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TMI Blog2014 (9) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture or adventure or concern is also business irrespective of the fact whether or not it makes any profit. The definition of business though has brought within its purview any trade, commerce, manufacture or any adventure or concern or any transaction in connection therewith, in our opinion, would not either directly or indirectly include agriculture/horticulture or agricultural/horticultural activity. From bare perusal of the provisions contained in Section 10 read with definition of ‘input’ and the definition of ‘business’, it appears to us that unless agriculture/horticulture or agricultural/horticultural activity is held to be a ‘business’, an assessee, such as, the assessees in the present case, is not entitled for input tax credit. The basic requirement to seek input tax credit on purchases of goods, such as fertilizers, chemicals, pesticides, etc. is that they are purchased by a dealer “in the course of his business” for resale or for use in the manufacture or processing or packing or sorting of other goods or any other use in business. The agriculture/horticulture or agricultural/horticultural activity or the business as contemplated by the relevant definitions, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax period between May 2007 and March 2008 and consequent demand notice. They are engaged in growing, curing and processing of coffee only. 2.4. Insofar as the assessee/appellants - M/s.Devon Plantation Industries Limited (for short Devon Plantation ) is concerned, they have also called in question the reassessment order dated 25-3-2011 passed by the AA for the tax period between April 2006 and March 2007 and consequent demand notice. 2.5. Admittedly, the appellants are registered dealers as defined by Section 2(12) of the Karnataka Value Added Tax Act, 2003 (for short the Act ). All the appellants together shall be hereinafter referred to as the assessees only. 3. Assessing Authority (AA) denied input tax credit to the assessees on purchases of fertilizers, chemicals, pesticides, agricultural machinery etc., holding that inputs used for cultivation of tea plants/coffee plants are not eligible for such credit. The AA held that such deduction is available towards the tax paid only on inputs as defined under Section 2(19) of the Act that are purchased in the course of and for use in their business . He observed that an activity of growing tea plants/coffee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that in view of the clarification under Section 59(4) of the Act, no useful purpose would be served by filing appeals. The writ petitions were, therefore entertained and decided on merits. When, initially we expressed that the assessees ought to have filed appeals and further when we expressed that even at this stage parties can be relegated to a remedy of appeal, learned counsel expressed their desire to have hearing of these intra court appeals on merits and our opinion on the question formulated in the first paragraph of this judgment. 5.1 The learned single Judge while dealing with the writ petitions, after making reference to the clarification, quoted the relevant observations made by this Court in M/s.Diwan Bahadur and noticed that this Court had referred to the definition of the term agricultural produce or horticultural produce as defined by Section 2(3) and Explanation 4(a) to Section 2(12) of the Act and in the light thereof, considered the submissions advanced by learned counsel appearing for the parties to hold that fertilizers, pesticides, fungicides, chemicals, agricultural machineries, pump sets and other electrical equipments used for growing tea leaves by te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed dealer and used in cultivation of tea and coffee, in view of the statutory scheme of the Act, in particular, Sections 10(2) read with Section 2(19) and 2(6) of the Act. In support of his contention, Mr.Naganand, placed heavy reliance upon the following judgments of the Supreme Court in Travancore Tea Estates Co. Ltd. v. State of Kerala, (1977) 39 STC 1 (SC); Chowgule Co. Pvt. Ltd. v. Union of India (1981) 1 SCC 653, paragraph 9; and of the Kerala High Court in The Travancore Tea Estates Co. Ltd. v. The State of Kerala, (1973) 32 STC 47 (Ker), at page 50. 6.2. Mr. Naganand, then submitted that Section 10(2) of the Act permits input tax credit on any goods for use in the course of business. Section 2(19) of the Act defines input as any goods including capital goods purchased by a dealer in the course of business, or any other use in business. Section 2(6) of the Act, defines business , is of wide import, and includes any transaction in connection with or incidental or ancillary to trade, commerce, manufacture, adventure or concern. In short, he submitted that cultivation and growing of tea leaves/coffee cherries is in connection with, or incidental or ancillary to the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. These goods, she submitted, of which input tax credit is claimed, in other words, are not used in the manufacturing process of tea/coffee. Cultivation and growth of tea leaves/coffee cherries is prior stage of manufacturing process. Cultivation of tea leaves and coffee cherries and manufacture of tea/coffee are two distinct activities. Fertilizers, chemicals, pesticides etc., are used for cultivation and/or not the inputs used in the course of the business of manufacture and sale of tea/coffee as marketable commodities. She, based on clause (b) of Section 2(6), submitted that the agricultural operation/cultivation of tea are not incidental or ancillary to the manufacture of tea/coffee. She submitted that insofar a Company is concerned, such as the assessees, it is deemed to be a dealer, in respect of turnover relating to sale of the products as mentioned in Clause(b) of Explanation 4 of Section 2(12) of the Act. This legal fiction is only with respect to turnover relating to sales of such products not otherwise. Lastly, she submitted the scope of business cannot be stretched to the source of input/raw materials, required for growing/cultivation of tea/coffee. Growing of tea le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could also be an agriculturist, as defined under Section 2(2) of the Act. 12. Sub-section (3) of Section 2 of the Act defines agricultural produce or horticultural produce (for short AP or HP ). Arguments advanced by learned counsel for the parties were centered round this provision for quite some time. It would be relevant to reproduce this provision, which reads thus : Agricultural produce or horticultural produce shall not be deemed to include tea, beedi leaves, raw cashew, timber, wood, tamarind and such produce, (except coffee) as has been subject to any physical, chemical or other process for being made fit for consumption, save mere cleaning, grading, sorting or drying. 12.1 A glance at this provision would show that certain agricultural produce, by creating deeming fiction, are excluded from the preview of the definition of AP or HP for the purpose of this Act, such as, tea, beedi leaves, raw cashew, timber, wood and tamarind. These items, except coffee, as per the definition, shall not be deemed to include as agricultural produce provided they are subjected to any physical, chemical or other process for being made fit for consumption. 12.2 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Cabinet prepared when the words except coffee were inserted in the definition of AP or HP under Section 2(c) of the KST Act. The notes state that coffee is an agricultural produce as defined under Section 2(c) of the KST Act. But, however, doubt has been expressed as to whether pulping and other operations carried on by the planters to make their coffee fit for delivery to Coffee Board would bring about any kind of physical or chemical change so as to exclude it from the purview of the definition of agricultural produce . Therefore, in order to remove ambiguity and to remove doubts, it is proposed to amend the definition of agricultural produce retrospectively . 13.3. It is in this backdrop, when we read the definition of AP or HP under Section 2(3) of the Act, it is clear as crystal that coffee is an agricultural/horticultural produce. In other words, it has not been excluded from being agricultural/horticultural produce by this definition. What has been excluded from the purview of the said definition by creating deeming fiction are tea, beedi leaves, timber etc. and that too, if they are subjected to any physical, chemical or other process for being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sale of coffee in market under the provisions of the Act. 14. Indubitably, the Act makes distinction between coffee and tea to the extent, as indicated above, though both are basically agricultural produce. In the light of these provisions, we had a glance at the third schedule of the Act, which gives a long list of several taxable goods. Entry 24 therein reads as follows: Coffee beans and seeds (whether raw or roasted); cocoa pods and beans; green tea leaf and chicory . Entry 92 in the third Schedule speaks only of Tea . Entry 92, in our opinion, means Tea , which is subjected to any physical/chemical/other process. 14.1. As is seen in the Explanation 4(a) of Section 2(12) an agriculturist who exclusively sells agricultural produce grown on land cultivated by him personally shall not be deemed to be a dealer within the meaning of this clause. Despite this Clause, Entry 24 provides for green tea leaves , which in our opinion, indicates that if green tea leaves are grown and sold by a person who is not an agriculturist and who has not grown it on land cultivated by him personally, may be a middleman, he requires to pay tax as provided for in the third Schedule of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n does not amount to agricultural activity. In fact, both are true. But, for the purpose of this Act agricultural produce namely tea , once made fit for consumption, stand excluded from being agricultural produce. 17. The arguments advanced by learned counsel for the parties were also centered around the word business as defined by Sub-section (6) of Section 2 of the Act. It would be advantageous to reproduce the definition of business to understand what it exactly means for our purpose. The definition of business (Section 2(6) of the Act) reads thus: Business includes- (a) any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues therefrom; and (b) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern. 17.1. The word business , within the meaning of Sub-section (6) of Section 2 of the Act, includes any trade , commerce , manufacture or any adventure or concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STC 577 (SC); (1976) 3 SCC 512]. Such profit-motive may, however, be statutorily excluded from the definition of business but still the person may be carrying on business . (emphasis supplied) 17.3. A bare look at the definition of business , shows that the legislature has recognized the word business , wider than the words trade, commerce, or manufacture etc. . Any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture or adventure or concern is also business irrespective of the fact whether or not it makes any profit. The definition of business though has brought within its purview any trade, commerce, manufacture or any adventure or concern or any transaction in connection therewith, in our opinion, would not either directly or indirectly include agriculture/horticulture or agricultural/horticultural activity. 18. Mr. Naganand, learned Senior Advocate appearing for the assessees vehemently submitted that an agriculture is also a business as it is an adventure or concern carried on in furtherance of gain or profit irrespective of the fact whether or not any gain or profit accrues therefrom. To test this argument, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade including the banking, insurance etc., and social dealings or communication. The words trade and commerce are usually used together. In common parlance the word commerce means carrying of any trade, business or profession, sale or exchange of goods of any type whatsoever and also includes the running of with a view to make profits. Thus, the word commerce is a term of largest import. The word manufacture includes any process carried out in the course of making the product. It also includes assemble. The word manufacturer means any person who manufactures a product. Thus, by no stretch of imagination, agriculture/horticulture or agricultural/horticultural activity could be termed as business or business activity 19.1. The Supreme Court in State of Tamil Nadu vs. Binny Ltd. Madras, 1982 49 STC 17 had an occasion to deal with the very same definition of business as occurs in Tamil Nadu Act. It would be relevant to reproduce the observations made by the Supreme Court in paragraph (3) of the report. Relevant observations reads thus : This Court observed in the Burmah Shell case [1973] 31 STC 426 (SC) that for the purpose of attracting the applicabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture of tea/coffee, perhaps all products fit for consumption, made from agricultural produce will have to be taken as incidental or ancillary to such finished products and in that eventuality, deduction or input tax credit on fertilizers, chemicals, pesticides etc., will have to be granted in all such cases. That, in our opinion, is not the intendment of the legislature. In other words, if that was the intention of the legislature it would have reflected in so many words in all relevant provisions in the Act such as the definitions contained in Sections 2(1), 2(2), 2(3), 2(6), 2(12), 2(19) and Sections 3, 10 etc. 19.4. In United India Insurance Co., Ltd. vs. Commissioner of Commercial Taxes, ILR 1986 Kar.3418, this Court while dealing with the word business observed thus: 17. On a careful analysis of the decisions relied upon for the State and in view of the principle laid down by the Supreme Court dealing with the definition of business , as including transactions, which are incidental or ancillary and depending upon the facts of each case, I am of the view that the contention of the Department has to be upheld. That the general Insurance Company, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of works contract. A contractor would purchase cement and for purchasing it he would be entitled for input tax credit/deduction of tax paid for purchasing the cement. He cannot claim input tax credit on the raw materials used for manufacturing of cement. It is the manufacturer of cement would be entitled to claim input tax credit on such raw material. In our case, to manufacture of tea/coffee the raw material would be tea leaves or coffee cherries and certainly not the items used for its cultivation, such as fertilizers, chemicals etc. Cultivation of tea plants is distinct and separate from manufacture of tea and selling it in market. In other words, cultivation and growth of tea plants cannot be comprehended in the expression in the manufacture of or processing of goods for sale . 21. The expression input tax has the meaning assigned to it in Section 10 of the Act. Section 10 speaks of output tax, input tax and net tax. It would be relevant to reproduce the said Section so as to appreciate whether, on the facts and in the circumstances of the present case, it is possible for the assessees to claim input tax credit. Section 10 reads thus : 10. Output tax, input ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds or any other use in business. The agriculture/horticulture or agricultural/horticultural activity or the business as contemplated by the relevant definitions, it is clear that the word business as occur in Sub-section (6) of Section 2 is independent and therefore, input tax credit on the purchases such as fertilizers, chemicals, pesticides etc. used in agricultural/horticultural activity cannot be granted. 22. The controversy between the parties, before us is centered round the question as to whether fertilizers, chemicals, pesticides, agricultural implements etc., could be treated as the goods intended for use in the course of their business, or for processing of tea/coffee to make it fit for consumption or sale in the market. Section 10(2) of the Act states that input tax means the tax collected and payable under this Act on the sale of any goods for use in the course of business . Section 10(3) provides that the net tax payable shall be the amount of output tax payable less the input tax deductible shall be accounted for in accordance with the provisions of the Act. It is true that, growing/cultivating of green tea leaves/coffee cherries and its processing in the factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess of production of goods only. The expression in the manufacture was held to take in within its compass all processes which are directly related to the actual production. Drawing and photographic materials directly related to the actual production of goods were held to be goods intended for use in the manufacture of goods . Building material, including lime and cement, not required in the manufacture of tiles for sale was, however, held to be not raw material in the manufacture or processing of goods or even as plant . We may now turn to the present case. The question which essentially arises for determination is whether fertilisers and other goods mentioned in item No. (1) are intended for use by the appellant as equipment or stores in the manufacture or processing of tea meant for sale, as urged on behalf of the appellant. The controversy between the parties has centered round the point as to whether fertilisers and other goods mentioned in item No. (1) can be said to be goods intended for use in the manufacture or processing of tea meant for sale. So far as this question is concerned, we find that the growing and plucking of tea leaves from the plants and the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of tea meant for sale. What is meant by manufacture of tea is clear from pages 863-4 of Vol. 21 of Encyclopedia Britannica (1965 Edition), wherein it is observed: Black and green teas result from different manufacturing processes applied to the same kind of leaf. After plucking, the leaf is withered by being spread on bamboo trays in the sun, or on withering tats within doors. The process takes 18 to 24 hours. Next it is rolled by hand or by machines. The object of rolling is to break the leaf cells and liberate the juices and enzymes sealed within. The roll may last as long as three hours. Then it is taken to the roll breaker and green leaf sifting machine and after that fermented in baskets, on glass shelves or on cool cement floors under damp cloths for or 4 hours. The firing process (drying) follows, in pans or baskets or in firing machines. It takes 30 to 40 min. The difference between black tea and green tea is the result of manipulation. Green tea is manufactured by steaming without fermentation in a perforated cylinder or boiler, thus retaining some of the green colour. Black tea is allowed to ferment after being rolled and before firing. In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and the above paragraphs in particular, it is clear that the manufacturer of Herbal extracts and fine chemicals, in order to carry on their business, had roped in the farmers for growing herbal plants, for which they provided seedlings, fertilizers and financial assistance with clear agreement to deduct the said expenses/financial aid out of the cost of the plants sold by the farmers. This judgment, on the contrary shows, what ultimately the manufacturer was entitled for, is deduction of the costs of the plants sold by the farmers. This view in fact supports the view taken by us in this judgment. 25. The following observations made in Aspinwall Co.Ltd. v. CIT, Ernakulam, [2001] 7 SCC 525, by the Supreme Court were also relied upon heavily by the assessees : 15. Adverting to facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to claim credit because the explosives were used for manufacture of intermediate product, namely, limestone, which, in-turn, was used for manufacture of cement. In Vikram Cement (supra), the question before the Supreme Court was whether it was necessary for inputs to be used within the factory premises where manufacture of final products takes place for the purposes of availing credit. The Supreme Court after referring to its judgment in Jaypee Rewa Cement (supra) held that MODVAT was allowable on the use of explosives in the manufacture of cement irrespective of the fact that the explosives were used directly in the mines and never entered the factory of the manufacturer of cement. In Commercial Taxation Officer, Udaipur (supra), the question under consideration before the Supreme Court was whether diesel could be called raw material in the manufacture of polyster yarn and it was held that diesel is being used for the purpose of running the generator set for the production of ultimate product which is also required for the purpose of manufacturing the end product the diesel can only be termed as raw material and not otherwise. In Flex Engineering Limited (supra), the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act excluding the tea cultivation/plantation from the purview of agriculture. The learned Judge, in paragraphs-12 and 14 observed as follows: The submissions of the learned counsel have received my anxious consideration. My perusal of the impugned order reveals that the second respondent has proceeded on the fallacy that the petitioner s tea growing is an agricultural activity. He has held that, as the fertilizers, chemicals, pesticides are not required for the business activity, the input tax paid on their purchases cannot be considered for deduction out of the output tax payable on the sale of commercial tea. The implications of the petitioner not being an agriculturist and the tea not being agricultural or horticultural produce for the purpose of the said Act are not examined by the second respondent. What is required to be considered by the respondent No.2 is the entitlement or otherwise based on the petitioner s registration as a dealer under the said Act, when the petitioner is not an agriculturist and tea is not an agricultural or horticultural produce. This aspect of the matter has to be examined and thereafter fresh orders are to be passed by the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultivation of the land in the strict sense of the term meaning thereby, tilling of the land, sowing of the seeds, planting and similar operations on the land. They would be the basic operations and would require the expenditure of human skill and labour upon the land itself. There are however other operations which have got to be resorted to by the agriculturist and which are absolutely necessary for the purpose of effectively raising the produce from the land. They are operations to be performed after the produce sprouts from the land, e.g., weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting, and rendering the produce fit for the market. The latter would all be agricultural operations when taken in conjunction with the basic operations above described, and it would be futile to urge that they are not agricultural operations at all . 33. In Union of India Another vs. Belgachi Tea Co. Ltd. others, [2008] 304 ITR 1 (SC), the Supreme Court was dealing with the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icides, agricultural implements, etc. cannot be stated to be the goods used in the course of business . vi) Inputs such as fertilizers, chemicals, agricultural implements, though are used in agriculture, cannot be treated as inputs used in the manufacturing process of tea/coffee as marketable commodities. Merely because tea leaves/coffee cherries are agricultural produce anything done to it after it is grown to make it marketable commodity is not necessarily a continuation of agricultural process. It is altogether a distinct and separate process called manufacturing process which brings out a complete transformation in the original produce/article so as to produce a commercially different article/commodity. vii) An agriculturist, who grows/cultivates green tea leaves and not involved in any of its physical, chemical or other process, and so also is not in any other business of sale and purchase, which requires registration as a dealer, and only sells green tea leaves to the manufacturer of tea as marketable commodity, requires no registration as dealer under the provisions of the Act. viii) Companies, like the assessees, who are engaged in growing of tea/coffe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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