IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM FRIDAY, THE 27TH MARCH 2009 / 6TH CHAITHRA 1931 ST.Rev..No. 20 of 2008() ------------------------ TA.19/2007 of S.T.A.TRIBUNAL,ADDL.BENCH,PALAKKAD .................... APPELLANTS/ASSESSEE --------------------------------------- M/S. ELITE SUPER MARKET & DISTILLERIES THRISSUR. BY ADV. SRI.R.VENKITARAMANI, SENIOR ADVOCATE SRI.N.N.SUGUNAPALAN, SENIOR ADVOCATE SRI.S.SUJIN RESPONDENT(S): REVENUE ---------------------- STATE OF KERALA,REPRESENTED BY ITS FINANCE SECRETARY, SECRETARY, THIRUVANANTHAPURAM. BY SPL. G.P. SRI.VINOD CHANDRAN THIS SALES TAX REVISION HAVING BEEN FINALLY HEARD ALONG WITH STRV 35/2008 & CONN. CASES ON 04/02/2009, THE COURT ON 27/03/2009 PASSED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & C.K.ABDUL REHIM, JJ. .................................................................... S.T. Rev. Nos.20,35,,34,37, & 36 of 2008 & 291, 274,282,277 & 281 of 2007 .................................................................... Dated this the 27th day of March, 2009. ORDER Ramachandran Nair, J. These connected Sales Tax Revision cases arise from common order of the Sales Tax Appellate Tribunal partly allowing the claim of the assessee and partly rejecting the same. The assessee is engaged in blending,compounding, bottling and selling of Indian Made Foreign Liquor like Brandy, Rum etc. under various brand names. The entire sales are to Kerala State Beverages Corporation Limited, a Government of Kerala Company engaged in monopoly distribution of Indian Made Foreign Liquor in Kerala. Sales tax on Indian Made Foreign Liquor at the rate prescribed in the First Schedule to the KGST Act is payable at the point of sale by Beverages Corporation Ltd. to the retail dealers and to consumers. Similarly under the Foreign Liquor Rules, Beverages Corporation is liable to pay excise duty at the point of removal of the goods from the warehouses of the distilleries and 2 blending units to their warehouses. Obviously point of levy of sales tax at the scheduled rate is fixed at the hands of the Beverages Corporation only to ensure that incidence of tax falls on price of liquor including excise duty. Even though distilleries and other suppliers of liquor to the Beverages Corporation are not liable to pay sales tax at the rate provided in the First Schedule to the Act, such dealers in foreign liquor are liable to pay turnover tax at all points of sale as provided under Section 5(2C) of the KGST Act, 1963. The assessee's case is that under Section 5(2C) they are not liable to pay turnover tax which is payable on the sales turnover only by "distillery, brewery, winery or other manufactury" which they are not. Their specific case is that liability is cast upon them only by virtue of an amendment to Section 3 (19) of the Abkari Act with effect from 1.4.2003 wherein compounding is also brought within the meaning of manufacture. Therefore, according to the assessee, they have no turnover tax liability under Section 5(2C) for the assessment years 1999-2000 to 2002-2003. Even though the Tribunal in principle upheld the contention of the assessee, they upheld the liability of the assessee for turnover tax under 3 Section 5(2C) but declared that they are not liable to pay turnover tax on the excise duty paid by Beverages Corporation for the goods sold by the assessee to the Corporation. The revisions filed by the assessee are for a declaration that they not being manufacturers are not liable to pay turnover tax for the assessment years 1999-2000 to 2002-2003. On the other hand, the main issue raised in the revisions filed by the State is against the order of the Tribunal holding that assessee is not liable to pay turnover tax on excise duty, which decision of the Tribunal according to the State, is exactly contrary to the decision of the Supreme Court in STATE OF KERALA & OTHERS V. MAHARASHTRA DISTILLERIES LTD. & OTHERS (141 STC 358). We have heard Senior Counsel Sri.R.Venkitaramani appearing for the assessee and Special Government Pleader Sri.Vinod Chandran appearing for the State. 2. The two questions that arise for decision are: (i) Whether the assessee is liable to pay turnover tax under Section 5(2C)(1) on the turnover of Indian Made Foreign Liquor for the years 1999-2000 to 2002-2003? 4 (ii) If the assessee is liable to pay turnover tax, whether turnover tax is payable on the sale price including excise duty paid by the Beverages Corporation Ltd? 3. At the outset we notice the strange finding of the Tribunal, which to our mind is self-contradictory. The Tribunal though held that assessee is not a manufactory liable for payment of turnover tax under Section 5(2C), still held that benefit is only in regard to exclusion of excise duty from sale price for the purpose of payment of turnover tax. In other words, even after holding that assessee is not a manufacturer within the meaning of that term contained in Section 3(19) of the Abkari Act until the amendment effective from 1.4.2003, still the Tribunal held that assessee is liable to pay turnover tax on the sale price excluding excise duty even for the years 1999-2000 to 2002-2003. It is only on account of this finding that the assessee has chosen to file revisions for a declaration that they have no liability to pay turnover tax at all for the years 1999-2000 to 2002-2003. The revisions filed by the State are for the purpose of declaring that assessee is not only liable for turnover tax, but the turnover tax so payable should be on the sale price 5 including excise duty paid by the Beverages Corporation to the State. 4. Before proceeding to consider the issues raised, we find that the assessee misrepresented facts pertaining to the ingredients used in the production of IMFL before the Tribunal and tried to assert the same in the revisions filed in this court. We, therefore, directed the Excise Department to conduct inspection and report the ingredients used in the production. The report submitted by the Excise Inspector prove beyond doubt that the assessee obtained the order from the Tribunal by misrepresenting facts. The activity undertaken by the assessee stated in paragraph 2 of S.T. Rev. No.36/2008 is as follows: "The activity undertaken by the petitioner is compounding of ENA into Brandy and Rum. The process involved is that the ENA stored in stainless steel tanks is pumped into tanks fitted with stirrers, diluted with de- mineralised water to bring the strength of ENA to 42.8 volume/volume followed by stirring to make it homogeneous, adding selected caramel and flavour, again stirring well, filtering to remove any particles and bottling." Admittedly assessee among other things is engaged in manufacture of Brandy, one of the important ingredients of which is spirit obtained from fruits mainly, grape. The Excise Inspector after conducting inspection of assessee's blending and bottling unit has reported the 6 process of preparing Brandy as follows: "Imported ENA is mixed up with Grape-Spirit, adds DM Water and Caramel. This liquor can be bottled for consumption." It is common knowledge that ENA or Extra Neutral Alcohol is obtained from rectified spirit by redistillation to remove all impurities to make the alcohol absolutely potable and safe. Brandy cannot be made without spirit obtained from fruits and like any other manufacturer of Brandy, assessee is purchasing fruit spirit and blending the same along with ENA to make it Brandy. The other ingredients used in blending and compounding are caramel for the purpose of colouring and flavour, if any, for the purpose of flavouring the liquor. The assessee suppressed the use of Grape spirit in the making of Brandy only to mislead the lower authorities including the Tribunal. The effort was made in this court also by filing revision petitions suppressing this fact and only when we doubted the making process of Brandy, we called for a report from the Excise authorities who have confirmed that grape spirit is used as an ingredient in the manufacture of Brandy. The position is not different so far as Rum is concerned, 7 which is also made by mixing ENA with HBS (High Bouquet Spirit) the details of which are not furnished by the assessee to this court. In view of the correct information furnished by the Excise Department, we have to consider the case with reference to the true facts pertaining to production, bottling and sale of liquor by the assessee through blending and compounding of various ingredients stated above. Section 5(2C) pertaining to levy of TOT on liquor, both Indian Made and Foreign Made, underwent several changes. Since the assessments involved pertain to 1999-2000, we extract hereunder the provision that stood in the statute prior to it's amendment by Act 8 of 2000 with effect from 1.1.2000. "S.5(2C)(i) Notwithstanding anything contained in this Act or the Rules made thereunder, every dealer shall pay turnover tax on the turnover of goods as specified hereunder, namely: (a) .......... (b) by any dealer in Foreign liquor (Indian made) or Foreign liquor (Foreign made), as specified in entries against serial numbers 53 and 54 of the First Schedule at the rate of (5%) on the turnover at all points." The above provision was later amended by Act 19 of 2004. The 8 provisions on turnover of liquor are split up into two, sub-clause (b) covering bar hotels and sub-clause (c) covering distillery, brewery, winery or other manufactory. Sub-clause (c) extracted in the Tribunal's order is as follows: "by any manufacturer or distillery, brewery, winery or other manufactory established under Section 14 of the Abkari Act, 1 of 1077, shall be liable to pay turnover tax on the turnover including any duty of excise leviable on such liquor at the hands of such person, whether such duty is paid by such person or any subsequent dealer as per the provisions in Section 18 of the said Act." It is by relying on the above provision the assessee has contended before the Tribunal and before us that it is not a distillery, brewery or other manufactory and so much so, it is not liable to pay turnover tax on the sale of it's products which are obtained through compounding and blending under licence specifically issued in this regard. The assessee's counsel relied on the licence issued to it which is not a Distillery Licence, but a blending and compounding licence issued under the "Kerala Foreign Liquor (Compounding, Blending and Bottling) Rules, 1975". Several decisions are cited by counsel for the assessee including various decisions of this court relied on by the 9 Tribunal namely, KURIAN ABRAHAM PVT. LIMITED V. ASSISTANT COMMISSIONER (ASST.)II (137 STC 237), BACHU & COMPANY V. ASSISTANT COMMISSIONER (ASST.) (132 STC 68) and TEEJAN BEVERAGES LTD. V. STATE OF KERALA (131 STC 538) and contended that until the term manufacture contained in Section 3(19) of the Abkari Act, 1977 was amended to include compounding therein with effect from 1.4.2003, assessee could not be treated as a manufactory for the purpose of levy of turnover tax under Section 5(2C) of the Act. We are unable to accept the argument of the assessee for various reasons. In the first place, as already held by us, assessee is engaged in manufacture of products like Brandy, Rum etc. by blending various items of liquor, compounding for colouring, flavouring and bottling the same under brand names for the purpose of marketing. Assessee has no case that after blending and making of the liquor, it retains the identity of the original items used in the manufacture namely, grape spirit, Bouquet Spirit, ENA, Caramel, Flavours etc. In fact in the course of blending and compounding, assessee produces an entirely new product different from the 10 ingredients used and the products made admittedly cannot be restored to it's constituents. In other words, blending is an irreversible process by which an entirely new commodity with new identity emerges. In fact, prior to the amendment of 2004, Section 5(2C) provided for turnover tax on dealers of Indian Made Foreign Liquor, whether they are distilleries, manufacturers or even mere traders. In fact, the purpose of introduction of sub-clause (C) in Finance Act, 2004 with retrospective effect was to neutralise the decision of this court in KERALA DISTILLERIES AND ALLIED PRODUCTS LTD. V. ASST. COMMISSIONER, SPECIAL CIRCLE, PALAKKAD [(2000) 117 STC 553)] wherein this court held that turnover tax is not payable on excise duty paid by Beverages Corporation. The purpose of amendment is not to exclude blending and compounding units from the scope of "manufactory", but to ensure that turnover tax is paid on sale price including excise duty. In other words, we are of the view that a blending and compounding unit is a manufactory because in the process of blending and compounding, new liquor products namely, Brandy and Rum are manufactured. In fact, it is pertinent to note that 11 even prior to the introduction of compounding under the definition of "manufacture" in Section 3(19) of the Abkari Act, blending and compounding were defined under the Kerala Foreign Liquor (Compounding, Blending and Bottling) Rules, 1975. Under these Rules blending means mixing of two different spirits of the same or different strength and compounding is preparation of foreign liquor by addition of flavouring or colouring matter or both; to imported or Indian made spirit. Admittedly the assessee is engaged in both these activities and the net result is manufacture of new products namely, Brandy and Rum under brand names. The blending and compounding process is irreversible in as much as the original items used in blending and compounding lose their identity and new and different products such as Brandy, Rum etc. are produced. If the process involved is not a manufacturing activity, we do not know what else leads to the ultimate production of Brandy and Rum by the assessee. Therefore, we find no merit in the contention of the assessee that it is not engaged in manufacture of any product. The findings of the Tribunal are therefore, vacated holding that the assessee is liable to pay turnover tax 12 on the entire products manufactured through blending and compounding and sold by them for all the years involved. The S.T. Revisions filed by the assessee are consequently dismissed. 5. The main question raised in the revisions filed by the State is whether the Tribunal was justified in holding that the assessee is not liable to pay turnover tax including excise duty paid by the Beverages Corporation Ltd. The Special Government Pleader rightly pointed out that the issue is squarely covered against the assessee by decision of the Supreme Court in STATE OF KERALA & OTHERS V. MAHARASHTRA DISTILLERIES & OTHERS (141 STC 358) wherein the Supreme Court has held that from 5.1.1999 i.e. with effect from the amendment to the Foreign Liquor Rules requiring payment of exise duty by Beverages Corporation before removing of the liquor from the godowns of the distilleries and blending units, turnover tax is payable by the distilleries, blending and bottling units and other manufacturers on the sale price including excise duty paid by the Beverages Corporation. This decision of the Supreme Court is applicable to the case of the assessee because we have already found 13 that assessee is also engaged in manufacture of Indian Made Foreign Liquor like Brandy, Rum etc. We, therefore, allow the S.T. Revisions filed by the State by reversing the order of the Tribunal and by holding that the assessee is liable to pay turnover tax on sale price including excise duty paid by Beverage Corporation Ltd. for all the years. 6. Even though department has raised several questions pertaining to additions in assessments deleted by the Tribunal, we do not think there is any justification for us to interfere with the findings of the Tribunal on these issues because on facts Tribunal found no justification for sustaining additions to the turnover under various grounds. We, therefore, dismiss the revisions filed by the State on this issue. 7. The last question raised in the revisions filed by the State pertains to the order of the Tribunal deleting interest levied. The Tribunal allowed the claim by relying on decision of the Supreme Court in J.K.SYNTHETICS LTD. V. COMMERCIAL TAX OFFICER (94 STC 422), MARUTI WIRE INDUSTRIES PVT. LTD. V. SALES TAX OFFICER & OTHERS (122 STC 410) and in 14 P.K.DAMODARAN V. STATE OF KERALA (12 KTR 133) and the decision in SIVASAKTHI ENGINEERING & FABRICATORS V. SALES TAX OFFICER & ANOTHER (145 STC 438). We find that the decisions abovereferred are generally rendered with reference to Section 23(3) of the KGST Act. In fact, there has been substantial changes to the provisions pertaining to interest by virtue of introduction of Section 23(3A) and Section 23(3B) to the KGST Act. In this case we notice that the demand of turnover tax atleast on excise duty was held up on account of decision of this court in favour of the assessee in KERALA DISTILLERIES AND ALLIED PRODUCTS LTD. V. ASST. COMMISSIONER, SPECIAL CIRCLE, PALAKKAD [(2000) 117 STC 553)]. Further, in this case it is seen that interim orders of this court granting conditional stay was taken by the assessee before the Supreme Court and the Supreme Court directed payment of turnover tax leaving freedom to the assessee to challenge the statutory provisions. Strangely, we do not find any writ petition challenging the statutory provisions neither on levy of turnover tax nor on interest. In the circumstances, interest has to be computed with reference to 15 Section 23(3A) and Section 23(3B) read with Section 23(3) of the KGST Act. We notice that none of the authorities have considered the scope of these Sections while demanding interest. We, therefore, set aside the order of the Tribunal on the levy of interest with direction to the Assessing Officer to verify the records and the returns filed, turnover tax found payable, payments made, default with reference to statutory provisions and issue notice proposing interest under any provision abovereferred, if payable, and issue detailed order levying interest after giving opportunity to the assessee to file written reply to specific proposals with reference to statutory provisions. C.N.RAMACHANDRAN NAIR Judge C.K.ABDUL REHIM Judge pms