2014 (4) TMI 593 - SC - VAT and Sales Tax

Rate of tax on Surgical Cotton - Classification Interpretation of Statute Whether the manufacturing process is involved in the production of surgical cotton from cotton in terms of definition mentioned u/s 2(27) of the Act and whether the same commodity in the same entry would be liable for taxation twice specially when the Act suggests that cotton is a commodity of special importance and must be taxed only once u/s 15 of the CST Act - Double taxation - Held that - The definition u/s 2(27) is an inclusive definition and encompass all processing of goods which would produce new commodity which is commercially different and distinctly identifiable from the original goods - The definition however excludes all such mechanisms of processing of goods which have been notified by the State Government to the said effect - Admittedly, no such exclusion in respect of the process in analysis for surgical cotton has been notified by the State Government - Thus, the process of transformation has to be tested on the anvil of proposition whether surgical cotton is processed such that it is commercially different and distinctly identifiable than cotton - Relying upon CRANE BETEL NUT POWDER WORKS Versus COMMR. OF CUS. & C. EX., TIRUPATHI 2007 (3) TMI 6 - SUPREME COURT OF INDIA citing the earlier decision in Brakes India Ltd. v. Supdt. of Central Excise 1997 (3) TMI 120 - SUPREME COURT OF INDIA wherein the process of drilling, trimming and chamfering was said to amount to manufacture , has reiterated that if by a process, a change is effected in a product and new characteristic is introduced which facilitates the utility of the new product for which it is meant, then the process is not a simple process, but a process incidental or ancillary to the completion of a manufactured product. After going through the various steps that are carried out by the assessee for getting surgical cotton from raw cotton, it can certainly be said that cotton has undergone a change into a new commercially identifiable commodity which has a different name, different character and different use - The process of transformation is not merely processing to improve quality or superficial attributes of the raw cotton - The cotton looses its original form and it marketed as a commercially different and distinct product - As rightly noticed by the High Court by relying upon the decision in EMPIRE INDUSTRIES LTD. Versus UNION OF INDIA 1985 (5) TMI 215 - SUPREME COURT OF INDIA wherein this Court has explained the meaning of the expression manufacture as when the result of the treatment, labour and manipulation a new commercial commodity has emerged which has a distinctive new character and use This court is of considered opinion that surgical cotton is a separately identifiable and distinct commercial commodity manufactured out of raw cotton and therefore, ceases to be cotton under Entry 16 of the said notification This Court cannot take any exception to the impugned judgment and order passed by the High court Decided against Assessee. Scope of the term Include - Held that - Judgment in South Gujarat Roofing Tiles Manufacturers Association and anr. v. State of Gujarat and anr. 1976 (10) TMI 147 - SUPREME COURT OF INDIA and Karnataka Power Transmission Corpn. v. Ashok Iron Works (P) Ltd. 2009 (2) TMI 745 - SUPREME COURT OF INDIA - The expression include is used as a word of extension and expansion to the meaning and import of the preceding words or expressions When the word includes is used in the definition, the legislature does not intend to restrict the definition it makes the definition enumerative but not exhaustive - The term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. By introducing the word including immediately after detailing the definition of cotton, the legislature has expanded the meaning of the expression cotton for the purposes of the Act - While the natural import suggests and prescribes only unmanufactured cotton in all forms, the commodities absorbent cotton wool I.P. and cotton waste manufactured out of cotton are intentionally and purposefully included in the relevant entries alongwith cotton in its ordinary meaning This Court is of the considered opinion that surgical cotton/absorbent cotton wool I.P. is also cotton for the purposes of the relevant entries in the notifications for assessment years 1993-94 to 1998-99 and therefore is liable to exemption from levy of tax under the Act - In light of the same, judgment and order passed by the High Court cannot be sustained - Judgment and order of the High Court is set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the transformation of cotton into surgical cotton constitutes "manufacture" under the Rajasthan Sales Tax Act, 1994.
2. Whether surgical cotton is a distinct commercial commodity from cotton.
3. Whether tax already paid on raw cotton entitles the appellant to a set-off for the manufactured surgical cotton.
4. Applicability of tax exemption for surgical cotton under the amended entries for assessment years 1993-94 to 1998-99.

Detailed Analysis:

Issue 1: Whether the transformation of cotton into surgical cotton constitutes "manufacture" under the Rajasthan Sales Tax Act, 1994.

The court examined whether the process of converting raw cotton into surgical cotton amounts to "manufacture" as defined under Section 2(27) of the Act, which includes every processing that brings into existence a commercially different and distinct commodity. The court observed that the essential test for determining "manufacture" is whether the end product is distinct from the original raw material. Citing various precedents, the court noted that "manufacture" implies a transformation resulting in a new and different article with a distinctive name, character, or use. The detailed process of converting raw cotton into surgical cotton, involving multiple stages of cleaning, bleaching, drying, and carding, results in a product that is commercially and functionally distinct from raw cotton. Therefore, the conversion process qualifies as "manufacture."

Issue 2: Whether surgical cotton is a distinct commercial commodity from cotton.

The court analyzed the commercial and functional differences between raw cotton and surgical cotton. Surgical cotton is primarily used for medical purposes, requiring it to be sterile and free from impurities, unlike raw cotton. The court applied the common parlance test, concluding that consumers of surgical cotton would not accept raw cotton as a substitute and vice versa. The distinct uses, consumer segments, and the stringent medical standards for surgical cotton further support that it is a different commercial commodity from raw cotton. Thus, surgical cotton is a separate entity and does not fall under the same category as raw cotton.

Issue 3: Whether tax already paid on raw cotton entitles the appellant to a set-off for the manufactured surgical cotton.

The appellant argued that since tax was already paid on the raw cotton, a set-off should be provided for the manufactured surgical cotton. However, the court noted that this issue was not raised before the original assessing authority and, consequently, was not considered by the authorities below. The court declined to consider this issue for the first time in the appeals but allowed the appellant the liberty to raise it before the appropriate authorities in accordance with the law.

Issue 4: Applicability of tax exemption for surgical cotton under the amended entries for assessment years 1993-94 to 1998-99.

For the assessment years 1993-94 to 1998-99, the relevant entries were amended to include "absorbent cotton wool I.P.," which the court identified as synonymous with surgical cotton. The court examined the legislative intent behind the inclusion of "absorbent cotton wool I.P." in the entries and concluded that the term "including" was used to expand the definition of cotton to cover surgical cotton. Therefore, surgical cotton falls under the category of cotton for these assessment years and is exempt from tax. The court set aside the High Court's judgment for these years, confirming that surgical cotton is not liable to tax under the amended entries.

Conclusion:

The Supreme Court upheld the High Court's decision for the assessment year 1992-93, confirming that surgical cotton is a commercially distinct commodity from raw cotton and is subject to tax. However, for the assessment years 1993-94 to 1998-99, the court ruled that surgical cotton is included in the definition of cotton under the amended entries and is exempt from tax. The appeals were allowed in part, with no order as to costs.