Case: M/S. Punjab Aromatics Vs. State Of Kerala

consumer has performed part of the final act of consumption, another portion of the final act 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............ In the absence of any words to limit the connotation of the word "consumption" to the final act of consumption, it will be proper to think that the constitution-makers used the word to connote any kind of user which is ordinarily spoken of as consumption of the particular commodity." 19. We are of the view that the judgment of this Court in Burmah-Shell (supra) has no application. Firstly, in that case the Court was concerned with the interpretation of Entries in the Legislative Lists. It is well-settled that Entries in the Legislative Lists have to be read in the widest possible sense. The Entries in the Legislative Lists demarcates an area/field within which the competent Legislature is entitled to enact laws. We are not concerned with interpretation of Entries in the Legislative Lists, therefore, the said judgment has no application to the facts of the present case. Secondly, as can be seen from para 20, this Court has itself clarified that the word "consumption" in the Explanation to Article 286 of the Constitution as it stood before the Constitution (Sixth Amendment) Act, 1956 has to be read in a manner different from the act of consumption in the generally understood sense. For both the aforestated reasons, the judgment of this Court in Burmah-Shell (supra) has no application to the present case. 20. Shri T.L.V. Iyer, learned counsel, also places heavy reliance on the judgment of this Court in the case of State of Karnataka v. B. Raghurama Shetty and Others (1981) 2 SCC 564. He places reliance on paragraphs 8 and 9 which are quoted hereinbelow: "8. 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 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 6(i) 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 millers flour that part of its 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 millers selling price in calculating his "value added" and the VAT tax on value added....)9. 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." 21. In our view the said judgment has no application as in that case this Court came to the conclusion that paddy and rice are two different commodities. It was further held on facts that the assessee had consumed paddy in the manufacture of rice. It is in this context that after coming to the conclusion that paddy and rice are two different commodities that this Court has examined the word "consumption" in the economic sense. In the present case, as stated hereinabove, by adding of impurities sandalwood oil becomes red oil. Therefore, there was no consumption of red oil in the manufacture of sandalwood oil. Further, it may be noted that the Explanation to Article 286(1)(a) of the Constitution, as it stood prior to the Constitution (Sixth Amendment) Act, 1956, used the word "consumption" in the Explanation to the said Article.However, after the Constitution (Sixth Amendment) Act, 1956 w.e.f. 11.9.1956 the said Explanation to Article 286(1)(a) of the Constitution is omitted. For the aforestated reasons, the judgment of this Court in the case of B. Raghurama Shetty (supra) has no application.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]8. We find merit in this civil appeal filed by the assessee. At the outset, it may be stated that process of purification is not in dispute. The entire process of purification has been discussed by the Tribunal in its judgment. The said process eliminates impurities. In the present case we are required to consider the words "consumes such goods (red oil) in the manufacture of other goods for sale or otherwise (sandalwood oil)". These words find place in Section 5A(1)(a) of the 1963 Act. When raw-material is converted into a final product one of the important tests to be applied to ascertain whether the process of conversion amounts to manufacture is: whether the raw-material is subsumed into the final product. In this case, the highest fact-finding body is Appellate Tribunal under the 1963 Act. After examining the process, it has come to the conclusion that sandalwood oil (final product) can be brought back to the original State, namely, red oil by adding impurities, therefore, the process is reversible. Therefore, red oil is not subsumed into sandalwood oil. Keeping in mind this basic test, it is clear that red oil is not consumed/used in the manufacture of sandalwood oil. Hence, Section 5A(1)(a) or (b) of the 1963 Act has no application.The "test of irreversibility" is an important criterion to ascertain as to when a given process amounts to manufacture. In the present case that test is not satisfied. In the present case, the Tribunal has examined the process and has come to the conclusion that by adding impurities to the sandalwood oil the product could become red oil once again. In the circumstances, it cannot be said that red oil and sandalwood oil are two separate and distinct products as held by the High Court overruling the judgment of the Tribunal.13. One more aspect needs to be mentioned. According to the impugned judgment of the High Court, even assuming for the sake of argument that Section 5A(1)(a) of the 1963 Act is not applicable still in any event alternatively Section 5A(1)(b) stood attracted.For the aforestated reasons, we are of the view that there is no infirmity in the judgment of the Tribunal and that the High Court had erred in interfering with the said judgment.To say the least, in tax matters courts have to keep in mind distinction between approach and principle. Courts have to go by the principle involved in the fiscal legislation. Keeping in mind the distinction between these two concepts, we are of the view that the High Court was not justified in making the observation which is underlying hereinabove. The decision of the Tribunal is objective. It is based on the correct formulation of the test of irreversibility involved in the process of manufacture and, therefore, the High Court was not justified in observing that the finding of the Tribunal was patently absurd and perverse.In our view the said judgment has no application as in that case this Court came to the conclusion that paddy and rice are two different commodities. It was further held on facts that the assessee had consumed paddy in the manufacture of rice. It is in this context that after coming to the conclusion that paddy and rice are two different commodities that this Court has examined the word "consumption" in the economic sense. In the present case, as stated hereinabove, by adding of impurities sandalwood oil becomes red oil. Therefore, there was no consumption of red oil in the manufacture of sandalwood oil. Further, it may be noted that the Explanation to Article 286(1)(a) of the Constitution, as it stood prior to the Constitution (Sixth Amendment) Act, 1956, used the word "consumption" in the Explanation to the said Article.However, after the Constitution (Sixth Amendment) Act, 1956 w.e.f. 11.9.1956 the said Explanation to Article 286(1)(a) of the Constitution is omitted. For the aforestated reasons, the judgment of this Court in the case of B. Raghurama Shetty (supra) has no application.