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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 ..... r the sake of convenience, the facts arising in CRP. No. 103 of 2011 shall be dealt with first. The respondent in this revision petition is a public limited company and a dealer, registered under the provisions of the Karnataka Tax on Entry of Goods Act, 1979 (hereinafter referred to as "the Act", for brevity). It is engaged in the manufacture and sale of liquor, beer and sugar. The assessing authority levied entry tax on "barley malt"/"malted barley", under the provisions of the Act. Being aggrieved by the said levy, respondent preferred an appeal before the first appellate authority. The appellate authority held that "barley malt" is different from "barley" and therefore it could not be considered to be an "agricultural produce" falling under Schedule II of the Act, to qualify for exemption as contended by the respondent. Aggrieved by the said order the respondent herein preferred STA No. 1955 of 2004, before the Appellate Tribunal. The Regular Bench of the Appellate Tribunal referred, the matter for consideration of the Full Bench of the Appellate Tribunal. The Full Bench by the impugned judgment dated July 29, 2010, held that "barley malt" is an "agricultural produce" fallin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the following substantial questions of Law: "(1) In the facts and circumstances of the case whether the Tribunal is justified in giving a finding that malted barley/barley malt, hops and maize are agricultural produce falling under II Schedule to the K. T. E. G. Act and are 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, hops and maize continues to be barley, malt, hops and maize even after processing ? (3) In the facts and circumstances, whether the barley/barley malt, hops and maize is liable to tax under the provision of the K. T. E. G. Act ? (4) In the facts and circumstances of the case whether the Tribunal was right in holding that the assessing authority has no jurisdiction to pass the assessment order under the KTEG Act, 1979 ?" 9. As the basis of the relief granted to the respondents in the two revision petition is the order of the Full Bench passed by the Appellate Tribunal on July 29, 2010, submissions have been made by the respective counsel on the corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the respondent supporting the impugned orders, passed by the Appellate Tribunal, contended that "barley malt"/ "malted barley" is indeed an "agricultural produce" which is subject to exemption under Schedule II of the Act. Responding to the contentions advanced on behalf of the State with regard to the processes by which the barley grain/barley cereal gets converted to "barley malt"/"malted barley", he contended that even if certain processes are applied to the cereal as such, such a processes must ultimately result in making the produce fit for consumption, which according to him is, human consumption. 13. According to the learned counsel, even if the produce is subjected to physical, chemical or other processes but it is not fit for human consumption, then in that case, it continues to be an "agricultural produce", which is subjected to exemption under the Act. Drawing our attention to the definition of "agricultural or horticultural produce", he contended that the definition is in a negative language. It categorically states as to what produce are not "agricultural produce and horticultural produce" and those which are subjected to certain processes but not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , pepper and cotton; and such produce as has been subjected to any physical, chemical or other process for being made fit for consumption, save mere cleaning; grading, sorting or drying." Entry 80 of Schedule I on which reliance has been placed by the State and which has been amended with effect from April 1, 2001 reads as under: "80. Raw materials, component parts and inputs which are used in the manufacture of an intermediate or finished product, other than those specified in Second Schedule." 16. The bone of contention between the parties herein is with regard to entry 80 of Schedule I and entry 2 of Schedule II vis-a-vis, the products in question. 17. The contention of the learned Additional Government Advocate is that "barley malt" or "malted barley" is a raw material or an input, which is used in the manufacture of finished products, namely, beer and therefore it is subjected to entry tax. A similar contention has been raised with reference to maize flakes or grits and hops pellets. 18. Per contra, the contention of the learned counsel for the respondent is that entry 80 of Schedule I, itself makes a reference to Schedule II and therefore if any raw mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral produce" but they have been intentionally included within the expression "agricultural produce" in the II Schedule, so as to exempt them from the levy of entry tax. Also, agricultural produce subjected to certain process to be made fit for consumption ceases to be agricultural produce under the definition clause and would be subject to entry tax. 23. While considering the definition of "agricultural produce" in the context of sub-section (6) of section 3 of the Act, the honourable Supreme Court in Falcon Tyres Ltd. v. State of Karnataka [2006] 147 STC 466 (SC), has opined that entry 2 of the Second Schedule creates exceptions regarding a few of the excluded items of the definition clause from payment of entry tax, but not all excluded items. Thus, the items mentioned in entry 2 of the Second Schedule would be exempted from payment of entry tax but not the items which have been excluded from the definition of agricultural produce. Thus all produce which fall within the definition clause of agricultural produce are exempted from payment of entry tax. 24. Thus, while interpreting the provisions of the Act, the legislative intention would have to be given effect to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g converted into chips for human consumption would imply that potato has ceased to be an agricultural produce for the purpose of Entry Tax Act and therefore, is not subjected to exemption. But if potato is merely cut and dried and enters the local area, then it would continue to be an agricultural produce. Meaning of consumption: 27. As already noted section 3 is the charging section which uses the expression, "consumption, use or sale". The expression "consumption" is also used in the definition clause of agricultural or horticultural produce. According to the definition clause, if an agricultural produce is subjected to any physical, chemical or other process for being made fit for consumption, then it ceases to be an agricultural produce. After being made fit for consumption, agricultural produce is brought into a local area for the purpose of consumption. Thus when an agricultural produce is processed for being made fit for consumption and brought to the local area for consumption use or sale, then it is no longer an agricultural produce. 28. The expression consumption, according to the learned counsel for respondents must be read to mean human consumption. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no less than the final act of consumption, when no distinct commodity is being brought into existence, but what was brought into existence is being used up. Thus, the principle enunciated by the honourable Supreme Court was that the treatment given to a particular commodity if it converts that commodity into a different commercial commodity, then there would be consumption, then the different commercial commodity may in turn be used as raw material for producing some other commodity, which would ultimately be used as a final product; nevertheless, at every intermediate stage where there is a conversion of commodity into a different commercial commodity by subjecting it to some process there would be consumption. Thus, the test is that there must be a conversion of a commodity into a different commercial commodity by subjecting it to some process in order to come within the expression of consumption even though that may not be the final product. The said connotation of the word "consumption" could safely be applied to the definition of "agricultural produce" under the Act. (b) In State of Travancore-Cochin v. Shanmugha Vilas Cashew nut Factory [1953] 4 STC 205 (SC); AIR 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... steel drums) and packed at the packing station in unit containers (glass bottles) and thereafter exported outside those limits. On the above facts, the honourable Supreme Court held that in the process of putting powder from drums to the bottles for the purpose of exporting or taking out of the municipal limits, Horlicks powder was neither used nor consumed and therefore, octroi could not be levied or collected. (f) Placing reliance on the above decision in Mafatlal Industries Ltd. v. Nadiad Nagar Palika [2000] 118 STC 494 (SC); [2000] 3 SCC 1, the honourable Supreme Court held that when cloth piece of 100 meters length were brought within the octroi limits and cut into smaller pieces for the purpose of exporting, it did not amount to use or consumption thereof and therefore did not attract levy of octroi. (g) In this context, it would be relevant to refer to another decision of the honourable Supreme Court rendered under section 5A(1)(a) of the Kerala General Sales Tax Act (15 of 1963), in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers [1980] 46 STC 63 (SC), wherein it was held, although pineapple fruit is subjected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a commercially different commodity. (i) In Punjab Aromatics v. State of Kerala [2008] 14 VST 519 (SC); [2008] 11 SCC 482, the question was whether the conversion of red oil into sandalwood oil amounted to consumption or use of red oil (the purchased oil) in the process of conversion into sandalwood oil. The test of irreversibility was relied upon as an important criterion to ascertain as to when a given process amounts to manufacture. On the facts of that case, it was held that from sandalwood oil the product could become red oil once again. In the circumstances, it was held that red oil and sandalwood oil were not two different and distinct products. (j) In the aforesaid case, Tungabhadra Industries Ltd. v. Commercial Tax Officer [1960] 11 STC 827 (SC); AIR 1961 SC 412, was cited, wherein it was held that hydrogenated groundnut oil continues to be groundnut oil notwithstanding the hydrogenation process, as there was no change amounting to manufacture. (k) In Sinnar Bidi Udyog Ltd. v. Sangamner Municipal Council [1995] 2 Mah. L.J. 552, the matter arose under the Maharashtra Municipal Councils Act, 1965 but on the question of tax on the entry of goods into a municipal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpretation could be given, but at the same time it has to be borne in mind that an exemption clause must be construed strictly. In the exemption clause certain products, which are excluded in definition clause are included expressly such as tea, coffee and cotton. There is no express inclusion of agricultural produce subjected to a process for being made fit for consumption. In fact, when an agricultural produce is processed to be made fit for consumption, it is excluded from the purview of the definition of "agricultural produce". If that is so, then the same cannot be read within the scope of the exemption clause pertaining to agricultural produce. 31. In the definition clause, there are two aspects to be noted. Firstly, agricultural produce has been subjected to any physical, chemical or other process and secondly, the object of subjecting agricultural produce to such a process is to make it fit for consumption, in which event, agricultural produce would not come within the definition under the Act. The expression "consumption" according to the learned counsel for the respondents must be interpreted to mean only human consumption, but we do not think that the expression can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as in the instant case, for preparation of beer, ceases to be an agricultural produce. 37. Hops is one of the raw materials in the manufacture of beer. Hops are female flower clusters commonly called cones or strobiles of the humulus plant (humulus lupulus), is an horticultural process. They are used primarily as a flavouring and stability agent in beer. Baled hops are broken up and passed into an air-stream which delivers them to a hammermill. Heavy foreign materials drop out and metal fragments are removed using magnets. The cone hops are milled until they pass through a sieve. The powder from many bales is mixed and homogenized in a blender and then conveyed to a pellet die. The pellets are immediately cooled and cooled pellets pass over a shaker where dust is removed and re-circulated through the plant. The clean pellets are packaged in laminated, plastic/aluminium foil pouches, evacuated and boxed. The packs may be back-flushed with carbon dioxide or nitrogen gas to produce a soft pack container. Normally, pellets are called T-90, T-30 and T-45 pellets. 38. Chemically modified hops are called "pellets", isomerized extracts or reduced extracts used in brew-house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve retained their original identity, despite being subjected to a process after being made fit for consumption. Rather, the test should be, whether, the product has been subjected to a process in order to make it fit for consumption, when it enters the local area so as to take it outside the scope of definition clause. 42. The judgment relied upon by the Tribunal in the case of Commissioner, Trade Tax v. National Cereal Product [2005] 140 STC 69 (SC), rendered by the honourable Supreme Court and the judgment of the Allahabad High Court between the same parties on the same controversy are not relevant in order to answer the substantial questions of law raised in these matters. In the aforementioned cases, the question was whether malted barley continued to be a cereal ever after barley was subjected to a process of germination, etc. There the question was, whether barley malt was a food- grain or cereal. In [1998] 111 STC 241 (All) (Commissioner of Trade Tax, U. P. v. National Cereal Products Limited), the Allahabad High Court, after an elaborate discussion, held that malted barley continued to be a cereal within the definition section 14 of the Central Sales Tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suji, wheat loses its identity, it gets consumed and new commodity is formed. The new goods so emerging have a higher utility than the commodity consumed. Commercially speaking, they are different goods. Thus, it was held that flour, maida and soji derived from wheat are not wheat, within the meaning of section 14 of the Central Sales Tax Act and they are not declared goods excisable to tax at four per cent. 44. But under the definition of "agricultural produce", which is under consideration, all the three produces, namely, barley, maize and hops, originally are agricultural or horticultural produce. There is no doubt about that. But all these produces have been subjected to certain processes, the object of which is for being made fit for consumption, in the manufacture of beer. Once an agricultural produce is subjected to any physical, chemical or other process for being made fit for consumption, either as a final product or as an intermediate product, for being consumed in any manufacturing process in the local area, then the said produce is excluded from the scope of definition, when the same enters the local area. Therefore, the test is not, as to whether, the agricultur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain as to whether those produces had been subjected to a process for being made fit for consumption, i.e., in the manufacture of beer in the instant case. 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. 46. In Burmah-Shell Oil Storage and Distributing Co. of India Ltd., Belgaum v. Belgaum Borough Municipality, Belgaum, AIR 1963 SC 906, a constitution Bench of the honourable Supreme Court held that the word consumption in its primary sense means the act of consuming and in ordinary parlance means the use of an article in a way which destroys, wastes or uses up that article. But in some legal contexts, the word consumption has a wider meaning. It is not necessary that by the act of consumption the commodity must be destroyed or used up. 47. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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