In the High Court of Judicature at Madras Dated : 22.4.2010 Coram : The Honourable Mrs.Justice PRABHA SRIDEVAN and The Honourable Mr.Justice P.P.S.JANARTHANA RAJA WRIT PETITION NO.3000 OF 2008 MP.NO.1 OF 2008 M/s.Golden Leathers, Tannery rep.by its Partner Mr.D.Muralidharan ...Petitioner Vs 1. The Secretary, the Tamilnadu Sales Tax Appellate Tribunal, City Civil Court Buildings, II Floor, Chennai-104. 2.The Deputy Commercial Tax Officer Tirupattur. 3.The Principal Commissioner and Commissioner of Commercial Taxes, Ezhilagam, Chepauk Chennai-5. 4.The State of Tamilnadu, rep.by its Secretary Commercial Taxes & Registration Department, Fort.St.George, Chennai-9. ...Respondents
PETITION under Article 226 of The Constitution of India praying for the issuance of a Writ of Certiorarified Mandamus to call for the records of the first respondent in STA.No.91 of 2004, quash the impugned proceedings dated 21.1.2008 and further direct the second respondent to grant the concessional rate of tax on the purchase of chemicals, dyes and pigments against Form XVII, which are used for the process of conversion of wet blue skins into finished leather in view of the enabling provisions of the Tamilnadu General Sales Tax Act, 1959 and in the light of the decisions of the Apex Court in 80 STC 249, JT 1999 (9) SC 275 : 1999 (114) ELT 770 and (2004) 3 RC 613.
For Petitioner : Mr.K.J.Chandran for Mr.V.Sundareswaran
For Respondents : Mr.Haja Naziruddin, SGP (T) and
Mr.K.Radhakrishnan, GA(T)
ORDER OF THE COURT WAS MADE BY PRABHA SRIDEVAN,J
In this writ petition, the question is whether process by which the wet blue leather is turned into finished leather amounts to ‘manufacture’. This question assumes importance in the context of Section 3(3) of the Tamilnadu General Sales Tax Act (hereinafter referred to as the Act).
2. The petitioner is a manufacturer of finished leather. They purchased chemicals, dyes and pigments against Form XVII to convert wet blue leather into finished leather. The dealer is allowed concessional rate of tax under Section 3(3) of the Act, if a declaration in Form XVII is obtained from the purchasing dealer and produced before the Assessing Authority; after having bought the goods at the concessional rate of tax, he must use them for the manufacture of goods for sale. If he misuses them or disposes them off in any other manner, the concession will not be available to him. Thirdly, the buying dealer must maintain a separate stock for the goods purchased by availing the concession. According to them, to convert wet blue leather into finished leather, several processes and manufacturing activities take place, which include splitting, shaving, neutralizing, bleaching, dyeing, fat-liquoring, stuffing, setting out, samming, drying, staking and finishing and therefore, they fully complied with the provisions of Section 3(3) of the Act.
3. The Original Authority was not inclined to accept it. On appeal, the Appellate Authority found that the leather industry is of three types. One is the industry of tanning raw skins and manufacturing finished leather, which is called the full-fledged unit; the next kind is wet unit or wet skin unit by which, the raw skins are turned into semi tanned leather i.e wet blue; and the third unit, by which, the wet blue leather is converted into finished leather. The Appellate Authority, therefore, found that is a commercially distinct commodity and the wet unit or crust or wet blue leather is not the same as finished leather and that therefore, such processing will certainly amount to manufacture and allowed the appeal.
4. Against that, the State filed an appeal before the Tribunal. The Tribunal referred to various decisions, which dealt with the question of what is manufacture and what is processing and then concluded that it cannot be said that there is a process of manufacture, when wet skins are converted into finished leather. According to Tribunal, as far as leather industry was concerned, leather was “raw hides and skins”, which are the basic materials or “dressed hides and skins”, which are the finished products and since wet blue leather had crossed the stage of raw hides and skins, it is the same as finished leather. They are one and the same commodity and that therefore, it cannot be said that when wet blue leather is converted into finished leather, a manufacturing activity takes place. The Tribunal drew strength from the fact that as per item 7B of Schedule II to the Act, wet blue leather would be included under the description ‘dressed hides and skins’. This re-enforced the view of the Tribunal that wet blue leather, not being raw hides and skins, would be equivalent to finished leather, which, in turn, would mean that there is no manufacture when wet blue leather turns into finished leather. Against this, the present writ petition has been filed.
5. Learned counsel for the petitioner submitted that a detailed description of various stages that the wet blue leather undergoes to transform into a finished leather was explained before the Appellate Authority, who was, thereafter, satisfied that this would meet “the test of manufacture” as laid by the Supreme Court in various cases. The Appellate Authority was also satisfied that the wet blue leather and the finished leather were commercially distinct commodities in the industry concerned and one cannot be equated to the other. Learned counsel also produced the samples of wet blue leather and finished leather to show that they are different. He referred to various decisions of the Supreme Court, which explained as to what is manufacture.
6. Learned Special Government Pleader submitted that as long as the hides and skins are raw, they are liable to putrefaction and once processing takes place, they are no longer liable to putrefaction. It is only a question of stages of refinement and it is not as if a different or distinct commodity comes into existence. Learned Special Government Pleader also referred to the decisions of the Supreme Court to support his case.
7. It is also relevant to note that at the instance of the All India Skin and Hide Tanners and Merchants Association, a clarificatory note was issued by the Principal Commissioner and Commissioner of Commercial Taxes, who declared that when a dealer purchases semi finished skin and converts into finished hides, both the semi finished and finished hides are to be treated as the same commodity and Form XVII cannot be used for the purchase of chemicals. This appears to have loomed large in the minds of the Members of the Tribunal for arriving at their decision.
8. The various stages the wet blue leather undergo transformation from raw hides and skins to finished leather were explained to us, which are as follows :
“Raw Hides/Skins -> Trimming, Sorting, Desalting (raw material storage yard) -> Soaking -> Liming Unhairing -> Fleshing -> Washing -> Deliming/Batting -> Washing -> Degreasing/Washing -> Pickling -> Chrome Tanning -> Wet Blue.”
The wet blue leather undergoes the following processes when it get transformed to finished leather which are as follows :
“Wet blue -> Splitting (Splitting Machine) -> Shaving (Shaving Machine) -> Washing (Drums) -> Rechroming (Drums) -> Neutralization and Washing (Drums) -> Retanning/Dyeing/ Fatliquoring (Drums) -> Drying/Staking/ Trimming -> Buffing/ Dedusting (Machine) -> Finishing (Autospray) -> Finished Leather.”
9. The phrases mentioned above have been explained by the respondents in their written statements filed before the Tribunal, which are as follows :
SPLITTING & SHAVING
The leather is shaven in the back side for having even thickness.
WASHING
Watered and wetting agent is added and drumming is done and the process is carried for 15 minutes and thereafter, it is again washed for removal of dust and stains.
RECHROMING
Water, basic chrome sulphate, and cationic fatliquor are added in drum and run for 3 hours for strength.
NEUTRALIZATION
Water, sodum formate, sodium acetate, sodium sulphide and soda bi carbonate are added in drum for increase in PH value for intake of chemicals for one hour.
RETANNING
Syntans, vegetable extracts are added in drums and rotated for one hour for tightness and strength.
DYEING
The required colour is taken and dyed for colouring
DRYING
The water, which is already present in the leather is removed.
STAKING
This process involves to make leather soft and flat.
TRIMMING
The process is carried on for the neat surface area and good looking purpose.
BUFFING/
STUFFING
This process removes the dust in the Backside of the leather and for uniformity on both sides.
DEDUSTING
Process is carried on for the purpose of smooth surface on both sides.
FINISHING
The process is for fixing the colour in the grain surface.
We have to consider whether this activity will amount to manufacture. So, we seek help from the various rulings of the Courts.
10. In the case of Deputy Commissioner of Sales Tax Vs. Coco Fibres (reported in (1991) 80 STC 249), the Supreme Court held that when coconut husk is converted into coconut fibre, a manufacturing activity takes place where green husks are soaked in saltish sea water for days together and after decomposition, it is subjected to beating process and the fiber is extracted. The Supreme Court held as follows :
The word manufacture has not been defined under the Act, and therefore, we have to look into the meaning known in commercial parlance. In Blacks Law Dictionary, Fifth Edition, the word manufacture has been defined as, the process or operation of making goods or any material produced by hand, by machinery or by other agency; anything made from raw materials by hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand, labour or machine. Thus, by process of manufacture, something is produced and brought into the existence, which is different from that, out of which, it is made, in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. The Constitution Bench of this Court in Ujagar Prints Vs. Union of India (1989) 74 STC 401 : (1989) 3 SCC 488, held thus :
The prevalent and generally accepted test to ascertain that there is manufacture is 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, recognized as a distinct and new article that has emerged as a result of the processes. The principles are clear. But difficulties arise in their application in individual cases. There might be borderline cases where either conclusion with equal justification may be reached. Insistence on any sharp or intrinsic distinction between processing and manufacture, we are afraid, results in an oversimplification of both and tends to blur their interdependence in cases such as the present one.
In State of Bihar Vs. Chrestien Mica Industries Ltd. (1956) 7 STC 626, the Patna High Court was to consider the question whether the process of mining mica is tantamount to manufacture of goods within the meaning of Section 2(g) of the Bihar Sales Tax Act, 1947. It held that to manufacture must mean to bring into being something in a form in which it was capable of being sold or supplied in the course of business. The essential point to remember is that something is brought into the existence which is different from that originally existing, in the sense that the thing produced is by itself a commercial commodity and is capable as such of being sold or supplied. It is not necessary that the stuff or the material of the original article must lose its character or identity or it should become transformed in its basic and essential properties. In Commissioner of Sales Tax Vs. Harbilas Rai and Sons (1968) 21 STC 17, this Court held at page 20 that the word manufacture has various shades of meaning, and in the context of sales tax legislation, if the goods to which some labour is applied remain essentially the same commercial article, it cannot be said that the final product is the result of manufacture. The test laid down by this Court is that the article which comes into being must be commercially different from the one from which it is made or manufacture.
11. In the case of Aspinwall & Co.Ltd. Vs. CIT (reported in 251 ITR 323 (SC)), the question was as to whether when raw coffee berries undergo nine processes to become coffee beans, there is a manufacturing activity. The Supreme Court took note of the factual observation of the Tribunal regarding nine processes involved in curing of coffee and then, they held that the conclusion of the Tribunal that a manufacturing activity takes place is correct. It was further held as follows :
Adverting to the facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from the raw material from which it was manufactured. A distinct change comes about in the finished product.
12. In the case of M/s.India Cine Agencies Vs. Commissioner of Income Tax, Madras (reported in (2009) 308 ITR 98), the question was as to whether the activity undertaken was manufactured or produced in the conversion of jumbo rolls of photographic films into small flats and rolls in the desired sizes. The Supreme Court held as follows :
“Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise, Jaipur Vs. Rajasthan State Chemical Works, Deedwana, Rajasthan (1991 (4) SCC 473).
‘Manufacture’ is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that, in manufacture something is brought into existence, which is different from that, which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produce a commercially different article. (See M/s.Saraswati Sugar Mills and Others Vs. Haryana State Board and Others (1992 (1) SCC 418).
The prevalent and generally accepted test to ascertain that there is manufacture is 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, recognized as a distinct and new article that has emerged as a result of the process. There might be borderline cases where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between processing and manufacture, results in an oversimplification of both and tends to blur their interdependence. (See Ujagar Prints Vs. Union of India (1989 (3) SCC 488).
To put it differently, the test to determine whether a particular activity amounts to ‘manufacture’ or not is : Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes ‘manufacture’ takes place and liability to duty is attracted. Etymologically the word ‘manufacture’ properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. Vs. Union of India (1985 (3) SCC 314).'”
They then referred to the words production and manufacture with their grammatical variations and cognate expressions and held that when the jumbo rolls of photographic films are cut into small flats and rolls, the manufacturing activity takes place since, after cumulative effect of various processes, a manufactured product emerges from the raw material and each step towards such production would be a process in relation to the manufacture.
13. In the case of CIT Vs. N.C.Budharaja & Co. (reported in (1993) 204 ITR 412), the Supreme Court again referred to the words manufacture and production wherein the relevant portions read thus :
The words ‘manufacture’ and ‘production’ have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word ‘production’ has a wider connotation than the word ‘manufacture’. While every manufacture can be characterized as production, every production need not amount to manufacture. The meaning of the expression ‘manufacture’ was considered by this Court in Deputy CST Vs. Pio Food Packers (1980) 46 STC 63, among other decisions. In the said decision, the test evolved for determining 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 recognized in the trade as a new and distinct commodity. Pathak J., as he then was, stated the test in the following words (at page 65) :
‘Commonly, manufacture is the end result of one or more processes 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 recognized as a new and distinct article that a manufacture can be said to take place.’
The word ‘production’ and ‘produce’ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.’
14. In the present case, it is very clear from the facts before us that if a person placed an order for finished leather, wet blue leather will not be supplied to them. The same observations are made by the Supreme Court in the decision reported in (1991) 80 STC 249) (cited supra). It is clear that after the 12 processes, which have been described in the earlier paragraphs, wet blue leather gets transformed into finished leather, after which, it loses it identity as wet blue leather and becomes a different commodity with a distinct identity in the market and in the industry concerned. Therefore, we find that the activity satisfies all the propositions laid down by the Supreme Court to decide as to whether a process is a manufacture or not.
15. The Tribunal did not take note of the factual finding of the Appellate Assistant Commissioner, who had not only referred to various stages, which the wet blue leather undergoes and becomes finished leather, but also the fact that each activity is known in the industry with different name. One is called the full-fledged unit, by which, the raw hides and skins get transformed into finished leather; the other is called the wet unit; and the third is called the dry unit. It is after discussing these facts the Appellate Assistant Commissioner came to the conclusion that a manufacturing activity takes place. The Tribunal appears to have been persuaded by the fact that in item 7B of Schedule II to the Act, the two categories of leather that are mentioned in the entry are ‘raw hides and skins’ and ‘dressed hides and skins’. The entries indicate taxability and the rate. That cannot decide the issue as to whether any manufacturing activity takes place or not. Both ‘wet leather’ and ‘finished leather’ may be described as “dressed hides and skins” that is opposed to “raw hides and skins”. But we must still examine whether, when the wet blue takes through the various stages, a manufacturing activity takes place. The change or series of changes take the wet blue to a point where it can no longer be regarded as wet blue but must be recognized as finisher leather. So there is a manufacture. This question must be decided on the facts and circumstances of each case that comes up for consideration, the processes that the particular goods pass through and whether they get converted or not and whether the inputs are used for such activity. In this case, we are satisfied that the activity amounts to a manufacturing activity.
16. In the result, the writ petition is allowed. The impugned order is set aside. NO costs. Consequently, the above MP is closed.
(P.S.D.J.) (P.P.S.J.J.)
22.4.2010
Index : Yes
Internet : Yes
To
1. The Secretary, the Tamilnadu Sales Tax Appellate Tribunal, City Civil
Court Buildings, II Floor, Chennai-104.
2. The Deputy Commercial Tax Officer, Tirupattur.
3. The Principal Commissioner and Commissioner of Commercial Taxes,
Ezhilagam, Chepauk, Chennai-5.
4. The Secretary to Government of Tamilnadu, rep.by its Secretary, Commercial
Taxes & Registration Department, Fort.St.George, Chennai-9.
RS
PRABHA SRIDEVAN,J
AND
P.P.S.JANARTHANA RAJA,J
RS
WP.NO.3000 OF 2008
& MP.NO.1 OF 2008
22.4.2010