By TIOL News Service

NEW DELHI, SEPT 04, 2016: THE issue is - Whether 'packing materials' which enter local area for packing tea, can be claimed as input for purpose of seeking exemption from payment of Entry Tax. NO is the answer.

Facts of the case

The assessee is having a tea manufacturing unit at Dharwad, wherein three types of tea, namely, packet tea, tea bags & quick brewing black tea is manufactured. It was claimed by assessee that the Dharwad Unit, as opposed to the other units manufacturing tea, was a new unit and was, therefore, exempt altogether from payment of entry tax on packing material of tea under a notification issued u/s 11A of Karnataka Entry Tax Act. Insofar as the other units were concerned, it was the case of assessee that they were covered by Explanation II to a Notification issued u/s 3 of the said Act, and "packing material" being covered by the said Explanation would entitle them to pay entry tax at the rate of 1% and not 2%. All the authorities under the Entry Tax Act i.e. the AO, the First Appellate Authority and the Karnataka Appellate Tribunal however, held that packing material could not be regarded as raw material, component parts or inputs used in the manufacture of finished goods and, therefore, in the context of the Entry Tax Act read with Schedule I, such packing material was neither exempt nor chargeable at the rate of 1% on a true construction of the aforesaid notifications.

Having heard the parties, the Supreme Court held that,

++ as has been explained in Escorts Limited v. CCE, the definition of "manufacture" in the Central Excise Act is dependent upon the definition of "goods" in the Constitution in Article 366(12), which states that 'goods' includes all materials, commodities and articles. However, on a perusal of the definition of "goods" u/s 2(A)(4a) of Entry Tax Act, the said definition is an exhaustive one including all kinds of movable property and livestock. It is obvious from a reading of this definition that marketability does not appear to be a sine qua non for something to qualify as "goods" under the Entry Tax Act, unlike the Central Excise Act. This is for the reason that anything that is tangible, without more, and enters a local area for consumption, sale or use therein is taxable, the taxable event being 'entry' and not 'manufacture' of goods, which, as has been noticed hereinabove, brings in the concept of marketability in the context of a duty of excise, which is absent in the context of entry tax. We might also add that Section 2(A)(8a) wherein the "value of the goods" is defined, also makes a distinction between "goods" as such, and "packing material", making it clear that charges borne by a dealer as cost of packing would have to be included in the "value of goods". In the context of the Entry Tax Act, the difference between 'goods' used in the manufacture of goods and "packing material" is also brought out by Schedule I. Packing materials are separately defined in Entry 66. On the other hand, raw materials, component parts and inputs, which are used in the manufacture of an intermediate or finished product, are separately and distinctively given in Entry 80 thereof. The context of the Entry Tax Act therefore is clear. When raw materials, component parts and inputs are spoken of, obviously they refer to materials, components and things which go into the finished product, namely, tea in the present case, and cannot be extended to cover packing materials of the said tea which is separately provided for by the aforesaid Entry 66;

++ the notification dated 23.9.1998 issued u/s 3 uses identical language as that contained in Entries 66 and 80 of Schedule I to the Entry Tax Act. Equally, notification dated 31.3.1993 is an exemption notification issued u/s 11A which also uses the identical language of Entry 80 of Schedule I. This being the case, it is clear that neither notification can be read to include "packing material" as "raw materials, component parts or inputs used in the manufacture" of tea. What has first to be seen is that packing material, and raw materials, component parts and inputs are separately provided for under the Schedule to the Act. The same is also true of the aforesaid Notification. Packing material is contained in Entry 3 of the table whereas raw materials, component parts and inputs are contained in Entry 4. The rate at which they are taxed is also different-packing materials at 2%, whereas raw materials, components parts and inputs are taxed at 1%. This being so, the reason for inclusion of Explanation II appears to be that goods which are liable to tax, being finished goods in themselves, may yet be brought into a local area for use or consumption as raw material, component parts and inputs in the manufacture of an intermediate or finished product. It is only such goods that are liable to be taxed at the rate of 1%. It is difficult to accept the argument on behalf of the assessee that Explanation II makes it clear that though packing materials may be liable to tax at 2%, yet if they fall in Explanation II, they would be liable to tax at the rate of 1%. This would fly in the face of the scheme of Schedule I of the statute which, as has been held earlier, makes it clear that in no case can packing materials be said to be raw materials, component parts or inputs used in the manufacture of finished goods. For this reason alone we find it difficult to construe the notification dated 23.9.1998 in the manner suggested by the assessee. Even otherwise, there is no such Explanation II contained in the exemption notification dated 31.3.1993. This being the case, if we were to accept the case of assessee, they would be liable to tax at the rate of 1% under the 1998 notification but would not be exempt under the 1993 notification, thus rendering the same packing material liable to tax at the rate of 2% in the case of the Dharwad unit and 1% in the case of all other units. This would lead to an anomalous situation which can best be avoided by not accepting the argument on behalf of assessee;

++ equally, the argument based on Section 5A of Karnataka Sales Tax Act is fallacious in that it is only for the purpose of "industrial inputs" that packing materials are included, and forms a separate scheme of taxation under the Sales Tax statute. We cannot accede to the argument that de hors the context of the Entry Tax Act, we should accept that industrial inputs include packing materials and that therefore, by parity of reasoning, "inputs" under the Entry Tax Act should also include packing material. This argument has therefore correctly been turned down by the High Court of Karnataka in the Nestle case. Needless to add, a manufacturer for the purpose of the said order is specifically a person who produces value added products commercially known as tea.

( See 2016-TIOL-154-SC-MISC)