2006 (12) TMI 472 - HC - VAT and Sales Tax

Summary

Issues Involved: Determination of liability to pay purchase tax under section 5A of the Kerala General Sales Tax Act, 1963 on the purchase turnover of red oil converted to sandalwood oil and sold by the assessees.

Judgment Summary:

Controversy on Manufacturing Process:
The assessees contended that the process involved in converting red oil to sandalwood oil is merely removal of impurities and water, not amounting to manufacturing. However, the court found that the process of steam distillation to separate sandalwood oil from red oil is more than a simple process, as evidenced by the establishment of factories with equipment and boilers. The substantial value difference between the raw material and the final product indicates a manufacturing process. Despite the assessees' argument that excise duty payment does not equate to manufacturing under the Act, the court upheld the tax levy under section 5A, considering the commercial distinction between red oil and sandalwood oil.

Legal Precedents and Interpretation:
The court referenced various decisions, including the Supreme Court's stance on activities constituting manufacturing under different tax laws. Notably, the court highlighted the scope of liability under section 5A, emphasizing that the purchase tax is attracted when goods purchased are consumed in the manufacture of other goods for sale. The court also cited the Constitution Bench decision explaining the liability for purchase tax in cases where purchased goods cease to exist after use, as in the present scenario.

Conclusion:
The court found the Tribunal's assumption that liability under section 5A requires the use of chemicals in manufacturing to be absurd and reversed the Tribunal's orders. Consequently, the court upheld the levy of tax under section 5A on the purchase turnover of red oil by the assessees for all relevant years, emphasizing the importance of applying the statutory provisions effectively to prevent tax evasion.

Note: The judgment was delivered by C.N. Ramachandran Nair J.