2003 (1) TMI 679 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Taxability of surgical cotton.
2. Definition of manufacturing process.
3. Applicability of set-off for tax paid on raw cotton.
4. Distinct identity of surgical cotton compared to raw cotton.

Issue-wise Detailed Analysis:

1. Taxability of Surgical Cotton:
The petitioner, a partnership firm registered under the Rajasthan Sales Tax Act, 1994, and the Central Sales Tax Act, 1956, argued that surgical cotton should not be taxed separately as it is merely a processed form of ordinary cotton. The assessing authority initially did not levy tax on surgical cotton. However, upon a departmental survey, it was concluded that surgical cotton was taxable, leading to reassessment and imposition of tax, penalty, and interest. The Deputy Commissioner (Appeals) reversed this, stating that surgical cotton is just another form of cotton. The Rajasthan Tax Board, however, concluded that surgical cotton is a distinct, taxable commodity.

2. Definition of Manufacturing Process:
The petitioner contended that the processes involved in making surgical cotton (cleaning, treating with chemicals, bleaching, drying, and carding) do not constitute a manufacturing process as the end-product remains cotton. The petitioner relied on Supreme Court judgments, such as Sterling Foods v. State of Karnataka and Deputy Commissioner of Sales Tax v. Pio Food Packers, which emphasize that a manufacturing process must result in a new commodity distinct from the original. The respondent argued that the extensive processing transforms raw cotton into a distinct, commercially marketable product known as surgical cotton, which is used exclusively for medical purposes, thus constituting a manufacturing process.

3. Applicability of Set-off for Tax Paid on Raw Cotton:
The petitioner alternatively argued that if surgical cotton is taxable, a set-off should be provided for the tax already paid on raw cotton. The respondent countered that this issue was not raised before the appellate or assessing authority and thus cannot be considered in the revision petition. The court noted that the petitioner could raise this issue before the appropriate authority if permitted by law.

4. Distinct Identity of Surgical Cotton Compared to Raw Cotton:
The court applied tests to determine if surgical cotton is a distinct commodity: whether it is a distinct marketable commodity, extensively used for specific purposes, known differently in the market, and has higher utility than raw cotton. The court noted that surgical cotton undergoes significant processing, resulting in a product with distinct identity and uses, primarily in the medical field. The court cited precedents, including State of Haryana v. National Scientific Industries and Rajasthan Roller Flour Mills Association v. State of Rajasthan, to support that surgical cotton is a different commodity from raw cotton. The court concluded that surgical cotton is a distinct commodity, taxable separately from raw cotton.

Conclusion:
The court upheld the Rajasthan Tax Board's decision that surgical cotton is a distinct, taxable commodity. The court also allowed the petitioner to raise the issue of set-off before the appropriate authority. The revision petitions were disposed of accordingly.