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2016 (10) TMI 719 - SUPREME COURT

2016 (10) TMI 719 - SUPREME COURT - TMI - Demand of duty - Exemption on polished granite stone on the basis that polished granite stones were produced from out of the tax suffered from rough granite blocks - Revisions under Section 12-A(1) - If a polished granite stone is used in a building for any purpose, it will come under Entry 17(i) of Part S of the second schedule, but if it is a tile, which comes into existence by different process, a new and distinct commodity emerges and it has a differ .....

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ak Misra And Shiva Kirti Singh, JJ. JUDGMENT Dipak Misra, J. These appeals, by special leave, assail the common judgment and order passed by the High Court of Karnataka in STA No. 574-575/2011 and other connected matters preferred under Section 24(1) of the Karnataka Sales Tax Act, 1957 (for brevity, the Act ), on 4th December, 2012 whereby it has overturned the order dated 25.02.2011 passed by the Additional Commissioner of Commercial Taxes, Zone-I, Bangalore in a batch of suo motu revisions un .....

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ns, we shall advert to the facts in the appeal where Ayili Stone Industries is the respondent-assessee. 2. The respondent-assessee is a dealer under the Act as well as the Central Sales Tax Act, 1956 (for short, CST Act ) and is engaged in the business of manufacturing and trading in granite stone. The assessing authority finalised the assessment for certain assessment years allowing exemption on polished granite stone on the basis that polished granite stones were produced from out of the tax s .....

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lates to granite stones, namely, (a) polished, (b) unpolished and (c) chips. The Assessing Authority observed that the polished and unpolished granite stones are under separate entries in the said schedule and such being the case, treating of sale of polished granite sold within the State which are obtained out of unpolished granite stones as sales inasmuch as they are suffered sales tax was not correct and, therefore, the exemption had been granted erroneously. Being aggrieved by the aforesaid .....

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ed in Poonam Stone Processing Industries v. Deputy Commissioner of Commercial Taxes, Gulbarga STC Vol. 94 page 182, Foredge Granite Pvt. Ltd. v. State of Karnataka STRP No. 58/1991 decided on 12.12.1994, State of Karnataka v. Goa Granites 2006 (60) Kar.L.J. 110, Chowgale and Company Pvt. Ltd. v. Union of India AIR 1981 SC 1014 and came to hold as follows:- 8. In view of the clear dictum laid down by the Division Bench of this Court in the case of Foredge Granite Pvt. Ltd., this Court deems fit t .....

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posed to the dictum laid down by the Division Bench of this Court in the case of M/s. Foredge Granite s case cited supra. 9. The Commissioner has referred to Part-S entry No. 17 of II schedule to the Karnataka Sales Tax at 1957 to hold that the polished and unpolished granite stones are separate commodities. But he has failed to appreciate the fact that merely because entry No.17, para-5 to II Schedule refers to polished and unpolished granites under two separate heads, it cannot be said that th .....

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6B of KST Act. 10. It is not disputed that the assessment orders in these matters are prior to 01.04.2002, on which date, Section 6-B of the Act is amended and the provision relating to levy of re-sale tax is submitted. Thus, the provision of Section 6-B of the Act as introduced by Act No.5 of 2002 with effect from 01.04.2002 is not applicable to the matters on hand, inasmuch as, the transactions involved in the cases on hand are much prior to the said amendment. 4. After noting the said decisio .....

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ll as different commercial products, granite tiles obtained out of rough granite stones are liable to tax as first dealer. 5. The said authority produced a passage from the judgment in Goa Granites (supra) which we shall refer to at a later stage. It has also reproduced passages from Foredge Granite (supra) and formed an opinion which is to the following effect:- The aforesaid discussions clearly establish that the appeal order is erroneous causing loss of revenue to the state exchequer. It is a .....

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granite tiles are covered. After classifying certain tiles under which granite tiles do not appear as per entry 8(i),(ii) & (iii) of part T of second schedule to KST Act 1957, all other tiles are classified as under. (iv) Other tiles not covered by items 1-4-88 to 31-3-96 Fifteen percent (i), (ii) and (iii) above 1-4-96 to 31-3-98 Twelve percent 1-4-98 to 31-3-01 Ten percent 1-4-01 to 31-03-02 Twelve percent 1-4-02 to 31-5-03 Fifteen percent From 1-6-2003 (Sixteen percent) The granite tiles .....

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ing and polishing into granite tiles, whether such a process amount to manufacture and that the said product constitute a different commodity to attract Sales Tax U/s.5 of the Sales Tax Act? 7. As the impugned order would show, the High Court after passing the question referred to the authority in Aman Marble Industries Pvt. Ltd. v. CCE, Jaipur (2005) 1 SCC 279, reproduced paragraph 4 of the said judgment and thereafter referred to a passage from Foredge Granite (supra) and opined that cutting t .....

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or the respondents. 9. The factual matrix as noticeable is that the assessing authority has allowed the exemption on sale of polished granite stones on the foundation that the same is produced from out of granite slabs that had suffered tax as rough granite blocks. After the assessment, the concerned authority referred to Entry 17(i) of Part S of the Second Schedule, which is as follows:- Entry No.17(i) of Part S of the second Schedule, appended to the K.S.T. Act, 1957, which relates to granite .....

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n on the principle stated in Vishwakarma Granites (supra). In Vishwakarma Granites (supra), the challenge was to the circular No. 19/03-04 (KSA.CR.128/2000-01) dated 11.11.2003 issued by the Commissioner of Commercial Taxes in Karnataka Bangalore (hereinafter referred to Commissioner for short) and consequent assessment orders and the orders levying penalty were called in question. The said circular was under Section 3-A(2) of the Act in pursuance of certain observations made in Poonam Stone Pro .....

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before the High Court that the activity of the assessee in cutting and polishing of granite stone will not come within the meaning of manufacturing activity and the circular had been issued on an erroneous notion. The High Court in Vishwakarma Granites (supra) has noted that in Poonam Stone Processing Industries (supra) the issue as to whether the act of cutting and polishing of granite stone amounts to manufacturing activity was not considered as the Division Bench had held that the said quest .....

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un by electrical energy in his unit, cut the granite into required sizes and thickness and polishes the same to the requirement of the customers and sells the same. In support of his case, the learned counsel for the petitioner pointed out the objections filed by him before the Revisional Authority and also produced a brochure before us indicating the nature of the activities carried on by him. Neither a perusal of the objections filed by the petitioner nor the very attractive brochure produced .....

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may be used as a building material, the granite block does not cease to be a granite block. Therefore, no manufacturing activity is involved. The finding recorded in this regard is perfectly in order. 5. Merely cutting a rough block of granite into different sizes to the requirement of the customers would not involve any manufacturing activity. In that view of the matter, we do not think the view taken by the Tribunal is wrong in any manner. In the view we have taken non-production of the valua .....

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mmodities for allowing exemption under Section 5(3) of the CST Act, 1956? II. Whether the ratio of the decision of this Hon ble Court in the case of Foredge Granite v. State of Karnataka in STRP.No.58/1991 rendered with reference to Entry 17 of Part S of the Second Schedule to Karnataka Sales Tax Act, as it stood prior to 1.4.1991 was applicable to the facts of the case of the assesses? 13. While discussing, the Court took note of the fact that what is sold or supplied by the dealer-assessee, re .....

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ng retains its original character and identity is as to whether the processed commodity is regarded in the trade by those who deal in it as distinct in identity from the original commodity or it is regarded, commercially and in the trade the same as the original commodity. It is necessary to point out that it is not every processing that brings about change in the character and identity of a commodity. The nature and extent of processing may vary from one case to another and indeed there may be .....

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f those dealing in the commodity or in commercial parlance the processed commodity is regarded as distinct in character and identity from the original commodity. 14. While proceeding with the analysis, the Division Bench posed a question which we think it apt to reproduce:- In other words, whether the rough granite blocks, which were sold were the very goods, which were exported? To be further precise, the controversy in this revision petition is about the identity of the goods purchased and ide .....

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statute was enacted . Thereafter, the Division Bench observed:- The question for consideration is, whether this polished tiles obtained out of rough granite blocks would amount to export of those goods , which had been sold by the assessee? It is the specific case of the assessee before all the authorities under the Act that what is sold in only rough granite blocks to an industrial unit, which is an 100% export oriented unit. It is also its case that the export unit by using heavy machinery, cu .....

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nite Pvt. Ltd. vs. The State of Karnataka and Another (STRP.No.58/1991). At the outset, we should notice in this case, firstly, that sub-section (3) of Sec. 5 of the CST Act did not fall for consideration of this Court. The issue that was raised in the said decision was, mere cutting a rough block of granite into different sizes to the requirement of the customer would involve any manufacturing activity? The facts which were noticed by the Court in that case was, that the petitioner had purchase .....

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r the KST Act, 1956, in respect of goods manufactured and sold by new industrial unit. The assessing authority had allowed the claim of the dealer and had granted exemption from payment of sale tax, treating the business activity of the petitioner as a manufacturing activity and therefore, entitled to certain incentives and concession flowing from the notification. This order of the assessing authority was revised by the revisional authority by invoking the provisions of Section 21(2) of KST Act .....

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g, it continues to be a granite block. May be a smaller or thinner size, but it would continue to be granite block however polished it may be. Even though it may be used as a building material, the granite block does not cease to be a granite block and therefore, no manufacturing activity is involved. The conclusion the Court has reached is, mere cutting a rough block of granite into different sizes to the requirement of the customers would not involve any manufacturing activity. 16. The Divisio .....

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tiles cannot be regarded as the rough granite blocks. When rough granite blocks are subjected to process of cutting, slicing into required size and polished and exported as tiles, the rough granite blocks ceased to be granite blocks and become a distinct and different commercial commodity from the original commodity. In the trade circle, they are not considered as one and the same commodity. If the purchaser goes to the market to buy the polished tiles, he will not be given the rough granite bl .....

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granite blocks to the exporter and if that exporter exports those small cut sizes of granite blocks, it can definitely be said, that what is sold and what is exported are one and the same commodity. But in the present case, the facts noticed by the fact finding authorities is that, the exporter before exporting the cut sizes of granite blocks, cuts them into slices to the actual size of tiles, polishes or effects honing process, which is similar to polishing and the end result is a tile that has .....

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are treated as different commodity altogether. Even if we have to adopt a value added test, then also, in our view, there is substantial transformation of the original commodity into different commercial commodity. Therefore, what is sold and what is exported is not those goods or the same goods , which is eligible for exemption under Sec. 5(3) of the Act. While considering the issues involved in this revision petition, we are not considering whether any manufacturing activity is involved while .....

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e remain as granites but as tiles ready to be used in building construction and other activities. By this process, there is value addition to the goods. There would be price variation between the rough granite block and cut and polished tiles. Even in the trade circles, when a customer asks for polished tiles of required size, the dealer shall not supply him with rough granites. The converse of this transaction is also an indicative factor how the trade circles understands the difference between .....

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was distinguished by observing that:- We further add that the Apex Court in the case of Sterling Foods v. The State of Karnataka(1986) 63 STC 239 has observed that the character or identity of the commodity has to be determined not on the basis of a distinction made by the State Legislature for the purpose of exigibility to state sales tax, because even where the commodity is the same in the eyes of the persons dealing in it, the State Legislature may make a classification determining liability .....

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manufacture and further it was adverting to the exigibility of tax under Section 5(3) of the CST Act. The Court distinguished the two concepts, namely, the manufacture and the recognised test of common parlance . 20. Now, we may look at what has been held in Aman Marble (supra). The two-Judge Bench was dealing with the issue whether the cutting of marble blocks into marble slabs amounts to manufacture for the purpose of the Central Excise Act. In that context, the Court referred to the authorit .....

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ter undergoing some transformation. When no new product as such comes into existence, there is no process of manufacture. Cutting and polishing stones into slabs is not a process of manufacture for the obvious and simple reason that no new and distinct commercial product came into existence as the end product still remained stone and thus its original identity continued. and this position was further reiterated as follows: (SCC pp. 147-48, para 16) It is also not possible to accept that excavati .....

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Electricity (Duty) Act, 1962. The Court referred to the authorities in Union of India v. Delhi Cloth and General Mills Co. Ltd. AIR 1963 SC 791, CCE v. Rajasthan State Chemical Works (1991) 4 SCC 473, wherein it has been held that pumping of brine and lifting of raw material constituted processes in or in relation to the manufacture. In the said case, the Court adverted to the facts in Rajasthan State Chemical Works (supra) and ultimately concluded thus:- In conclusion, it is said that if any o .....

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opriate to refer to comparatively a recent pronouncement in ITO, Udaipur v. Arihant Tiles & Marbles Pvt. Ltd. (2010) 2 SCC 699 In the said case, the assessee was engaged in the business of manufacture/production of polished slabs and tiles which the assessee exported (partly). The question that arose for consideration is whether conversion of marble blocks by sawing into slabs and tiles and polishing amounts to manufacture or production of article or thing so as to make the respondent assess .....

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and marked; (ii) Such blocks are then processed on single blade/wire saw machines using advanced technology to square them by separating waster material; (iii) Squared up blocks are sawed for making slabs by using the gang saw machine or single/multi-block cutter machine; (iv) The sawn slabs are further reinforced by way of filling cracks by epoxy resins and fibre netting; (v) The slabs are polished on polishing machine; the slabs are further edge cut into required dimensions/tiles as per market .....

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e activity of pumping out water from the mines came within the meaning of the words manufacture , production , processing or repair of goods . While disposing of the matter, this Court, vide paras 1 and 10, stated that the specific case of the company was that the electrical energy was consumed for pumping out water from mines to make mines ready for mining activity. This aspect is very important. It needs to be highlighted that the case of the company was that pumping out water from mines to ma .....

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ined that the controversy it was dealing with, the said activity was not required to be considered. Thereafter, the three-Judge Bench adverted to the principle stated in Aman Marble (supra). The Court distinguished the same by holding that the word production was not under consideration before the Court in the said case and thereafter noted that in the said case it had been held that cutting of marble blocks into slabs did not amount to manufacture. Explaining the dictum in the said case, the Co .....

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ut into slabs per se will not amount to the activity of manufacture. 25. Thereafter, the Court proceeded to deal with the process undertaken by the assessee and in that context stated:- In the present case, we are not concerned only with cutting of marble blocks into slabs. In the present case we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated hereinabove is that there are various stages th .....

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of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only is there manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and therefore, on the facts of these cases, we are of the vie .....

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nts is paying excise duty, some of the respondents are job-workers and the activity undertaken by them has been recognised by various government authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax, etc. because the activity did not constitute manufacture. 27. We .....

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was not possible to accept that excavation of stones and thereafter cutting and polishing them into slabs resulted in a manufacture of goods. The decision in Foredge Granite (supra) had been restricted to the concept of polished granite block. The revisional authority, as we perceive, has applied the test of separate and distinct commercial product that comes into existence from granite stones and for the said purpose, it has relied on the pronouncement in Goa Granites (supra). We have copiousl .....

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