2005 (1) TMI 660 - HC - VAT and Sales Tax

Issues Involved:
1. Whether the extraction of solvent oil from oil cake and soyabean seeds amounts to manufacture.
2. Whether the resultant products, deoiled sunflower cake and deoiled groundnut cake, are considered new commercial commodities.
3. The applicability of purchase tax under section 6 of the Karnataka Sales Tax Act, 1957, on purchases from unregistered dealers.

Detailed Analysis:

Issue 1: Whether the extraction of solvent oil from oil cake and soyabean seeds amounts to manufacture.
The appellant, a partnership firm registered under the Karnataka Sales Tax Act, 1957 (KST Act), contended that the process of extracting solvent oil from oil cake and soyabean seeds does not amount to manufacture. They argued that the deoiled cake and soyabean seeds remain essentially the same commodity as the original oil cake and soyabean seeds. The first appellate authority supported this view, stating that the oil cake and deoiled cake are considered the same commodity in commercial parlance, with the only difference being the oil content. The revisional authority, however, disagreed, relying on an amendment to section 6 of the Act, which expanded the scope to include consumption of goods either in a manufacturing process or otherwise.

Issue 2: Whether the resultant products, deoiled sunflower cake and deoiled groundnut cake, are considered new commercial commodities.
The first appellate authority concluded that the oil cakes used in the extraction process do not lose their main character and use, and thus, the deoiled cakes are not new commercial commodities. This conclusion was based on the observations made by the Madras High Court in S. Viswanathan v. State of Tamil Nadu and other similar cases. The revisional authority, however, argued that the goods were consumed in the process, thereby attracting tax under section 6 of the Act.

Issue 3: The applicability of purchase tax under section 6 of the Karnataka Sales Tax Act, 1957, on purchases from unregistered dealers.
The core legal question was whether the purchases of sunflower oil cake and groundnut oil cake from unregistered dealers, used in the extraction of solvent oil, attract purchase tax under section 6 of the KST Act. The relevant portion of section 6 states that tax is levied on goods consumed in the manufacture of other goods for sale or consumed otherwise. The revisional authority asserted that the amendment to section 6 broadened its scope to include any form of consumption, not just manufacturing. However, the court noted that the term "consumed otherwise" should be interpreted to mean that goods cease to exist in their original form. The court cited various cases, including Assistant Commissioner (Intelligence) v. Nandanam Construction Company, to support the view that the goods must be completely used up or transformed into a new commodity to attract purchase tax.

Conclusion:
The court concluded that the revisional authority's interpretation of section 6 was incorrect. The deoiled cakes retained their original identity as oil cakes, merely with less oil content, and thus did not constitute a new commercial commodity. Therefore, the extraction process did not amount to consumption in the sense required to attract purchase tax under section 6 of the KST Act. The court set aside the revisional authority's order and restored the first appellate authority's decision, which had exempted the purchases from tax.

Order:
1. Appeal is allowed.
2. The impugned order passed by the revisional authority in SMR. No. 37/1996-97 dated May 7, 1997, is set aside.
3. The order passed by the first appellate authority in No. KST. AP. 29/96-97 dated January 20, 1997, is restored. Ordered accordingly.

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