NEW DELHI, APR 21, 2014: ASSESSEE purchases cotton after paying tax at the rate of 4% and thereafter processes it into surgical cotton for sale - assessing authority rejected the stand of the assessee that cotton and surgical cotton are not distinct commodities for the purposes of levy of tax under the Act and held that surgical cotton is liable to be taxed at 4% under the Act - Deputy Commissioner (Appeals) Commercial Tax, Ajmer accepting the submission of the appellant assessee and allowing the appeal - in Revenue appeal, Rajasthan Tax Board set aside the orders passed by the First Appellate Authority and restored the orders passed by the assessing authority - Assessee approaching the High Court in S.B. Civil Sales Tax Revision No. 932 of 2002 - High Court reaching the conclusion that surgical cotton is amenable to be taxed as an independent entity and accordingly, rejected the tax revision cases and confirmed the orders passed by the Tax Board - Civil Appeal before Supreme Court.

Question before the Supreme Court - Whether the manufacturing process is involved in the production of surgical cotton from cotton in terms of definition mentioned in Section 2(27) of the Act and whether the same commodity in the same entry would be liable for taxation twice specially when the scheme of Act suggests that cotton is a commodity of special importance and must be taxed only once in terms of Section 15 of the CST Act.

Submissions by appellant

+ That by the process of transformation of cotton into surgical cotton no new commercial commodity comes into existence as a result of such process, and therefore it cannot be considered as "manufacture" of surgical cotton from cotton and thus would not be liable to tax at the rate of 4% under the Act. (Relied on CST v. Lal Kunwa Stone Crusher (P) Ltd., (2000) 3 SCC 525)

+ Since the purpose of sales tax is to levy tax on sale of goods of each variety and not the sale of the raw material of which they may have been made and therefore, where commercial goods are merely subjected to some processing, they may remain commercially the same goods which cannot be taxed again in a series of sales so long as they continue to retain their identity as goods of that particular variety.

+ The essential feature of ' manufacturing' is the utilization of original commodity and its transformation into a different commodity wherein the original article stands distinguished from the end product as an entirely different commodity and since the aforesaid is not the case herein, the process of transformation of cotton into surgical cotton would not be a manufacture for the levy of tax under the Act. (Sterling Foods v. State of Karnataka, (1986) 3 SCC 469 - 2002-TIOL-274-SC-CX-LB and CST v. Pio Food Packers, 1980 Supp SCC 174)

Alternate plea by appellant - Even if surgical cotton is assumed to be a distinct commodity from cotton, the originally purchased raw cotton has already suffered taxation at the outset and, therefore, a set off has to be provided in light of the scheme of the Act and the CST Act.

Revenue submissions - Supported the judgment and order passed by the High Court.

Observations of the Supreme Court -

A) For Assessment Year 1992- 1993 Entry prescribing the rate of tax on cotton reads thus -

+ Since neither does 'surgical cotton' find mention in the aforesaid entry as a commodity nor does it suitably fit into the description aforesaid, it becomes relevant to delve into the question whether the commodity in question has undergone any change in its characteristics so as to acquire a new commercial identity, that is to say, whether surgical cotton remain as cotton after having undergone transformation through various processes. In other words whether the process of conversion of cotton into surgical cotton be termed as 'manufacture of surgical cotton'.

+ Section 2(27) of the Act defines the expression 'manufacture' as under:

"27. "Manufacture" includes every processing of goods which bring into existence a commercially different and distinct commodity but shall not include such processing as may be notified by the State Government."

+ The definition is an inclusive definition and, therefore, would encompass all processing of goods which would produce new commodity which is commercially different and distinctly identifiable from the original goods.

+ Admittedly, no exclusion in respect of the process in analysis for surgical cotton has been notified by the State Government. Therefore, 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.

Process of conversion of cotton into surgical cotton

+ The Project report on Surgical Absorbent Cotton, December 2010 (pg. 3 and 4) prepared by MSME - Development Institute, Ministry of Micro, Small & Medium Enterprises, Government of India provides for the following steps in manufacture of surgical cotton: - a) Opening and cleaning of Raw Cotton, b) Bleaching, c) Removal of Chemicals, d) Drying, e) Lapping, f) Carding, g) Rolling, h) Weighing and cutting.

Utility and Commercial use: common parlance test.

++ When a consumer requires surgical cotton, he would not be satisfied with cotton being provided to him and the same principle would reversibly apply that a customer of cotton would not use surgical cotton as a substitute. Further the purposes for which cotton and surgical cotton are used are diametrically opposite. While surgical cotton finds utility primarily for medical purposes in households, dispensaries, hospitals, etc., raw cotton being, inter alia, non-sterilised and riddled with organic impurities cannot be used as such at all.

++ For both these commodities operational territories are different and both have a different consumer segments.

++ The surgical cotton is made sterile and fit for surgical use and it is not put to the same use to which the unmanufactured cotton is put and vice versa.

++ Therefore, when unmanufactured cotton undergoes a manufacturing process, a new product saleable into the market which is having a distinct identity, comes into existence which is known in the commercial market by a different name and use. Surgical cotton possesses higher utility than the cotton in its un-manufactured state.

Held:

++ 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.

Alternative submission of appellant - The High Court has noticed that the said question was not raised before the original assessing authority and consequently, the authorities below have not considered the said question and such being the case, the High Court has declined to consider the same. In our considered opinion, the said question cannot be considered by us for the first time in these appeals and thus, the conclusion of the High Court in this regard stands affirmed. However, the appellant is at liberty to raise the said question before the appropriate authorities in accordance with law.

B) For Assessment Year 1993 - 1994 to 1998 - 1999,the Entry prescribing the rate of tax on cotton reads thus -

++ In the year 1993, by an amendment notification the legislature has consciously included 'absorbent cotton wool I.P.' immediately after the words 'cotton waste' in Entry 16. By the notification dated 07.03.1994, for the Assessment Year 1994-95, the entry stands as - 'Cotton, that is to say, all kinds of cotton (indigenous or imported), kinds of readymade garments, whether ginned or unginned, baled, pressed or otherwise including Absorbent cotton wool I.P. and Cotton waste'. From the Assessment Year 1995-96, the State has amended the entry such that cotton means cotton as defined in clause (iv) of Section 14 of the Central Sales Tax Act, 1956 but has specifically included absorbent cotton wool I.P. & cotton waste in such entry. The relevant entry has remained unaltered for the succeeding assessment years 1996-97, 1997-98 and 1998-99 numbered as Entries 28, 27 and 29, respectively.

++ The assessing authority and forums below including the High Court have noticed that 'cotton' and 'surgical cotton' are different commercial commodities and, therefore, sale of 'surgical cotton' attracts sales tax under the provisions of the Act. However, during the proceedings before the High Court it was not brought to the notice of the Court that an amendment to Entry 16 was made in the year 1993 whereby the meaning of the expression 'cotton' has been expanded to include 'absorbent cotton wool I.P.' and thus, the High Court has only analysed Entry 16 as it stands for the Assessment Year 1992- 1993.

++ The commodity 'absorbent cotton wool I.P.' as included in the relevant entries is the same as 'surgical cotton' which the assessee manufactures. The absorbent cotton wool I.P. is a technical name of the cotton which is sold in the market and commonly known as surgical cotton.

++ 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.

++ "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.

++ The judgment and order passed by the High Court for the assessment years 1993-1994 to 1998-1999 cannot be sustained.

ORDER - Appeals are allowed in part and the judgment and order passed by the High Court is confirmed for the assessment year 1992-93 and the judgment and order of the High Court so far as it relates for the assessment years 1993-94 to 1998-99 is set aside.

(See 2014-TIOL-47-SC-CT)