1993 (12) TMI 216 - HC - VAT and Sales Tax

Issues Involved:
1. Eligibility for tax exemption under the notification dated March 31, 1983.
2. Definition and scope of "manufacture" under the Karnataka Sales Tax Act, 1957.
3. Validity of the Commissioner of Commercial Taxes' circular dated July 4, 1987.
4. Application of relevant case law to determine if polishing and cutting stones constitute manufacturing.

Issue-Wise Detailed Analysis:

1. Eligibility for Tax Exemption under the Notification Dated March 31, 1983:
The petitioners, who set up a small-scale industrial unit for stone polishing, high polishing, and stone cutting, sought the benefit of a tax exemption notification issued under section 8-A(1)(b) of the Karnataka Sales Tax Act, 1957. The notification exempted tax on the turnover of goods manufactured in Karnataka and sold by tiny sector industrial units for five years from the commencement of commercial production, subject to certain conditions. The petitioners argued that their industry was not listed in the appendix of the notification, thereby implying eligibility for the exemption.

The court clarified that not being listed in the appendix does not automatically grant eligibility for the exemption. Industries must meet other requirements specified in the notification, including the condition that the goods must be "manufactured" in Karnataka.

2. Definition and Scope of "Manufacture" under the Karnataka Sales Tax Act, 1957:
The core issue was whether the petitioners' activities of polishing and cutting stones constituted "manufacture." The court examined various precedents and principles to determine if these activities resulted in a new commercial commodity. The petitioners contended that polished and cut stones are commercially distinct from raw stones, thus qualifying as manufactured goods.

The court referred to the Supreme Court's definition of manufacture, which requires a transformation resulting in a new and different article with a distinctive name, character, or use. The court found that polishing and cutting stones do not alter the substance of the material but merely enhance its marketable quality, thus not qualifying as manufacturing.

3. Validity of the Commissioner of Commercial Taxes' Circular Dated July 4, 1987:
The petitioners challenged the circular issued by the Commissioner of Commercial Taxes, which stated that polished stones are not commercially different from unpolished ones and thus do not qualify as manufactured goods. Consequently, the concession of 50% tax exemption was deemed unavailable to the petitioners.

The court upheld the circular, agreeing with the Commissioner's view that polishing and cutting stones do not result in a new commercial commodity. Therefore, the petitioners were not entitled to the tax exemption under the notification.

4. Application of Relevant Case Law:
The court examined several decisions to apply the principles to the facts of the case. It referred to the Supreme Court's rulings in Deputy Commissioner of Sales Tax v. Pio Food Packers and Sterling Foods v. State of Karnataka, which emphasized that not all changes constitute manufacturing. The court also considered the Rajasthan High Court's decision in Assistant Commercial Taxes Officer v. Sitaram Badrilal, which held that polished stones do not become a new commercial commodity.

The court concluded that the petitioners' activities are more akin to the "timber" case discussed in Bangalore Wood Industries v. Asst. Commissioner of Commercial Taxes, where the transformation did not result in a new substance. Thus, the activities of polishing and cutting stones do not qualify as manufacturing.

Conclusion:
The court dismissed the writ petitions, holding that the petitioners' activities do not constitute manufacturing under the Karnataka Sales Tax Act, 1957. Consequently, they are not eligible for the tax exemption under the notification dated March 31, 1983. The circular issued by the Commissioner of Commercial Taxes on July 4, 1987, was upheld, and the petitioners were required to pay the tax on the turnover of polished stones.

← Previous Next →