1986 (2) TMI 304 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the process of slitting larger paper reels into smaller reels constitutes "manufacture" under section 2(17) of the Bombay Sales Tax Act, 1959.
2. Whether the smaller paper reels resulting from the slitting process are commercially different commodities from the larger paper reels.

Issue-Wise Detailed Analysis:

1. Whether the process of slitting larger paper reels into smaller reels constitutes "manufacture" under section 2(17) of the Bombay Sales Tax Act, 1959:

The assessee, a registered dealer, purchased paper in larger reels and cut them into smaller reels using a slitting process. The process involved unbinding the open end of the paper reel, drawing it through rotary slitters adjusted to the required size, and rewinding the cut paper onto paper tubes. The assessee sought a determination from the Commissioner of Sales Tax on whether this activity constituted "manufacture" under section 2(17) of the Bombay Sales Tax Act, 1959.

The Deputy Commissioner initially held that the activity amounted to manufacture, thus subjecting the sale to sales tax. However, the Sales Tax Tribunal later ruled that the activity did not constitute manufacture since it did not result in the production of a new commercial commodity. The Tribunal relied on the precedent set by the Division Bench in Commissioner of Sales Tax v. Dunken Coffee Manufacturing Co. [1975] 35 STC 493.

The Court noted that section 2(17) of the said Act provides an extensive definition of "manufacture," including processing, treating, or adapting goods. However, the definition must be interpreted within the context of sales tax legislation, which primarily taxes the sale of goods. The Court emphasized that for an activity to be considered manufacture, it must result in a commercially different commodity.

2. Whether the smaller paper reels resulting from the slitting process are commercially different commodities from the larger paper reels:

The Court examined whether the smaller paper reels produced by the assessee were commercially different from the larger reels. It was argued that the essential characteristics of the paper remained the same in both the larger and smaller reels, and both could be used for packing. There was no evidence to suggest that the paper market treated larger reels as different commercial commodities from smaller reels.

The Court referenced several cases, including Commissioner of Sales Tax v. Bombay Traders [1976] 38 STC 286, where it was held that frying and spicing cashew-nuts did not result in a different commercial commodity from plain cashew-nuts. The Court also cited the Supreme Court's observation in State of Orissa v. Titaghur Paper Mills Co. Ltd. [1985] 60 STC 213, which stated that different forms of the same commodity do not constitute different commercial commodities.

The Court concluded that the smaller reels of paper produced by the assessee were commercially the same as the larger reels purchased. The revenue failed to establish that the two types of paper were regarded as different commercial commodities, either by showing they were dealt with in different markets or sold by different shops.

Conclusion:
The Court answered the question in the affirmative, ruling in favor of the assessee. It held that the process of slitting larger paper reels into smaller reels did not constitute "manufacture" under section 2(17) of the Bombay Sales Tax Act, 1959, as it did not result in a commercially different commodity. The applicant was ordered to pay the costs of the reference to the respondent.

Reference answered in the affirmative.