1996 (10) TMI 443 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether absorbent cotton wool I.P. is in its unmanufactured state.
2. Whether absorbent cotton wool falls under entry 2 of Schedule B to the Bombay Sales Tax Act, 1959.

Detailed Analysis:

1. Whether absorbent cotton wool I.P. is in its unmanufactured state:

The primary issue was whether the process applied to raw cotton to convert it into absorbent cotton wool amounts to manufacture. The assessee argued that the process, which includes removing impurities, boiling with caustic soda, bleaching, drying, and packaging, does not transform cotton into a new product but merely makes it fit for a particular use. The Revenue contended that this process amounts to manufacture as defined under section 2(17) of the Act, which includes "producing, making, extracting, altering, ornamenting, finishing or otherwise processing, treating, or adapting any goods."

The Court noted that "manufacture" implies a transformation where a new and distinct product emerges. However, every process does not constitute manufacture unless the commodity loses its original identity and is recognized as a new product in trade. The Court cited several precedents, including the Supreme Court's decisions in Alladi Venkateswarlu v. Government of Andhra Pradesh and Deputy Commissioner of Sales Tax v. Pio Food Packers, which clarified that a product retains its original identity despite processing if it is still recognized as the same commodity in trade.

The Court concluded that the process applied to cotton to make absorbent cotton wool does not amount to manufacture because absorbent cotton wool retains the essential character of cotton.

2. Whether absorbent cotton wool falls under entry 2 of Schedule B to the Bombay Sales Tax Act, 1959:

Entry 2 of Schedule B covers "all kinds of cotton (indigenous or imported) in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise." The Court emphasized that the phrase "all kinds of cotton" is broad and includes various forms of cotton as long as they do not lose their original character.

The Court examined previous judgments, including the Madras High Court's decision in Sri Ram Products v. State of Tamil Nadu and the Bombay High Court's decision in Commissioner of Sales Tax v. Fairdeal Corporation Ltd. These cases were distinguished on the grounds that they dealt with specific entries like "surgical dressings" or "raw cotton," which are not applicable to the present case.

The Court concluded that absorbent cotton wool, despite the processing it undergoes, retains its identity as cotton and falls under the broad definition of "all kinds of cotton" in entry 2 of Schedule B. The Court also referred to rule 3(xviii) of the Bombay Sales Tax Rules, 1959, which supports that processes not altering the description of goods in Schedule B do not constitute manufacture.

Conclusion:

The Court held that absorbent cotton wool is in its unmanufactured state and falls under entry 2 of Schedule B to the Act. The question referred was answered in the affirmative, in favor of the assessee, and against the Revenue. The reference was disposed of with no order as to costs.

Reference disposed of accordingly.