varieties and forms". The character of the final product does not partake of the character of the individual ingredient. Though spices are used as ingredients, the manufactured article is not a spice or spices. Though Entry C-91 comprehends within its purview spices of all varieties and forms, the entry applies to a product which retains its essential character of being a spice. Having regard to the law laid down by the Supreme Court in the two judgments in Jalani Enterprises and A.P. Products, we are of the view that the final products of the Appellant noted earlier do not fall within the purview of Entry C-91.

Counsel appearing on behalf of the Respondent, however, sought to place reliance upon the judgment of the Supreme Court in State of Gujarat v. Sakharwala Brothers (1967) 19 STC 24 In that case, in the reference which was made by the Tribunal before the Gujarat High Court, the questions of law were whether the sales of patasa, harda and alcidine (small lumps of sugar) were exempt from the payment of sales tax leviable under the Bombay Sales Tax Act, 1959 as adapted to the State of Gujarat by virtue of Entry 47 in Schedule A to the Act and whether the sales of the aforesaid items could be regarded as sales of sweets and sweetmeats within the meaning of Entry 31 of Schedule C. The Supreme Court held that patasa, harda and alachidana fell within Entry 47 of Schedule A and their sales were exempt from the payment of sales tax. The word "sugar" in Entry 47, ruled the Supreme Court, was intended to include within its ambit, all forms of sugar, that is to say, sugar of any shape of texture, colour or density and by whatever name it is called. From the judgment of the Supreme Court, it is evident that the product in question was sugar for, the three items constituted sugar. The Supreme Court noted that it was not in dispute that all the three items contained 90% of sucrose and rejected the submission of the Revenue that they were not forms of sugar, but were products of sugar. The Supreme Court observed that from the judgment of the Tribunal, it emerged that it was possible to convert those articles into sugar by merely dissolving them in water and by subjecting the solution to an appropriate process. The use of the article was the same as sugar candy. The judgment of the Supreme Court, therefore, dealt with a situation where the three products in question admittedly were sugar with the requisite sucrose content. This would be of no assistance to the Respondent since the final product is a commercially distinct article from spices. Reliance was also sought to be placed on a judgment of a Division Bench of this Court in Commissioner of Sales Tax v. Sultan Shev Co. 1977 (40) STC 583 where a Division Bench held that the Tribunal was correct in law in holding that Maida was a form of cereal within the meaning of Entry 10 of Schedule A to the Bombay Sales Tax Act, 1959 and that vermicelli was covered under the expression "spices of all forms". The judgment of the Division Bench does not advance the contention of the Respondent and is in a clearly different context.

The Tribunal in the present case has placed extensive reliance on the position as it obtained under the Central Excise Act and on the Harmonized commodity description. In construing an entry not in the Central Excise Act, but under the Maharashtra Value Added Tax Act, 2002, the Tribunal, with respect, fell into error in placing reliance on the position as it obtained under central excise legislation. The Tribunal was required to consider the entry, as it stands, in the Value Added Tax Act enacted by the State legislature.

For the reasons that we have already indicated, we are of the view that the Tribunal was in error in the view which it took. We accordingly allow the appeal by answering the first question in the negative. In our view, the Tribunal was not correct in holding that the products of the Respondent were classifiable under Entry C-91 of the Schedule and that they were liable to tax at the rate of 4%. There being no other competing entry, the product would fall for classification for the relevant period under residuary Entry E-1 and would attract the applicable rate of tax of 12.5%. The appeal is accordingly disposed of. There shall be no order as to costs.