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2016 (4) TMI 877 - KERALA HIGH COURT

2016 (4) TMI 877 - KERALA HIGH COURT - [2016] 90 VST 304 (Ker) - Demand of tax - Entitlement for benefit of SRO 641/81 - Whether the Tribunal had erred in fact and in law in holding that 'rubber compound' processed by the assessee is not the same as 'compound of rubber' - Held that:- while the State has failed to show that the article manufactured by the assessee is 'compound of rubber' and not a 'rubber compound', the assessee has succeeded in establishing that what it manufactures through its .....

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mulated and remitted for consideration through the remand order of the Honourable Supreme Court of India, an independent consideration of the grounds raised in the captioned original petitions are not called for. They also stand concluded by the findings herein. - Therefore, the petitioner/assessee is entitled to the benefit of SRO 641/81 notwithstanding SRO 1516/90 and is therefore bound to pay tax only at reduced rate on the purchase of rubber for the manufacture of its product through its .....

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andakumar, Sri K John Mathai, Sri P Benny Thomas, Sri P Gopinath, Sri Kuryan Thomas JUDGMENT Thottathil B. Radhakrishnan, J. 1. These revisions under Section 41 of the Kerala General Sales Tax Act, 1963 and original petitions stand remitted by the Hon'ble Supreme Court of India as per the remand order dated 28.4.2011 in Civil Appeal No.3758 of 2011 and connections. 2. The basic substratum of these litigations relates to the interpretation and construction of SRO.No.641/81 and SRO.No.1516/90 .....

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81 was sought to be explained by the introduction of an Explanation which is deemed to have come into force with effect from 1.4.1989 subject to the condition that taxes if any remitted by any dealer shall not be refunded. That Explanation is, inter alia, to the effect that for the purpose of SRO.No.641/81 'finished rubber product' shall not include any form of rubber which are subjected to processing by mixing with chemicals, gas, fumigation or any other similar process to make any ' .....

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ng, in our view, correctly, that the main issue agitated by the assessee in all the appeals is the denial of claim of concessional rate of tax on the purchase turnover of raw rubber used in the manufacture of rubber compound. The Tribunal held that the assessee is entitled to concessional rate of sales tax on the purchase of rubber used in the production of compound rubber. This Court, through Sales Tax Revision No.213 of 2006 and connections and also two original petitions tagged along therewit .....

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ent dated 18.12.2008 in STRV.No.213 of 2006 and connections. It reads as follows: "Since assessee raised a contention that rubber compound made after processing is different from rubber compound made as manufactured product, we requested the assessee to inform us whether any other form of rubber compound other than what is made by the assessee is available in the market which is fit for use in the manufacture of tyre. The assessee fairly conceded that all through they were making one and th .....

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and the product manufactured continued to be the same all through. We notice that the assessee misled the Tribunal by stating that there is difference between the rubber compound and compound of rubber and the Tribunal easily fell prey to it. The Explanation to the notification covers any compound of rubber made out of mixing rubber with chemicals, gas, fumigation, etc. What assessee is doing is admittedly mixing up of natural rubber with carbon black, processing oil, etc. to make it a compound .....

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c and unsustainable. Explanation covers process of mixing of rubber with chemicals or any other ingredient to make any compound of rubber, and therefore assessee will not get concessional rate of tax on the purchase of rubber used in the production of rubber compound. We are of the view that the purpose of Explanation as found by this Court in the earlier decision is to deny benefit to producers of any compound of rubber and therefore the distinction between manufacture and processing raised by .....

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12.2008 to the Hon'ble Supreme Court of India seeking Special Leave to Appeal. Leave was granted and those appeals were decided through order dated 28.4.2011. The said order on Civil Appeal Appeal No.3758 of 2011 and connections reads as follows: "1. Leave granted. 2. This appeal is directed against the judgment and order passed by the Division Bench of the Kerala High Court on 18.12.2008 allowing the Sales Tax Revision filed by the respondent State and thereby setting aside the judgmen .....

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r the parties, we are of the considered opinion that in order to decide the entire dispute between the parties effectively, a finding has to be recorded as to whether or not "rubber compound" and "compound of rubber" are two different and distinct articles or they are the same article. In order to decide the aforesaid issue which appears to be very technical, we feel that sufficient evidence is required to be led. Although in the present case evidence has been led by way of a .....

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2.2008 of the Division Bench of the Kerala High Court in STRs Nos.224, 225, 213, 231, 262 of 2006 and restore the same to the file of the High Court. 6. Be it also mentioned that two writ petitions were filed, being Writ Petition No. (OP) 12020 of 1998 and OP 3444 of 1998, by the appellant herein before the Kerala High Court challenging the validity of the notifications issued by the respondent, which also were dismissed by the High Court under the impugned judgment and order. 7. Since we have s .....

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uments or affidavits in terms of the said order on or before June 15, 2011 and it shall also be open to the parties to file any additional documents in response to the documents filed as stated hereinbefore, before July 15, 2011. The aforesaid additional documents and affidavits, if filed by the parties shall be accepted by the High Court. It shall also be open to the parties to raise additional issues/questions of law before the High Court by filing proper affidavits in that regard in terms of .....

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request the High Court to hear the matter as expeditiously as possible, preferably within a period of six months from the date of receipt of the records of this case. 11. So far the amount of ₹ 13,19,11,404/- (Rupees thirteen crores nineteen lakhs eleven thousand four hundred and four only), which was deposited by MRF in terms of order of this Court dated 27.1.2009 in SLP(C) No.909 of 2009 is concerned, the said amount shall continue to remain with the Department as deposit till the matter .....

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e of compound rubber and compound rubber so manufactured is transferred to their units outside the State of Kerala from where they manufacture tyres and tubes. The argument is that the only manufacturing activity carried on within the State by the assessee is that of compound rubber which is not a 'finished product' as defined in the notification granting concessional rate and that compound rubber is not a finished rubber product for the purpose of the notification granting concessional .....

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er', excluded from the definition of 'finished product' in terms of the concessional rate notification. It is further argued that the assessee, by the use of the terms 'rubber compound' and 'compound rubber'; alternatively, for the product manufactured by them within the State, belies its contention and lends credibility to the stand of the State on that issue, which is primarily a question of fact. 6. Per contra, the learned senior counsel appearing for the assessee .....

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said finding of the Appellate Tribunal stands further substantiated by the evidence produced as Annexures R1(a) to R1(t) after remand. Those documents produced after the Apex Court's order are taken on record following the directions contained in that order of remand. 7. The learned Senior counsel appearing for the assessee in the original petitions argued that the decisions impugned in those original petitions have been rendered on grounds never put to the notice of the assessee and if the .....

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made on behalf of the assessee by the learned Senior counsel in the revisions. 8. It is settled principle that where the order of remand lays down limits for the enquiry to be made by the lower court, that court ought to confine to questions which fall within those limits. The exercise of jurisdiction by the lower court to which an order of remand is made depends on specifications of the order of remand. It is not open to any of the parties or to the court below to enlarge the scope of the rema .....

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fore it, such a view would not be countenanced. See: Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai [AIR 2004 SC 1815]. The law laid through that precedent is authority for the proposition that when an order of remand is made by the superior court for the purpose of considering certain aspects, the court to which the case is remitted cannot assume a wider field of jurisdiction than the one which is permitted by the superior court through the remand order. The court below is bound by .....

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ed would have no jurisdiction to enter into questions falling outside those limits. 9. Bearing in mind the aforenoted principles of law relating orders of remand, we see that the remand order was issued by the Apex Court after holding, in paragraph No.4 thereof that a finding has to be recorded as to whether or not 'rubber compound' or 'compound of rubber' are two different and distinct articles or they are the same article. Their Lordships also noted that in order to decide the .....

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if any, before this Court by way of additional documents as also by filing fresh affidavits and further replies/rejoinders thereto. The State and the assessee were given liberty to file such additional documents or affidavits in furtherance to that order of remand and also in response to further documents that may be produced by either side. The High Court was directed to accept such additional documents and affidavits. It was also left open to the parties to raise additional issues / questions .....

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rty given to the parties through the order of remand to raise additional issues/questions of law has been effectuated permitting three additional questions of law being raised. The question of law suggested for consideration through these memorandum of revisions is as to whether the Tribunal had erred in fact and in law in holding that 'rubber compound' processed by the assessee is not the same as 'compound of rubber'. In other words, the plea projected is that the Tribunal ought .....

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cal, gas, fumigation" as to take within its purview the process held out by the assessee as the one undertaken by it, since the resultant product of the process of the assessee is only a raw material which goes into manufacture of tyres, tubes and flaps which are manufactured by the assessee outside the State of Kerala. It is also pointed out that the Government has consciously and intentionally included "any compound of rubber" as falling outside the purview of the notifications .....

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ntified as Annexures A1 to A17. In the affidavit filed in support of reception of those documents as evidence, an affidavit was sworn to by the Deputy Commissioner (Law) on behalf of the Department. In the affidavit dated 15.06.2011, it is stated that as per SRO 641/81 issued under Section 10 of the KGST Act, a reduction in the rate of tax as concession was provided on the purchase of rubber used for the manufacture of finished rubber products within the State. It proceeds to say that the practi .....

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te. It is pointed out that the question for decision is as to whether the assessee is entitled to concessional rate of tax on the purchase of rubber which is used for the manufacture of compound rubber. The order of remand issued by the Honourable Supreme Court is reiterated pointing out that what is required is that a finding has to be rendered as to whether or not 'rubber compound' and 'compound of rubber' are two different and distinct articles or they are the same article. An .....

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ing together of a number of compounding ingredients (rubber chemicals, fillers, process oils etc.) and that this process of mixing together is known as the process of compounding. The certificate proceeds to say that the process of manufacturing of rubber product is completed only by vulcanization of the compound or semi-processed material, usually by the incorporation of sulphur. Annexure A6 is a certificate issued by the Superintendent of Central Excise, which has certified that the assessee h .....

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in a factory. Large tyre makers may set up independent factories on a single site, or cluster the factories locally across a region." That material shows, among other things, that tyre manufacturing process is traditionally divided into five departments that perform special operations. These usually act as independent factories within a factory. Large tyre makers may set up independent factories on a single site, or cluster the factories locally across a region. Compounding is the operation .....

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y the State to show that through those returns, statements, objections etc., the assessee had claimed exemption of compounded rubber from finished product of the assessee. 12. Annexure R1(a) is an affidavit of Dr.Eby Thomas Thachil, who has averred therein that he holds a doctorate (Ph.D) in Polymer Technology from IIT, Madras and at the time of swearing that affidavit, he was the Head of the Department of Polymer Science and Rubber Technology in the Cochin University of Science and Technology a .....

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illers like carbon black, silica and process oil as raw materials. He elaborates on the process and further, enumerates "Fillers" and their application, and also the Processing Aids like process oil, wax etc., which are petroleum products used in the manufacture of compound rubber. He concludes his affidavit by specifically stating as follows: "Hence, the Compound Rubber is a product manufactured from Rubber (both Natural and Synthetic), Chemicals, Fillers and Process Aids. Compou .....

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he Corporate Manager of the assessee is filed placing therewith the certificate dated 13.06.2011 issued by Sri.S.Mohanachandran Nair, Director (Processing and Product Development), Rubber Board. That certificate is to the following effect: "TO WHOMSOEVER IT MAY CONCERN A certificate bearing even No. dated 1st January 1996 was issued to M/s.MRF Ltd. on their request to give clarification on the nature of COMPOUND RUBBER manufactured at their Vadavathoor Factory as to whether it is a Rubber P .....

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low. For the manufacture of COMPOUND RUBBER, Masticated Natural Rubber is fed into heavy duty machinery like Banbury and mixed with chemicals like anti-oxidants, activators, accelerators and fillers like carbon black, silica along with process aids like rubber process oil. When this process is complete, the percentage content of natural rubber in the new product is substantially reduced and the nature of rubber molecules is also altered to lower molecular stage resulting in the formation of a di .....

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tor of Rubber Research Institute of India. He holds Masters Degree in Chemistry from Kerala University and Ph.D in Rubber Technology from Indian Institute of Technology, Kharagpur and is a Licentiate of Plastics and Rubber Institute, U.K. He has described the various Institutions and the posts in which he has worked. He affirms that he had visited the factory of the assessee with a view to observe the processes adopted by them for the manufacture of compound rubber. It is apposite to quote the f .....

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tating rollers using mechanical friction which is hastened by adding chemicals called peptizers and softening agents. The broken down (BD) or masticated rubber thus prepared is a compound of rubber. Thus the compound of rubber, made by the simple process of mastication with chemicals is completed at this stage and then it is sent for carrying out the subsequent stages. This operation of mastication is conducted either in this factory or in mixing units engaged by MRF on job work. The 2nd stage o .....

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cally designed oil injection system. Other fillers such as silica and clay are loaded through the hopper door of the machine. The mixing operation for manufacture of compound rubber is taking place inside the enclosed chamber of the Banbury machine, having rotors with specially designed contoured wing, which rotate in opposite directions and subjected to pneumatically controlled ram pressure. The entire process is controlled through a sophisticated computer system. The downstream equipment consi .....

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cted to drying and cooling and then stored for further processing. In the fourth stage, the material is mixed with other chemicals such as curatives in another Banbury machine at lower temperature than in the second stage. The output from this machine is processed into sheet form using another set of two roll mills and again passed through a tank containing separating agent solution and finally dried and cooled in another Autobatch unit and stored on metal skids till dispatch. It was also observ .....

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ack in colour and is entirely different from the original compound of rubber in chemical composition, molecular weight, molecular weight distribution, specific gravity, processability etc. I find that the manpower employed is about 600 and investment over 50 crore for this manufacturing plant with huge Banbury machines of different capacities and a series of other machines/equipment. 4. Based on my knowledge of rubber products and technical expertise in the subject, I state that the Compound Rub .....

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er/latex is cream to amber or brown in colour and retains all the essential characteristics of raw rubber and cannot be categorized as commercially distinct and different from the starting raw material." 15. Annexure R1(d) is by a person who is the Director of a Company, which, going by that affidavit, is involved in the manufacture of compound rubber. That affidavit says inter alia that the said company manufactures compound rubber using raw rubber, carbon black, chemicals and softeners in .....

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hat compound rubber is a different and distinct product which is a commodity sold as such, as well. Annexure R1(h) is a certification by a Chartered Accountant. Certain photographs of the manufacturing unit are produced supported by affidavits as Annexures R1(i) and R1(j), respectively. Annexures R1(k) to R1(o) are notification SRO 641/81, assessment order, order of the Tribunal, reply given by the assessee to pre-assessment notice, Chartered Accountant's certification showing the cost works .....

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Engineering from Indian Institute of Technology, Kharagpur. He had also worked in Bata India Ltd. and Bayer India Ltd. He says that during his initial years at Mahatma Gandhi University, he was post-doctoral fellow at the Molecular Science and Engineering Research Centre of Laval University, Canada and was an invited visiting Professor to many Polymer Research Laboratories in Europe and Asia, and that he is a fellow of the Royal Society of Chemistry, London; member of the American Chemical Soci .....

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the contents of Annexure A5 certificate of Dr.K.A.Jose, Additional Director of Industries and Commerce, which was referred to him by the assessee for opinion. He has differed with the conclusion of Dr.K.A.Jose and has stated that rubber products could also be made without vulcanization. He further states that sulphur is not an essential ingredient for the manufacture of finished rubber product and that there are a number of rubber products in the market which are not vulcanized or cured such as .....

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dients required to make a component, according to the required properties. This component is essentially a finished rubber product and is not merely one which is a result of mixing with chemicals, gas, fumigation etc. or any other process similar to mixing with chemicals, gas, fumigation etc. As would be reflected from the affidavit filed on behalf of the Department after remand and referred to in paragraph No.11 above, what the Department appears to suggest is that whatever comes out of the pro .....

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not by itself conclude in the production of tyres and tubes. The product that comes out of the process in the assessee's unit in Kerala is itself a rubber product which has to be treated as finished one for the purpose for which it is put to use, including by persons who purchase it as such. The evidence by way of affidavits of experts tendered on behalf of the assessee corroborates each other and the evidentiary value of such evidence of experts clearly outweighs the views in Annexure A5 c .....

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no rebuttal evidence from the side of the State discharging its burden which it carried following the clear terms of the order of remand made by the Apex Court. 17. There is a suggestion through the additional questions of law sought to be raised by the State that the term "any other similar process" occurred in SRO 641/81 is expansive in content and, therefore, the exclusion from out of the term "finished rubber product" as contained in SRO 1516/90 should be understood as m .....

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that different dealers are involved in commercial transactions of compounded rubber as a product itself. 18. Though not directly relatable to the field of levy of sales tax, including grant of exemptions or reductions in the rate of sales tax, we think that it is apposite to look into the provisions of the Rubber Act, 1947; also to note the priority that could be given to some of the affidavits and certificates which have come from the Institutions and Officers connected with Rubber Board, whic .....

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isation should be set up to look after the interests of the rubber producers in India and the functions of that statutory organisation will include, steps, inter alia, to promote research and do all such other things, as may be necessary, for the development of the industry. The Rubber Act 1947 thus came into being. With effect from 01.08.1955, that Act was amended to provide the development of the rubber industry to be under the control of the Union. The purposes of that Act and its amendment t .....

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the Central Government on all matters relating to the development of the rubber industry etc. The views of the Rubber Board as reflected through the affidavits and certificates are, therefore, of abundant relevance. 21. Without ignoring the principle that an interpretation clause of one legislation is primarily meant to define the terms in that statute, it is worthwhile for the purpose of this case to look into few definitions under Section 3 of the Rubber Act, since that is a comprehensive leg .....

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d during the process of conversion into rubber; (iii) latex (dry rubber content) in any state of concentration, and includes scrap rubber, sheet rubber, rubber in powder and all forms and varieties of crepe rubber, but does not include rubber contained in any manufactured article." Section 3(e) defines manufacturer. It reads as follows: "manufacturer means any person engaged in the manufacture of any article in the making of which rubber is used." The term 'dealer' is defi .....

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bber is used and "rubber" which is in any form of rubber, but not including rubber contained in any manufactured article. These statutory materials carry relevant evidentiary value to show that any manufactured article would not be treated as rubber, even if it contains rubber. Therefore, when the process of mixing rubber with chemicals, gas, fumigation or any other similar processes results in compound of rubber or rubber compound, it apparently goes out of the term of rubber as under .....

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gh Union legislation leading to the Rubber Act. Statutory provisions of the Rubber Act appreciated in the context of the objects of that Act and the expertise of the persons who give effect to the purposes of that Act, unequivocally, show that the conclusions resulting out of the discussions made hereinabove based on the materials on record are at par with the concept of 'manufacture' and the use of the term rubber' by the people who are expected to be conversant with those terms in .....

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