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TMI Blog2015 (9) TMI 1516X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess as a raw material, or as an input used in the manufacture of intermediate or finished product, entry tax is leviable, under entry 80 of Schedule I. Then it cannot be construed as an agricultural produce within entry 2 of Schedule II, which contains the list of exempted products. When once it is admitted by the respondents that those products were subjected to certain processes for being used as raw materials in the preparation or manufacture of beer, it must be held that they were subjected to certain processes for being made fit for consumption, in which event, those products cannot be considered to be agricultural or horticultural produce within the definition clause. Hence, they are not subject to exemption from payment of entry tax under the Act. It is held that malted barley/barley malt, hops pellets and maize flakes are not agricultural/horticultural produce falling under entry 2 of Schedule II of the Act and they are not exempted from the levy of tax under the Act - petition allowed - decided against assessee. - C. R. P. Nos. 103, C. R. P. Nos. 204, C. R. P. Nos. 230 of 2011 (TAX) - - - Dated:- 14-9-2015 - Vineet Saran and Mrs. B. V. Nagarathna, JJ. Shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred this revision petition. 4. On hearing learned Additional Government Advocate for the State, we have formulated the following substantial questions of law for our consideration: (1) In the facts and circumstances of the case whether the Tribunal is justified in giving a finding that malted barley/barley malt is an agricultural produce falling under II Schedule to the K. T. E. G. Act and is exempted from the levy of tax under the K. T. E. G. Act ? (2) In the facts and circumstances of the case whether the Tribunal is right in interpreting the definition clause of section 2(A)(1) of the K. T. E. G. Act, to hold that malted barley/barley malt continues to be barley even after processing ? (3) In the facts and circumstance, whether the malted barley/barley malt is liable to tax under the provisions of the K. T. E. G. Act ? 5. The relevant facts in CRP No. 204 of 2011 are that the respondent therein, is a public limited company engaged inter alia, in manufacture and sale of beer. The first assessing authority levied entry tax on barley malt / malted barley , maize flakes and hops pellets under the provisions of Act. Being aggrieved by the said levy, the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 3, which is the charging section read with Schedule II of the Act, it is only agricultural or horticultural produce which is exempted from entry tax. That in the instant case barley malt / malted barley is not an agricultural produce as it has been subjected to certain processes and as a result, it has lost its character of being an agricultural produce simplicitor. He therefore contended that the Appellate Tribunal could not have held that barley malt / malted barley is an agricultural produce, subject to exemption under Schedule II of the Act. 11. Adverting to the stages with regard to conversion of barley into barley malt / malted barley , he contended that it involves three stages: (i) Liquification of the germinated grain. (ii) Washing. (iii) Filtering, evaporation and drying. That sprouted barley is dried in kiln by application of heat and as a result barley grain is converted into barley malt . That the process of malting of barley involves germination of barley; which is a process by which barley is soaked which is liquification of germinated grain; germinated barley is washed and filtered; then the same is heated in kiln. These involve ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain as an agricultural produce . 14. Referring to judicial precedent, he contended that in the instant case, the Appellate Tribunal rightly held that barley malt / malted barley continues to be an agricultural produce , despite being subject to those processes and hence, is exempted from payment of entry tax under Schedule II of the Act. Similar arguments were made with regard to maize flakes/grits and hops pellets. Legal frame work: 15. Before we answer the substantial question of law raised in these petitions, it would be useful to extract the relevant provisions of the Act. Section 3 of the Act is the charging section. Sub-sections (1) and (6) of section 3 of the Act, are relevant for the purpose of case and they are extracted as under: 3. Levy of tax.-(1) There shall be levied and collected a tax on entry of any goods specified in the First Schedule into a local area for consumption, use or sale therein, at such rates not exceeding five per cent of the value of the goods as may be specified retrospectively or prospectively by the State Government by notification, and different dates and different rates may be specified in respect of different goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds specified in Schedule I, into a local area for consumption, use or sale therein at the specified rates. The expression local area is defined under sub-section (5) of section 2 of the Act, whereas goods is defined under sub-section (4a) of section 2. 20. It is also necessary to note that sub-section (6) of section 3 of the Act, categorically states that no tax shall be levied under the Act on any goods specified in Schedule II on its entry to a local area for consumption, use or sale therein. Thus, the scope of the definition of the exempted product under Schedule II, relevant to the case namely, agricultural produce must be first understood. Analysis of definition of agricultural or horticultural produce : 21. The definition of agricultural produce or horticultural produce is couched in negative language. The definition does not state what is included in the expression agricultural or horticultural produce . It only states what are excluded. In the first place, it excludes tea, beedi leaves, coffee, rubber, cashew, cardamom, pepper and cotton. Secondly, all produce which have been subjected to any physical, chemical or other process for being made fit for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her agricultural produce which has been subjected to any process for making it fit for human consumption being mentioned in the exemption schedule, it was held that the Legislature had deliberately excluded certain items for the purpose of giving exemption, from payment of entry tax. In other words, the intention of the Legislature is that though tea, coffee and cotton have been excluded from the definition clause of agricultural produce , but for the purpose of levy of entry tax, tea, coffee and cotton are exempted from payment thereof. This is an exception created by the Legislature. Simply because tea, coffee and cotton are included in the Second Schedule exempting it from payment of entry tax would not imply that all other items of agricultural produce which have been excluded from the definition of agricultural produce would also stand included in the Second Schedule to the Act, thereby exempting them from payment of entry tax, is the observation of the honourable Supreme Court. 25. In the context of Second Schedule and the definition of agricultural produce , the honourable Supreme Court has cited the example of potatoes. If potatoes are cleaned, graded, sorted or dri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and it would be useful to delineate on and understand that expression in the context of controversy raised in this case with reference to judicial dicta. (a) In Anwar khan Mehboob Co. v. State of Bombay reported [1960] 11 STC 698 (SC); AIR 1961 SC 213, the honourable Supreme Court was considering Explanation to sub-clause (a) of clause (1) to article 286 of the Constitution (since deleted) in the context of inter-State trade, wherein, the expression consumption within the State was held to mean that if goods were brought within a State for the purpose of consumption, then it would not be a case of an inter-State trade. The facts of that case were that tobacco was purchased and in the State of Bombay the stem and dust from tobacco were removed. It was contended that removing of stem and dust from tobacco did not amount to consumption of tobacco. The honourable Supreme Court held that when tobacco was delivered in the State of Bombay for the purpose of changing it into commercially different article, namely bidi patti, the delivery was for the purpose of consumption, as conversion of a commodity into a different commercial commodity, by subjecting it to some processing, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y subjecting it to some processing. (c) In Khatiawar Industries Ltd. v. Jaffrabad Municipality [1979] 4 SCC 56, the question was whether salt manufactured by the appellant therein outside the octroi limits and brought within those limits for the purpose of being crushed into powder in the appellant's factory situated within those limits and then exported was liable to octroi. Applying the test laid down in the case of Anwarkhan Mehboob Co. [1960] 11 STC 698 (SC); AIR 1961 SC 213, it was held that when uncrushed salt was crushed in the factory and a commercially different article was produced, the uncrushed salt must be held to have been consumed. (d) In Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Thomas Stephen Co. Ltd., Quilon [1988] 69 STC 320 (SC); [1988] 2 SCC 264, which arose under the provisions of the Kerala General Sales Tax Act, 1963, while referring to section 5A, it was held that consumption must be in the manufacture as raw material or of other components which go into the making of the end-products. But goods used for ancillary purposes like fuel in the process of the manufacture, do not fall within section 5A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of process ing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity. (h) In State of Karnataka v. B. Raghurama Shetty [1981] 47 STC 369 (SC); [1981] 2 SCC 564, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctroi on the said product, it was held by the Bombay High Court that when the consumption covers the process by which the nature of the commodity changes and in that process the commodity in question can be said to have been used for creating another commodity. Kaccha Beedi was subject to a process for preparing a finished produce for human consumption and therefore, the municipal council was justified in levying octroi. 29. In the case of Raghurama Shetty [1981] 47 STC 369 (SC); [1981] 2 SCC 564, it has been categorically held that the expression consumption, must be understood in the economic sense, i.e., on the basis of levy of value added tax popularly called as VAT . It was held that manufacture also consumes commodities which are ordinarily called raw materials when one produces semi-finished goods which have to undergo further processes of production before they can be transformed into consumers' goods. Thus, at every stage of production it is obvious there is consumption of goods even though at the end of it there may not be final consumption of goods but only production of goods with higher utility, which may be used in further productive processes. Thus under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of barley malt or malted barley could be considered. Admittedly, barley is a foodgrain. Malted barley is barley which has been germinated or sprouted. Malted barley is used for manufacturing alcohol, beer and such other products. The product manufactured may be an industrial product but the question is as to whether barley, which has been made fit for consumption as malted barley and used as raw material for an industrial purpose, would cease to be an agricultural produce. The said question would be answered later. 34. Maize is subjected to a process in order to convert it into maize flakes and grits before they are used as raw materials in the manufacture of beer. Maize goes through processing of cleaning, conditioning, tempering, secondary conditioning and de-germination, which is made fit to use in the manufacture of beer as flakes or grits. Maize flakes or grit is a product obtained through de-germination of yellow corn and its subsequent grinding to make flaking grits. 35. Having regard to the aforesaid process, it is clear that maize flakes or grits, which is no longer the same as maize or corn. Maize flakes or grits is altogether a different commodity, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity. Thus, it is held that hops pellets does not come within the scope of definition of agricultural produce . 39. While considering the meaning of the expression barley malt or malted barley given in various dictionaries, it is argued that malt is an other form of barley. Malting is a process whereby barley is germinated and sprouted. Such malting process is also used in other cereals like wheat, maize, oats, etc., which are malted, as such, malt is nothing but sprouted and germinated barely. It is argued that barley or malted barley is a foodgrain, which is used in alcoholic products by fermentation and other process. The product manufactured by use of malted barely may be an industrial produce, but it does not make malted barely or barley malt per se, an industrial pro duct. It is only a raw material of industrial produce such as beer but it continues to be a foodgrain, as it is a cereal, is the subject of learned counsel for respondents. 40. Of course, the process involved in converting barley into malted barley or barley malt is not mere cleaning, grading, sorting or drying. Barley is germinated and germination is stopped at a suitable point of the development of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notification by which the rate of tax had been fixed in respect of foodgrains made it clear that the definition of foodgrain in the notifications was wider than that of section 14 of the Central Sales Tax Act, 1956 which dealt with the expression cereal and that the notifications were not exception notifications but contained charging provision. Therefore, the onus to prove that malted barley did not fall within the scope of expression foodgrain or cereal was on the Revenue. The latter had failed to discharge their onus, and it was held to be a foodgrain or a cereal. 43. In Rajasthan Roller Flour Mills Association v. State of Rajasthan [1993] 91 STC 408 (SC); [1994] Supp (1) SCC 413, the question arose under the provisions of the Central Sales Act, 1956. Section 14 of that Act declares certain goods to be of special importance in inter-State trade and commerce, referred to as declared goods. Section 15 of that Act imposes certain restrictions upon, and conditions in regard to the imposition of tax on sale or purchase of declared goods by a State Legislature. The restrictions are: (i) the State tax on intra-State sale of declared goods shall not exceed four per cent., ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural produce has been subjected to process when it enters the local area, in order to make it fit for consumption, either as a final product or as a raw material, for other products. If an agricultural produce is subjected to a process for being made fit for consumption, it is excluded from the definition clause. When it is expressly excluded from the definition clause, it cannot be included in the exemption clause by implication or on the premise that the product has retained its original identity despite being subjected to a process. Therefore, it has to be held that when an agricultural produce is subjected to a process for being made fit for consumption, i.e., either for human consumption or consumption in a manufacturing process or for consumption of livestock or animals, then it ceases to be an agricultural produce. But only on those agricultural produces which are made fit for consumption in a manufacturing process as a raw material, or as an input used in the manufacture of intermediate or finished product, entry tax is leviable, under entry 80 of Schedule I. Then it cannot be construed as an agricultural produce within entry 2 of Schedule II, which contains the list of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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