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

3. Appellant-assessee purchases "red oil" from unregistered dealers and converts such red oil into "sandalwood oil" by removing water content and other impurities. As regards the processing, there is no dispute between the parties. The case of the Department, in short, is that the assessee is not selling red oil as such; that the commodity purchased (i.e. red oil) by the assessee has undergone manufacture when it is heated to a specified degree and the same is filtered by which impurities are removed and, therefore, according to the Department, conversion of red oil into sandalwood oil attracts levy under Section 5A of the 1963 Act.4. For the sake of convenience we quote Section 5A of the 1963 Act which reads asLevy of purchaseEvery dealer who, in the course of his business, purchases from a registered dealer or from any other person any goods, the sale or purchase of which is liable to tax under this Act, in circumstances in which no tax is payable under sub-sections (1), (2), (3), (4) or (5) of Section 5 and either.(a) consumes such goods in the manufacture of other goods for sale or otherwise; or(b) uses or disposes of such goods in any manner other than by way of sale in the State;"

Court's reasoning:
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.