Civil Appeal Nos
1801 1805 of 1975
From the Judgments and Orders dated the 27th January and 3rd February 1975 of the Karnataka High Court at Bangalore in STRPs
14 15 19 26  32 of 1974
N Nettar for the Appellant
J Ramamurthy and Miss R Vaigai for the Respondent
Ex parte Respondents in CAs 1801 1803  180575
The Judgment of the Court was delivered by VENKATARAMIAH J
The question which arises for consideration in these appeals by certificate is whether the respondents here 282 inafter referred to as the assessees  are liable to pay purchase tax under section 6i of the Karnataka Sales Tax Act 1957 hereinafter referred to as the Act  on the turnover consisting of the price paid by them for purchasing paddy for the purpose of converting it into rice for sale in their respective rice mills
The assessees are owners of rice mills in the State of Karnataka and are registered dealers under the Act
In the course of their business they purchase paddy and after milling paddy sell the resultant rice
During the assessment years the assessees purchased paddy from agriculturists who were not liable to pay sales tax
The assessing authority under the Act levied on the assessee in each of these cases purchase tax on the purchase turnover of paddy under section 6i of the Act
The appeals filed by the assessees against the said assessments were dismissed by the appellate authority
The Karnataka Sales Tax Appellate Tribunal allowed the appeals filed by the assessees against the orders of the appellate authority except the one filed by the assessee who is the respondent in Civil Appeal No 1805 of 1975 holding that the conversion of paddy into rice did not involve any manufacturing process and that the purchase turnovers of paddy in those cases were not liable to tax under section 6i of the Act
In the case of the assessee who is the respondent in Civil Appeal No 1805 of 1975 the Tribunal held that the turnover was liable to be taxed as he had manufactured boiled rice out of the paddy purchased by him
Aggrieved by the decisions of the Tribunal the State Government filed revision petitions before the High Court under section 231 of the Act in the first four cases and the assessee filed a revision petition in the last case
The High Court after holding that the turnovers in question were not liable to tax under section 6i of the Act dismissed the petitions filed by the State Government and allowed the petition of the assessee who is the respondent in Civil Appeal No 1805 of 1975
Thereafter the High Court granted by a common order a certificate of fitness in all these cases to prefer appeals before this Court to the State Government
On the basis of said certificate these appeals have been filed by the State Government against the orders of the High Court
Since these appeals involve a common question of law they are disposed of by this common judgment
The relevant part of section 6 of the Act reads 6
Levy of purchase tax under certain circumstances
Subject to the provisions of sub section 5 of 283 section 5 every dealer who in the course of his business purchases any taxable goods in circumstances in which no tax under section 5 is leviable on the sale price of such goods and i either consumes such goods in the manufacture of other goods for sale or otherwise or disposes of such goods in any manner other than by way of sale in the state or ii    shall be liable to pay tax on the purchase price of such goods at the same rate at which it would have been leviable on the sale price of such goods under section 5 The contention of the State Government before the High Court was and before us is that the sale price of paddy which is a taxable commodity having not been subjected to tax under section 5 the assessees are liable to tax under section 6i of the Act as they had consumed it in the manufacture of rice which was a different commodity for sale
The assessees  contention which was accepted by the High Court is that paddy and rice being the same it cannot be said that they had manufactured other goods  out of paddy and hence section 6i is not attracted
Paddy and rice have been held to be different commodities by this Court in Ganesh Trading Co Karnal vs State of Haryana  Anr
in which it is observed thus Now the question for our decision is whether it could be said that when paddy was dehusked and rice was produced its identity remained
It was true that rice was produced out of paddy but it is not true to say that paddy continued to be paddy even after dehusking
It had changed its identity
Rice is not known as paddy
It is a misnomer to call rice as paddy
They are two different things in ordinary parlance
Hence quite clearly when paddy is dehusked and rice produced there has been a change in the identity of the goods
284 The above view has been followed by this Court in Babu Ram Jagdish Kumar and Co vs The State of Punjab  Ors
It is unfortunate that the High Court as well as the Tribunal have tried to distinguish the decision of this Court in Ganesh Trading Co s case supra on insubstantial grounds a detailed reference to which is unnecessary We reiterate the view expressed in the above two cases and hold that paddy and rice are two distinct commodities and that the milling of paddy involves a manufacturing process
There is no merit in the submission made on behalf of the assessees that they had not consumed paddy when they produced rice from it by merely carrying out the process of dehusking at their mills
Consumption in the true economic sense does not mean only use of goods in the production of consumers  goods or final utilisation of consumers  goods by consumers involving activities like eating of food drinking of beverages wearing of clothes or using of an automobile by its owner for domestic purposes
A manufacturer also consumes commodities which are ordinarily called raw materials when he produces semi finished goods which have to undergo further processes of production before they can be transformed into consumers  goods
At every such intermediate stage of production some utility or value is added to goods which are used as raw materials and at every such stage the raw materials are consumed
Take the case of bread
It passes through the first stage of production when wheat is grown by the farmer the second stage of production when wheat is converted into flour by the miller and the third stage of production when flour is utilised by the baker to manufacture bread out of it
The miller and the baker have consumed wheat and flour respectively in the course of their business
We have to understand the word consumes  in section 6i of the Act in this economic sense
It may be interesting to note that this is the basis of the levy of Value Added Tax  popularly called as VAT which is levied as an alternative to tax on turnover in some Western countries
The difference between Value Added Tax  and tax on the turnover of sales or purchases is explained by Professor Paul A Samuelson in his book entitled Economics  Tenth Edition 1976 at page 168 thus A turnover tax simply taxes every transaction made wheat flour dough bread VAT is different because it does not include in the tax on the miller s flour that part of its 285 value which came from the wheat he bought from the farmer
Instead it taxes him only on the wage and salary cost of milling and on the interest rent royalty and profit cost of this milling stage of production
That is the raw material costs used from earlier stages are subtracted from the miller s selling price in calculating his value added and the VAT tax on value added   At every stage of production it is obvious there is consumption of goods even though at the end of it there may not be final consumption of goods but only production of goods with higher utility which may be used in further productive processes
While construing the word consumption  which was found in the Explanation to Article 2861a as it stood prior to its deletion by the Constitution Sixth Amendment Act 1956 this Court in Ms Anwarkhan Mahboob Co vs The State of Bombay  Ors
observed thus The Act of consumption with which people are most familiar occurs when they eat or drink or smoke
Thus we speak of people consuming bread or fish or meat or vegetables when they eat these articles of food we speak of people consuming tea or coffee or water when they drink these articles we speak of people consuming cigars or cigarettes or bidis when they smoke these
The production of wealth as economists put it consists in the creation of utilities
Consumption consists in the act of taking such advantage of the commodities and services produced as constitutes the utilization thereof
For each commodity there is ordinarily what is generally considered to be the final act of consumption
For some commodities there may be even more than one kind of final consumption
Thus grapes may be finally consumed by eating them as fruits they may also be consumed by drinking the wine prepared from grapes
Again the final act of consumption may in some cases be spread over a considerable period of time
Books articles of furniture paintings may be mentioned as examples
It may even happen in such cases that after one consumer has performed part of the final act of consumption another portion of the final act 286 of consumption may be performed by his heir or successor in interest a transferee or even one who has obtained possession by wrongful means
But the fact that there is for each commodity what may be considered ordinarily to be the final act of consumption should not make us forget that in reaching the stage at which this final act of consumption takes place the commodity may pass through different stages of production and for such different stages there would exist one or more intermediate acts of consumption
 Applying the above test it has to be held that the assessees had consumed the paddy purchased by them when they converted it into rice which is commercially a different commodity
Since it is not disputed that the sales of paddy which is a taxable commodity in favour of the assessees had not suffered tax under section 5 in view of the circumstances in which they had taken place and it is held that the assessees had consumed paddy in the manufacture of rice which was a different commercial commodity for sale the case of the assessees squarely falls under section 6i of the Act
The charge under section 6i should therefore be given due effect
This view is in accord with the opinion of this Court in State of Tamil Nadu vs M K Kandaswami etc
and in Ganesh Prasad Dixit vs Commissioner of Sales tax where provisions corresponding to section 6i of the Act arose for consideration
It is next contended that since the assessees would be exposed to double taxation both as buyers of paddy and as sellers of rice we should hold that the levy in question is impermissible because paddy and rice are liable to be taxed at a single point
No provision is shown to us which bars such taxation when the commodities are different
In fact in this case there is no double taxation on the same commodity
A similar contention was rejected by this Court in the case of Babu Ram Jagdish Kumar supra thus We may at this stage refer to one other subsidiary argument urged on behalf of the appellants
It is argued that because paddy and rice are not different kinds of goods 287 but one and the same the inclusion of both paddy and rice in Schedule C to the Act would amount to imposition of double taxation under the Act
There is no merit in this contention also because the assumption that paddy and rice are one and the same is erroneous
In Ganesh Trading Co Karnal vs State of Haryana 1973 32 STC 623 SC arising under the Act this Court has held that although rice is produced out of paddy it is not true to say that paddy continued to be paddy even after dehusking that rice and paddy are two different things in ordinary parlance and therefore when paddy is dehusked and rice produced there is a change in the identity of the goods
 In the result these appeals are allowed the judgments of the High Court against which these appeals are filed are set aside and the turnover in question in each case is held to be taxable under section 6i of the Act
There shall however be no order as to costs


Summary:
The assessees respondents are the owners of rice mills and are registered dealers under the Karnataka Sales Tax Act 1957
In the course of their business they purchase paddy and after milling paddy sell the resultant rice
During the assessment years the assessees purchased paddy from agriculturists who were not liable to pay sales tax
The assessing authority under the Act levied on the assessee in each of these cases purchase tax on the purchase turnover of paddy under section 6i of the Act
The appeals filed by the assessees were dismissed by the Appellate Authority except the one holding that the conversion of paddy into rice did not involve any manufacturing process and that the purchase turnovers of paddy in those cases were not liable to tax under section 6i of the Act
In the case of the other assessee the Tribunal held that the turn over was liable to be taxed as he had manufactured milled rice out of the paddy purchased by him
The appellant filed revision petitions in the High Court and the assessee filed revision petition in the last case
The High Court after holding that the turn overs in question were not liable to tax under section 6i of the Act dismissed the petitions filed by the appellant and allowed the petition of the last assessee
The High Court granted a certificate of fitness to this Court
The appellant argued that the sale price of paddy which is a taxable commodity having not been subjected to tax under section 5 the assessees were liable to tax under section 6i of the Act as they had consumed it in the manufacture of rice which was a different commodity for sale
The respondent argued that they had not consumed paddy when they produced rice from it by merely carrying out the process of dehusking at their mills
Allowing the appeals  HELD 1
i Paddy and rice are two distinct commodities
The milling of paddy involves a manufacturing process
284 B ii The levy in question is not impermissible even though paddy and rice are liable to be taxed at a single point as in fact there is no double taxation on the same commodity
286 F G 281 Ganesh Trading Co Karnal vs State of Haryana and Anr
32 STC 623 Babu Ram Jagdish Kumar and Co vs The State of Punjab and Anr
44 STC 159 affirmed
Consumption in the true economic sense does not mean only use of goods in the production of consumer goods or final utilisation of consumer goods by consumers involving activities like eating of food drinking of beverages wearing of clothes or using of an automobile by its owner for domestic purposes
A manufacturer also consumes commodities which are ordinarily called raw materials when he produces semi finished goods which have to undergo further processes of production before they can be transformed into consumer goods
At every such intermediate stage of production some utility or value is added to goods which are used as raw materials and at every such stage the raw materials are consumed
284 D E 3
At every stage of production there is consumption of goods even though at the end of it there may not be final consumption of goods but only production of goods with higher utility which may be used in further productive processes
285 B B Ms
Anwar Khan Mahboob Co vs The State of Bombay and Ors
at pp
715 716 Economics Tenth Edition 1976 at page 168 by Professor Paul A Samuelson referred to
In the instant case the assessees had consumed that paddy purchased by them when they converted it into rice which is commercially a different commodity for sale
The case of assessees therefore squarely falls under section 6i the Act
286 C State of Tamil Nadu vs M K N Kandaswami etc
  Ganesh Prasad Dixit vs Commissioner of Sales Tax   referred to