2006 (6) TMI 511 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Validity of the Circular dated 11.11.2003 issued by the Commissioner of Commercial Taxes.
2. Whether the process of cutting and polishing granite stones amounts to manufacturing.
3. Legality of the assessment orders and penalty levied based on the impugned circular.
4. Applicability of Section-6B of the Karnataka Sales Tax Act regarding re-sale tax.
5. Justification for imposing penalties on the petitioners.

Issue-wise Detailed Analysis:

1. Validity of the Circular dated 11.11.2003:
The circular issued by the Commissioner of Commercial Taxes in Karnataka was challenged. The circular was based on a judgment by a Single Judge of the Karnataka High Court in the case of Poonam Stone Processing Industries, which held that cutting, sizing, and polishing of stones did not amount to manufacturing. The Commissioner issued the circular to inform subordinate officials to comply with this dictum. However, the petitioners argued that the circular was illegal as the Single Judge's judgment was set aside by a Division Bench, making the circular based on an erroneous legal foundation.

2. Whether the process of cutting and polishing granite stones amounts to manufacturing:
The petitioners contended that the activity of cutting and polishing granite stones does not constitute manufacturing. They relied on the Division Bench judgment in the case of State of Karnataka v. Goa Granites, which treated unpolished and polished stones as different commodities. The court noted that another Division Bench in the case of Foredge Granite Pvt. Ltd. held that cutting and polishing granite blocks did not involve manufacturing, as the substance of the material remained unchanged. The court concluded that the activity of cutting and polishing granite blocks does not amount to manufacturing.

3. Legality of the assessment orders and penalty levied based on the impugned circular:
The petitioners argued that the assessment orders and penalties levied based on the impugned circular were illegal. The court observed that the circular's clause 3(a) was justified, as the activity of cutting and polishing did not amount to manufacturing. However, clause 3(b) of the circular was found to be improper, as it contradicted the Division Bench's judgment in Foredge Granite, which held that polished granite stones could not be taxed again if the rough granite blocks were already taxed.

4. Applicability of Section-6B of the Karnataka Sales Tax Act regarding re-sale tax:
The court noted that the assessment orders in question were prior to the amendment of Section-6B of the Karnataka Sales Tax Act, which came into effect on 01.04.2002. The amendment introduced provisions for re-sale tax. Since the transactions involved were prior to this date, the amended provisions were not applicable. The court held that the subsequent sale of polished granite stones derived from already taxed rough granite blocks could not be treated as the first sale for tax purposes.

5. Justification for imposing penalties on the petitioners:
The court found that the imposition of penalties on the petitioners was unjustified. The assessment orders did not indicate any concealment or suppression of sales by the petitioners. Both the dealers and the department were under the impression that Form No. 37 could be used for purchasing unpolished granite blocks for conversion into polished stones. The court concluded that there was no malice or intentional misuse of Form No. 37 by the petitioners, and therefore, the penalties could not be sustained.

Conclusion:
The court quashed the impugned orders levying penalties on the petitioners and allowed the writ petitions. The respondent authorities were permitted to re-open the assessments if needed, in accordance with the law. The court upheld the validity of clause 3(a) of the circular but found clause 3(b) to be improper and not in line with the Division Bench's judgment in Foredge Granite.