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      REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 7084 OF 2005

                                                    M/s Mamta Surgical Cotton  Industries, Rajasthan

  ..Appellant(s)

                    Versus

Assistant Commissioner  (Anti-Evasion), Bhilwara, Rajasthan ..Respondent(s)    

WITH CIVIL APPEAL NOS. 7085-7093 of 2005

M/s Mamta Surgical Cotton  Industries, Rajasthan

  ..Appellant(s)

                    Versus

Assistant Commissioner  (Anti-Evasion), Bhilwara, Rajasthan ..Respondent(s)    

WITH

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CIVIL APPEAL NOS. 7094-7097 OF 2005

M/s Mamta Surgical Cotton  Industries, Rajasthan

  ..Appellant(s)

                    Versus

Assistant Commissioner  (Anti-Evasion), Bhilwara, Rajasthan ..Respondent(s)    

O R D E R

1.These  appeals  are  directed  against  the  common  judgment and order passed by the High Court of  Rajasthan in S.B. Civil Sales Tax Revision No.  932  of  2002  and  connected  matters,  dated  23.01.2003. By the impugned judgment and order,  the High Court has opined that “surgical cotton”  is  a  commercially  different  commodity  from  ‘cotton’  and  accordingly  confirmed  the  order  passed  by  the  Rajasthan  Tax  Board,  Ajmer  in  Appeal Nos. 509 to 512 of 2001, dated 28.06.2002.

Facts:

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2.The appellant is a partnership firm registered as  a dealer both under the Rajasthan Sales Tax Act,  1994 (for short, "the Act”) and the Central Sales  Tax Act, 1956 (for short, “the CST Act”). The  appellant carries on the business of processing  the  cotton  and  transforming  it  into  surgical  cotton.  

3. The assessment years in question are 1992-93  to  1998-99.  The  assessee  purchases  cotton  after  paying tax at the rate of 4% and thereafter process  it into surgical cotton for sale.

4. For  the  relevant  assessment  years,  the  assessing authority had conducted a survey on the  business premises of the assessee and opined that  surgical cotton produced and sold by the assessee  is a separate commercial commodity from cotton and  thus  liable  to  be  taxed  at  4%  under  the  Act.  Accordingly, a show cause notice was issued to the

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assessee. The assessee took the stand that cotton  and surgical cotton are not distinct commodities  for the purposes of levy of tax under the Act. The  said  stand  of  the  assessee  was  rejected  by  the  Assessing  Authority  which  passed  an  order  of  assessment whereby the assessee was taxed at the  rate of 4% and the penalty and interest thereon,  dated 28.03.2000.     

5. Being  aggrieved  by  the  aforesaid  order  of  assessment, the assessee had carried the matter by  way  of  an  appeal  before  the  Deputy  Commissioner  (Appeals)  Commercial  Tax,  Ajmer.  The  said  authority, accepted the stand of the assessee that  the process adopted for making surgical cotton out  of cotton purchased does not bring into existence a  new commercial commodity and that surgical cotton  is  nothing  but  another  form  of  cotton  and  accordingly,  allowed  the  appeal  and  granted  the  relief to the assessee by order dated 10.10.2000.

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6. Aggrieved  by  the  aforesaid  order  passed  by  the  First  Appellate  Authority,  the  Revenue  had  carried the matter before the Rajasthan Tax Board,  Ajmer  (for  short,  “the  Board”).  The  Board  after  considering  the  meaning  of  the  expression  'manufacture'  as  defined  under  the  Act  and  also  placing reliance on the observations made by this  Court  in  various  decisions  has  come  to  the  conclusion that the surgical cotton manufactured by  the assessee is a new commercial commodity exigible  to tax separately at the rate of 4% under the Act  and therefore, set aside the orders passed by the  First Appellate Authority and restored the orders  passed  by  the  assessing  authority  for  the  assessment  years  in  question  by  order  dated  28.06.2002.   

7. The  assessee  being  aggrieved  by  the  said  order passed by the Board had approached the High

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Court in S.B. Civil Sales Tax Revision No. 932 of  2002. The High Court has noticed Entry 16 of the  notification F.4 (7) FD/Gr.IV/92-70 (S.O. No. 993),  dated 04.03.1992 for the assessment year 1992-93  and analysed the submissions of parties to the lis  and thereafter reached the conclusion that surgical  cotton is amenable to be taxed as an independent  entity and accordingly, rejected the tax revision  cases and confirmed the orders passed by the Tax  Board  by  the  impugned  judgment  and  order  dated  23.01.2003.    

8. It  is  the  correctness  or  otherwise  of  the  said judgment and order is the subject matter of  these appeals.

9. We have heard the learned counsel appearing  for the parties to the  lis. We have also perused  the documents on record including the judgments and  orders passed by the Courts below.

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Submissions:

10. Shri V. Giri, learned senior counsel for the  appellant  submits  that  by  the  process  of  transformation of cotton into surgical cotton no  new commercial commodity comes into existence as a  result of such process, and therefore it cannot be  considered as “manufacture” of surgical cotton from  cotton and thus would not be liable to tax at the  rate of 4% under the Act. He would place reliance  on the decision of this Court in CST v. Lal Kunwa  Stone Crusher (P) Ltd., (2000) 3 SCC 525, to bring  home the point, that, since the purpose of sales  tax is to levy tax on sale of goods of each variety  and not the sale of the raw material of which they  may have been made and therefore, where commercial  goods are merely subjected to some processing, they  may remain commercially the same goods which cannot  be taxed again in a series of sales so long as they  continue to retain their identity as goods of that

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particular variety. He would further explain the  term “manufacture” in context of the Act and draw  support from the decisions of this Court in, inter  alia, Sterling Foods v. State of Karnataka, (1986)  3 SCC 469  and CST v. Pio Food Packers,  1980 Supp  SCC 174 and submit that that the essential feature  of “manufacturing” is the utilization of original  commodity and its transformation into a different  commodity  wherein  the  original  article  stands  distinguished from the end product as an entirely  different commodity and since the aforesaid is not  the case herein, the process of transformation of  cotton  into  surgical  cotton  would  not  be  a  manufacture for the levy of tax under the Act and  therefore, the High Court has erroneously dismissed  the case of appellants confirming the levy of tax  on surgical cotton under the Act. Alternatively, he  would  submit  that  even  if  surgical  cotton  is  assumed to be a distinct commodity from cotton, the  originally  purchased  raw  cotton  has  already

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suffered taxation at the outset and therefore, a  set off has to be provided in light of the scheme  of the Act and the CST Act.  

11. Per contra, learned counsel for the Revenue  would support the judgment and order passed by the  High Court.

Relevant Provisions

12. Before we advert to test the correctness or  otherwise  of  the  aforesaid  submissions,  it  is  necessary to notice that the Entry prescribing the  rate of tax on cotton for the assessment years in  question, i.e., from 1992-1993 till 1998-1999.  The  entry  has  been  amended  vide  series  of  seven  subsequent  notifications  issued  by  the  State  Government.  The  said  Entry  for  the  aforesaid  relevant years reads as under:

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Assessment  Year

Notification Date Number

1992-93 04.03.92 F.4 (7)  FD/Gr.  IV/92- 70  (S.O.  No.  993)

16 Cotton, that is to  say,  all  kinds  of  cotton  (indigenous  or  imported),  whether  ginned  or  unginned,  baled,  pressed  or  otherwise including  Cotton waste.

1993-94 12.04.93 F.4  (56)  FD/Gr.  IV/82-2  (S.O.  No. 8) (Amend- ment  notifi- cation)

Amen- ded  only  Entry  16  with  imme- diate  effect

“after the existing  words  “Cotton  waste”….the  expression  “and  Absorbent  Cotton  wool I.P.” shall be  added.”

1994-95 07.03.94 F.4 (8)  FD/Gr.  IV/94- 46  (S.O.  No.  176)

20 Cotton, that is to  say,  all  kinds  of  cotton  (indigenous  or imported), kinds  of  Readymade  garments,  whether  ginned or unginned,  baled,  pressed  or  otherwise including  Absorbent  cotton  wool  I.P.  and  Cotton waste.

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1995-96 27.03.95 F.4  (11)  FD/Gr.  IV/95- 49  (S.O.  No.  399)

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Cotton  as  defined  in  clause  (iv)  of  Section  14  of  the  Central  Sales  Tax  Act, 1956 including  absorbent  cotton  wool I.P. & cotton  waste.

1996-97 15.03.96 F.4  (69)  FD/Gr.  IV/95- 32  (S.O.  No.  267)

28

1997-98 12.03.97 F.4 (1)  FD/Gr.  IV/97- 101  (S.O.  No.  299)

27

1998-99 09.07.98 F.4  (14)  FD/Gr.  IV/98- 16  (S.O.  No.  114)

29

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1999-2000 26.03.99 F.4 (4)  FD/Gr.  IV/99-126  (S.O. No.  423)

39

13. The  question  which  arises  for  our  consideration  and  decision  in  these  appeals  is  whether the manufacturing process is involved in  the production of surgical cotton from cotton in  terms  of  definition  mentioned  in  Section  2(27)  of the Act and whether the same commodity in the  same  entry  would  be  liable  for  taxation  twice  specially  when  the  scheme  of  Act  suggests  that  cotton  is  a  commodity  of  special  importance  and  must be taxed only once in terms of Section 15 of  the  CST  Act.  Since  the  relevant  entry  has  been  amended  vide  successive  notifications  for  each  Assessment Year, we would analyse it sequentially.  

Assessment Year 1992-93

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14. For the Assessment Year 1992-93, Entry 16 as  reproduced  above  prescribes  that  cotton  of  all  kinds whether indigenous or imported and whether  ginned  or  unginned,  baled,  pressed  or  otherwise  including cotton waste is covered by this entry.  This is a comprehensive inclusion of all kinds of  cotton for the purposes of taxing. A reading of  this entry means that the commodity cotton in all  its  forms  namely,  indigenous,  imported,  ginned,  unginned, baled, pressed, non-pressed is liable to  be taxed at the rate of 4% alongwith cotton waste.  Since neither does “surgical cotton” find mention  in the aforesaid entry as a commodity nor does it  suitably  fit  into  the  description  aforesaid,  it  becomes relevant to delve into the question whether  the commodity in question has undergone any change  in  its  characteristics  so  as  to  acquire  a  new  commercial  identity,  that  is  to  say,  whether  surgical  cotton  remain  as  cotton  after  having

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undergone transformation through various processes.  In other words whether the process of conversion of  cotton  into  surgical  cotton  be  termed  as  “manufacture of surgical cotton”.

15. It  is  therefore  relevant  to  notice  the  definition  of  'manufacture'  as  defined  in  the  dictionary clause of the Act. Section 2(27) of the  Act defines the expression 'manufacture' as under:

"27.  "Manufacture"  includes  every  processing of goods which bring into  existence  a  commercially  different  and distinct commodity but shall not  include  such  processing  as  may  be  notified by the State Government."

The definition aforesaid is an inclusive definition  and  therefore  would  encompass  all  processing  of  goods which would produce new commodity which is  commercially different and distinctly identifiable  from  the  original  goods.  The  definition  however  excludes all such mechanisms of processing of goods  which have been notified by the State Government to

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the said effect. Admittedly, no such exclusion in  respect  of  the  process  in  analysis  for  surgical  cotton has been notified by the State Government.  Therefore, the process of transformation has to be  tested on the anvil of proposition whether surgical  cotton is processed such that it is commercially  different and distinctly identifiable than cotton.  

16. The essential test for determining whether a  process is manufacture or not has been the analysis  of  the  end  product  of  such  process  in  contradistinction with the original raw material.  In  1906,  Darling,  J.  had  subtly  explained  the  quintessence  of  the  expression  “manufacture”  in  McNichol and  Anor v. Pinch, [1906]  2  KB  352 as  under:  

“…I think the essence of making or of  manufacturing  is  that  what  is  made  shall be a different thing from that  out of which it is made.”

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17. In order to understand the finer connotation  of the expression 'manufacture', it may be useful  to refer to the decision of this Court in the case  of Empire Industries Limited and Ors. v. Union of  India and Ors.,(1985) 2 SCC 314, wherein this Court  after exhaustively noticing the views of the Indian  Courts, Privy Council and this Court had stated as  under:

"'Manufacture' implies a change, but  every change is not manufacture and  yet every change of an article is the  result  of  treatment,  labour  and  manipulation. But something more is  necessary  and  there  must  be  transformation; a new and different  article  must  emerge  having  a  distinctive name, character or use. "

(CCE v. Osnar Chemical (P) Ltd., (2012) 2 SCC 282;  Jai Bhagwan Oil & Flour Mills v. Union of India,  (2009) 14 SCC 63; Crane Betel Nut Powder Works v.  Commr. of Customs & Central Excise, (2007) 4 SCC  155; CIT v. Tara Agencies, (2007) 6 SCC 429; Ujagar  Prints (II) v. Union of India, 1986 Supp SCC 652;  Saraswati  Sugar  Mills  v.  Haryana  State  Board,  (1992) 1 SCC 418; Gramophone Co. of India Ltd. v.  Collector  of  Customs, (2000)  1  SCC  549; CCE  v.  Rajasthan State Chemical Works, (1991) 4 SCC 473;  CCE v. Technoweld Industries, (2003) 11 SCC 798;

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Metlex (I) (P) Ltd. v. CCE, (2005) 1 SCC 271; Aman  Marble Industries (P) Ltd. v. CCE, (2005) 1 SCC 279;  Shyam Oil Cake Ltd. v. CCE, (2005) 1 SCC 264; South  Bihar  Sugar  Mills  Ltd.  v.  Union  of  India,  (1968) 3 SCR 21; Laminated Packings (P) Ltd. v.  CCE, (1990) 4 SCC 51; Dy. CST v. Coco Fibres, 1992  Supp  (1)  SCC  290; CST  v.  Jagannath  Cotton  Co.,  (1995) 5 SCC 527; Ashirwad Ispat Udyog v. State  Level  Committee, (1998)  8  SCC  85; State  of  Maharashtra v. Mahalaxmi Stores, (2003) 1 SCC 70;  Aspinwall & Co. Ltd. v. CIT, (2001) 7 SCC 525; J.K.  Cotton Spg. & Wvg. Mills Co. Ltd. v. STO, (1965) 1  SCR 900; CCE v. Kiran Spg. Mills, (1988) 2 SCC 348  and  Park  Leather  Industry  (P)  Ltd.  v.  State  of  U.P., (2001) 3 SCC 135)

18. The  following  observations  by  the  Constitution Bench of this Court in Union of India  v. Delhi Cloth & General Mills Co. Ltd., 1963 Supp  (1) SCR 586 where the change in the character of  raw oil after being refined fell for consideration  are also quite apposite:  

“14. … The word ‘manufacture’ used as  a  verb  is  generally  understood  to  mean  as  ‘bringing  into  existence  a  new  substance’  and  does  not  mean  merely ‘to produce some change in a  substance.’”

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19. For  determining  whether  a  process  is  “manufacture” or not, this Court in Union of India  v. J.G. Glass Industries Ltd., (1998) 2 SCC 32 has  laid down a two-pronged test.  Firstly, whether by  such process a different commercial commodity comes  into  existence  or  whether  the  identity  of  the  original commodity ceases to exist and  secondly,  whether  the  commodity  which  was  already  in  existence would serve no purpose but for the said  process. In light of the said test it was held that  printing on bottles does not amount to manufacture.  

20. A Constitution Bench of this Court in  Devi  Das Gopal Krishnan v. State of Punjab, (1967) 3 SCR  557  observed  that  if  by  a  process  a  different  identity comes into existence then it can be said  to  be  “manufacture”  and  therefore,  when  oil  is  produced  out  of  the  seeds  the  process  certainly  transforms raw material into different article for  use.

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21. In CCE v. S.R. Tissues (P) Ltd., (2005) 6 SCC  310, the issue for consideration was whether the  process of unwinding, cutting and slitting to sizes  of  jumbo  rolls  into  toilet  rolls,  napkins  and  facial tissue papers amounted to manufacture. While  holding that the said process did not amount to  manufacture this Court inter alia, held as under:  

“12. … However, the end use of the tissue  paper in the jumbo rolls and the end use  of the toilet rolls, the table napkins and  the  facial  tissues  remains  the  same,  namely, for household or sanitary use. The  predominant test in such a case is whether  the characteristics of the tissue paper in  the  jumbo  roll  enumerated  above  is  different from the characteristics of the  tissue paper in the form of table napkin,  toilet  roll  and  facial  tissue.  In  the  present case, the Tribunal was right in  holding  that  the  characteristics  of  the  tissue paper in the jumbo roll are not  different from the characteristics of the  tissue paper, after slitting and cutting,  in the table napkins, in the toilet rolls  and in the facial tissues.”

(emphasis supplied)

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22. At  this  stage  the  discussion  of  difference  between “processing” and “manufacture” holds much  relevance  to  well  appreciate  the  contention  canvassed by Shri Giri that the transformation of  cotton  into  surgical  cotton  would  be  mere  processing and not manufacture.  

23. According to Oxford English Dictionary one of  the meanings of the word “process” is “a continuous  and regular action or succession of actions taking  place  or  carried  on  in  a  definite  manner  and  leading to the accomplishment of some result”. In  Chambers  21st  Century  Dictionary,  the  term  “process”  has  been  defined  as  “1.  a  series  of  operations performed during manufacture, etc. 2. a  series  of  stages  which  a  product,  etc.  passes  through,  resulting  in  the  development  or  transformation of it.”  

24. In  East Texas Motor Freight Lines v.  Frozen

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Food Express, 351 US 49 the Supreme Court of United  States of America has held that the processing of  chicken  in  order  to  make  them  marketable  but  without changing their substantial identity did not  turn  chicken  from  agriculture  commodities  into  manufactured commodities.  

25. A three-Judge Bench of this Court in Pio Food  Packers case (supra) has dealt with the distinction  between “manufacture” and “processing”. Therein the  appeals were filed against the order of the Kerala  High Court holding that the turnover of pineapple  fruits purchased for preparing pineapple slices for  sale in sealed cans is not covered by Section 5- A(1)(a) of the Kerala General Sales Tax Act, 1963.  This Court while deciding whether such conversion  of pineapple fruit into pineapple slices for sale  in sealed cans amounted to manufacture or not has  observed as follows:  

“5.  …  Commonly,  manufacture  is  the  end  result of one [or] more processes through

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which the original commodity is made to  pass. The nature and extent of processing  may vary from one case to another, and  indeed  there  may  be  several  stages  of  processing and perhaps a different kind of  processing  at  each  stage.  With  each  process suffered, the original commodity  experiences a change. But it is only when  the change, or a series of changes, take  the  commodity  to  the  point  where  commercially it can no longer be regarded  as the original commodity but instead is  recognised as a new and distinct article  that a manufacture can be said to take  place. Where  there  is  no  essential  difference  in  identity  between  the  original  commodity  and  the  processed  article it is not possible to say that one  commodity  has  been  consumed  in  the  manufacture  of  another. Although  it  has  undergone a degree of processing, it must  be  regarded  as  still  retaining  its  original identity.”

(emphasis supplied)

This Court held that when the pineapple fruit is  processed into pineapple slices for the purpose of  being sold in sealed cans, there is no consumption  of the original pineapple fruit for the purpose of  manufacture.  Pineapple  retains  its  character  as  fruit and whether canned or fresh, it could be put

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to the same use and utilized in similar fashion.

26. In Sterling Foods case (supra) this Court has  observed that processed and frozen shrimps, prawns  and  lobsters  cannot  be  regarded  as  commercially  distinct  commodity  from  raw  shrimps,  prawns  and  lobsters.  The  aforesaid  view  has  further  been  adopted and applied by this Court in Shyam Oil Cake  Ltd.  case  (supra) wherein  the  classification  of  refined  edible  oil  after  refining  was  under  consideration and on similar lines it was held that  the process of refining of raw edible vegetable oil  did  not  amount  to  manufacture.  In  Aman  Marble  Industries case (supra), this Court has held that  the cutting of marble blocks into smaller pieces  would  not  be  a  process  of  manufacture  for  the  reason that no new and distinct commercial product  came  into  existence  as  the  end  product  still  remained the same and thus its original identity  continued.

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27. This Court in  Crane Betel Nut Powder Works  case (supra) citing the earlier decision in Brakes  India Ltd. v. Supdt. of Central Excise, (1997) 10  

SCC 717 wherein the process of drilling, trimming  and chamfering was said to amount to “manufacture”,  has reiterated that if by a process, a change is  effected  in  a  product  and  new  characteristic  is  introduced which facilitates the utility of the new  product for which it is meant, then the process is  not a simple process, but a process incidental or  ancillary  to  the  completion  of  a  manufactured  product. In Kores India Ltd. v. CCE, (2005) 1 SCC  385 the  cutting  of  duty-paid  typewriter/telex  ribbons in jumbo rolls into standard predetermined  lengths was considered by this Court and it was  held  that  such  cutting  brought  into  existence  a  commercial product having distinct name, character  and use and amounted to “manufacture” and attracted  the  liability  to  duty.  In  Standard  Fireworks

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Industries v. Collector of Central Excise, (1987) 1  

SCC 600 this Court held that cutting of steel wires  and the treatment of paper is a process for the  manufacture of goods in question.

28. In Lal Kunwa Stone Crusher case (supra), the  decision relied upon by Shri Giri, this Court has  considered that whether on crushing stone boulders  into  gitti,  stone  chips  and  dust  different  commercial  goods  emerge  so  as  to  amount  to  manufacture as per the definition of “manufacture”  under Section 2(e-1) of the U.P. Sales Tax Act,  1948 and observed that even if gitti, kankar, stone  ballast, etc. may all be looked upon as separate in  commercial  character  from  stone  boulders  offered  for  sale  in  the  market,  “stone”  as  under  the  relevant  Entry  is  wide  enough  to  include  the  various forms such as gitti, kankar, stone ballast.  It is in this light, that the Court had opined that  stone  gitti,  chips,  etc.  continue  to  be

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identifiable with the stone boulders.  

29. Having  noticed  the  relevant  Entries,  the  definition  of  'manufacture'  and  judicial  precedents, we would now notice, (a) the process  adopted  by  the  assessee  for  the  purpose  of  converting raw cotton into surgical cotton and (b)  the utility and commercial use of surgical cotton  in contrast to cotton.

Process of conversion of cotton into surgical cotton

30. The  Project  report  on  Surgical  Absorbent  Cotton, December 2010 (pg. 3 and 4) prepared by  MSME - Development Institute, Ministry of Micro,  Small  &  Medium  Enterprises,  Government  of  India  provides for the following steps in manufacture of  surgical cotton:

“  a) Opening and cleaning of Raw Cotton:   Raw cotton received in bale or otherwise  is opened in opener where it is loosened

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and simultaneously dust/foreign particles  are also removed. Loosened cotton is then  put into a keir where chemicals such as  caustic  soda,  soda  ash,  detergent,  etc.  are added along with adequate water and  steam boiled for about 3-4 hours. By this  process most of the natural waxes and oils  are removed while remaining foreign matter  get soften and disintegrated. The treated  cotton  is  transferred  to  washing  tanks  where it is washed thoroughly. b) Bleaching: Washed  cotton  is  bleached  to  remove  brownish colour developed due to chemical  treatment.  Bleaching  is  done  by  using  bleaching  agent  such  as  sodium- hypochlorite  or  hydrogen  peroxide.  The  bleaching  process  improves  whiteness,  wetting  properties  and  assists  in  disintegration  of  any  remaining  foreign  materials. c) Removal of Chemicals: The bleached cotton is thoroughly washed  again to remove the chemicals. A little  quantity  of  dilute  hydrochloric  acid  or  sulphuric acid is also added to neutralize  excess alkali. If required, again washed  with water. The water of cotton is removed  with the help of hydro-extractor. It is  then sent to a wet-cotton opening machine. d) Drying: The cotton so obtained is dried by passing  through dryer or alternatively subjected  to sun drying where provision for dryer is  not there.

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e) Lapping: The dried cotton is sent to blower room  where  it  is  thoroughly  opened  and  made  into laps.

f) Carding: The laps are then fed into carding machine  wherein cotton is warped around rollers in  thin layers. g) Rolling: Cotton  so  obtained  is  compressed  and  rolled into suitable role size along with  packaging paper. h) Weighing and cutting: The  rolls  are  then  weighed  and  cut  according to required weight and sizes and  labeled  properly  before  packing  in  polythene sheets and heat sealed.”   

31. The admitted facts are the assessee purchases  raw cotton by paying tax at the rate of 4 per cent.  After such purchase, after ginning the cotton is  put into boiler and its roughage is separated from  cotton. The clean cotton thereafter is treated with  caustic soda and acid slurry. After such treatment  with the aforesaid chemicals, the cotton is cut in  small  pieces.  These  pieces  are  transferred  to  a

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tank  where  bleaching  process  takes  place.  Such  bleached cotton is then transferred into tanks for  washing. As noticed by the High Court, the cotton  passed  from  four  stages  from  raw  cotton  upto  surgical cotton. First, it is put into tanks for  washing each step takes sufficient time. Second,  the  treated  cotton  is  transferred  to  a  process  known as hydro process where it is dried. Third,  the cotton is put in the blower for cleaning the  same. Fourth, such blowed out cotton is thereafter  transferred to kler where rolls are prepared and  then cotton is cut into pieces with the desired  level, width and size. The process does not end  here. The rolled out calibrated pieces of cotton  are then put in carding machine where thin layers  are framed and such layers are packed in bundle for  marketing. The rolled and compressed cotton is sent  for trading.  

Utility and Commercial use:

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32. The  aforesaid  view  is  further  fortified  by  the common parlance test. It can be said when a  consumer requires surgical cotton, he would not be  satisfied with cotton being provided to him and the  same  principle  would  reversibly  apply  that  a  customer of cotton would not use surgical cotton as  a substitute. Further the purposes for which cotton  and  surgical  cotton  are  used  are  diametrically  opposite.  While  surgical  cotton  finds  utility  primarily  for  medical  purposes  in  households,  dispensaries,  hospitals,  etc,  raw  cotton  being,  inter alia, non-sterlised and riddled with organic  impurities cannot be used as such at all.  

33. For  both  these  commodities  operational  territories are different and both have a different  consumer segments. For medical and pharmaceutical  purposes,  use  of  ordinary  cotton  is  not  permissible. The fixed medical standards for the  quality  of  surgical  cotton  are  definite  and

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definable  such  that  ordinary  cotton  would  not  suffice the purpose. Surgical cotton is only used  in form of medicine or pharmaceutical product, thus  it  cannot  be  said  that  use  of  commodity  is  interchangeable  and  in  that  view  of  the  matter,  surgical cotton is a different commodity. It is a  commodity which is used with a completely distinct  identity in itself. As what is used for medical  purpose  is  perfectly  sterilized  disinfected  purified cotton. If raw cotton is used for surgical  purposes, it would be counter-productive. Surgical  cotton  is  extensively  used  for  making  napkins,  sanitary pads and filters, etc. The surgical cotton  is exclusively consumed into medical field while  ordinary cotton has so many uses. The main chemical  properties  desired  in  a  surgical  dressing  are  inertness and lack of irritation in use, which is  provided  by  the  surgical  cotton  only  if  manufactured as per the standards specified. Raw  cotton is purified by a series of processes and

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rendered  hydrophilic  in  character  and  free  from  other  external  organic  impurities  for  use  in  surgical  dressings.  Surgical  cotton  is,  thus,  completely different from ordinary cotton.

34. The surgical cotton is made sterile and fit  for surgical use and it is not put to the same use  to which the unmanufactured cotton is put and vice  versa.  Therefore,  when  unmanufactured  cotton  undergoes a manufacturing process, a new product  saleable into the market which is having a distinct  identity, comes into existence which is known in  the commercial market by a different name and use.  Surgical cotton possesses higher utility than the  cotton in its un-manufactured state.  

35. It is trite to state that “manufacture” can  be said to have taken place only when there is  transformation  of  raw  materials  into  a  new  and  different  article  having  a  different  identity,

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characteristic and use. While mere improvement in  quality does not amount to manufacture, when the  change  or  a  series  of  changes  transform  the  commodity such that commercially it can no longer  be  regarded  as  the  original  commodity  but  recognised as a new and distinct article. In the  instant case, after going through the various steps  that are carried out by the assessee for getting  surgical cotton from raw cotton, we can certainly  say that cotton has undergone a change into a new  commercially  identifiable  commodity  which  has  a  different name, different character and different  use. The process of transformation is not merely  processing  to  improve  quality  or  superficial  attributes of the raw cotton. The cotton looses its  original  form  and  it  marketed  as  a  commercially  different and distinct product. This aspect of the  matter is rightly noticed by the  High Court by  relying upon the decision of this Court in Empire  Industries  case  (supra) wherein  this  Court  has

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explained  the  meaning  of  the  expression  'manufacture" as when the result of the treatment,  labour and manipulation a new commercial commodity  has emerged which has a distinctive new character  and use.

36. Having  carefully  observed  the  process  of  transformation of raw cotton into surgical cotton  and having noticed that there is distinctive name,  character  and  use  of  the  new  commodity,  i.e.,  surgical cotton, we are of the considered opinion  that surgical cotton is a separately identifiable  and distinct commercial commodity manufactured out  of raw cotton and therefore, ceases to be cotton  under Entry 16 of the said notification.

37. The  second  limb  of  Shri  Giri’s  contention  that under the scheme of the Act and the CST Act,  since  tax  has  already  been  paid  once  on  the  original  commodity,  i.e.,  raw  cotton,  the  appellants would be entitled to claim set-off for

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the manufactured surgical cotton fails to impress  us.  The  High  Court  has  noticed  that  the  said  question  was  not  raised  before  the  original  assessing  authority  and  consequently,  the  authorities  below  have  not  considered  the  said  question and such being the case, the High Court  has  declined  to  consider  the  same.  In  our  considered  opinion,  the  said  question  cannot  be  considered  by  us  for  the  first  time  in  these  appeals and thus, the conclusion of the High Court  in  this  regard  stands  affirmed.  However,  the  appellant is at liberty to raise the said question  before  the  appropriate  authorities  in  accordance  with law.

38. In  view  of  the  above,  we  cannot  take  any  exception to the impugned judgment and order passed  by the High court in so far as the Assessment Year  1992-93 is concerned.

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Assessment Years 1993-94 to 1998-99:

39. We would now proceed to examine the claim of  the assessee for the Assessment Years 1993-94 to  1999-2000.  The  Entry  for  the  relevant  years  is  reproduced in the preceding paragraph no. 12.

40. In  the  year  1993,  by  an  amendment  notification F.4 (56) FD/Gr.IV/82-2 (S.O. No. 8)  dated 12.04.1993, the legislature has consciously  included “absorbent cotton wool I.P.”  immediately  after the words “cotton waste” in Entry 16. By the  notification dated 07.03.1994, for the Assessment  Year 1994-95, the entry stands as “Cotton, that is  to  say,  all  kinds  of  cotton  (indigenous  or  imported),  kinds  of  readymade  garments,  whether  ginned  or  unginned,  baled,  pressed  or  otherwise  including  Absorbent  cotton  wool  I.P. and  Cotton  waste”. From the Assessment Year 1995-96, the State  has amended the entry such that cotton means cotton  as defined in clause (iv) of Section 14 of the

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Central Sales Tax Act, 1956 but has specifically  included absorbent cotton wool I.P. & cotton waste  in  such  entry.  The  relevant  entry  has  remained  unaltered for the succeeding assessment years 1996- 97, 1997-98 and 1998-99 numbered as Entries 28, 27  and 29, respectively.  

41. It  is  an  admitted  fact  that  the  appellant  herein manufactures surgical cotton from the cotton  purchased  by  him.  The  assessing  authority  and  forums below including the High Court have noticed  that “cotton” and “surgical cotton” are different  commercial  commodities  and  therefore,  sale  of  “surgical  cotton”  attracts  sales  tax  under  the  provisions  of  the  Act.  However,  during  the  proceedings  before  the  High  Court  it  was  not  brought  to  the  notice  of  the  Court  that  an  amendment to Entry 16 was made in the year 1993  whereby the meaning of the expression “cotton” has  been  expanded  to  include  “absorbent  cotton  wool

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I.P.” and thus, the High Court has only analysed  Entry 16 as it stands for the Assessment Year 1992- 1993.  

42. Therefore,  the  question  that  falls  for  our  consideration is whether in terms of the relevant  entries  for  aforesaid  Assessment  Years  “surgical  cotton” is liable to tax or not.  

43. It  appears  to  us  that  the  commodity  “absorbent  cotton  wool  I.P.”  as  included  in  the  relevant entries is the same as “surgical cotton”  which  the  assessee  manufactures.  The  absorbent  cotton wool I.P. is a technical name of the cotton  which is sold in the market and commonly known as  surgical cotton.

44. The  Project  Report  on  Surgical  Absorbent  Cotton  (supra) at  page  1  states  that  “absorbent  cotton” is also known as “surgical cotton or cotton  wool”  and  mainly  used  for  medicinal  purposes  in

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hospitals, nursing homes, dispensaries and at home  (for first aid) etc. The report thereafter uses the  term “surgical absorbent cotton” uniformly to refer  to the commodity in question before us.

45. The  lexicographers  have  also  expressed  the  same  medicinal  use  and  properties  of  surgical  cotton in terms of definition of absorbent cotton.  The  Collins  English  Dictionary defines  “cotton  wool/absorbent  cotton/surgical  cotton”  as  “absorbent  cotton,  purified  cotton,  bleached  and  sterilized cotton form.” The  Oxford Dictionary of  English explains the meaning of “absorbent cotton”  as cotton which is used for cleaning the skin or  bathing  wounds.  In  Encarta  dictionary  “absorbent  cotton” is defined as under:

“Cotton that has had the natural wax  removed,  making  it  absorbent  and  suitable for medical and cosmetic use  as dressings or swabs”.

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46. In fact, the Rajasthan High Court in the case  of  Durga Cotton Industries Vs. State of Rajasthan  and Ors., 1994 (1) WLC 696 had an occasion to look  into  the  meaning  of  the  expression  “absorbent  cotton  wool  I.P.”  while  considering  notification  dated 27.6.1990 which provided the rates of tax for  cotton in Item No. 16 (the same as Entry 16 for  Assessment  Year  1992-93).  The  Court  on  consideration of the relevant literature had come  to the conclusion that “absorbent cotton wool I.P.”  is commercially known as surgical cotton. In our  considered opinion, the view of the Rajasthan High  Court appears to be correct and consonant with the  common jargon by which the commodity is recognised.

47. Having noticed the commodity in question, we  would  now  analyse  the  import  of  the  expression  “including” as contained in the relevant entries.  

48. The expression “include” is used as a word of

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extension and expansion to the meaning and import  of  the  preceding  words  or  expressions.  The  following observation of Lord Watson in Dilworth v.  Commr. of Stamps, (1899) AC 99 in the context of  use of ‘include’ as a word of extension has guided  this Court in numerous cases:

‘…  But  the  word  “include”  is  susceptible of another construction,  which may become imperative, if the  context of the Act is sufficient to  show that it was not merely employed  for  the  purpose  of  adding  to  the  natural significance of the words or  expressions  defined.  It  may  be  equivalent to “mean and include”, and  in  that  case  it  may  afford  an  exhaustive explanation of the meaning  which, for the purposes of the Act,  must invariably be attached to these  words or expressions.’

49. The meaning of the said expression has been  considered by a three Judge bench of this Court in  the  case  of  the  South  Gujarat  Roofing  Tiles  Manufacturers  Association  and  anr.  v.  State  of  

Gujarat and anr., (1976) 4 SCC 601, wherein this  Court has observed:

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“Now it is true that 'includes” is  generally used as a word extension,  but the meaning of a word or phrase  is  extended  when  it  is  said  to  include  things  that  would  not  properly  fall  within  its  ordinary  connotation.”

50. Principles of Statutory Interpretation (12th  Edn., 2010) by Justice G.P. Singh, at p. 181, has  discussed in detail the connotations of the word  “include”  and  emphasized  on  the  exhaustive  explanation of the word “inclusive” thus:

“…The  word  “include”  is  very  generally  used  in  interpretation  clauses  in  order  to  enlarge  the  meaning of words or phrases occurring  in the body of the statute; and when  it is so used those words or phrases  must be construed as comprehending,  not only such things, as they signify  according  to  their  natural  import,  but  also  those  things  which  the  interpretation  clause  declares  that  they shall include.”

51. In  RBI v.  Peerless  General  Finance  &  Investment Co. Ltd.,  (1987) 1 SCC 424 this Court

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has followed the observations in the Dilworth case  (supra) and explained the purpose and expanse of  the “inclusive definitions” as under:  

“32. We do not think it necessary to  launch  into  a  discussion  of  either  Dilworth  case or  any  of  the  other  cases  cited.  All  that  is  necessary  for us to say is this: legislatures  resort to inclusive definitions (1)  to enlarge the meaning of words or  phrases  so  as  to  take  in  the  ordinary, popular and natural sense  of the words and also the sense which  the  statute  wishes  to  attribute  to  it;  (2)  to  include  meanings  about  which there might be some dispute; or  (3) to bring under one nomenclature  all  transactions  possessing  certain  similar  features  but  going  under  different  names.  Depending  on  the  context, in the process of enlarging,  the  definition  may  even  become  exhaustive.”

52. In  Karnataka  Power  Transmission  Corpn.  v.  Ashok Iron Works (P) Ltd., (2009) 3 SCC 240  this  Court after analyzing the afore-cited decisions has  observed as follows:

“17.  It  goes  without  saying  that

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interpretation  of  a  word  or  expression  must  depend  on  the  text  and the context. The resort to the  word  ‘includes’  by  the  legislature  often  shows  the  intention  of  the  legislature  that  it  wanted  to  give  extensive  and  enlarged  meaning  to  such expression. Sometimes, however,  the  context  may  suggest  that  word  ‘includes’ may have been designed to  mean  ‘means’.  The  setting,  context  and  object  of  an  enactment  may  provide  sufficient  guidance  for  interpretation of the word ‘includes’  for the purposes of such enactment.”

53. The  word  “include”  is  generally  used  to  enlarge  the  meaning  of  the  words  or  phrases  occurring in the body of the statute; and when it  is so used those words or phrases must be construed  as  comprehending,  not  only  such  things,  as  they  signify according to their natural import, but also  those  things  which  the  interpretation  clause  declares that they shall include. That is to say  that  when  the  word  “includes”  is  used  in  the  definition,  the  legislature  does  not  intend  to

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restrict the definition: it makes the definition  enumerative but not exhaustive. That is to say, the  term defined will retain its ordinary meaning but  its  scope  would  be  extended  to  bring  within  it  matters, which in its ordinary meaning may or may  not comprise.  

Commr. of Customs v. Caryaire Equipment India (P)  Ltd., (2012) 4 SCC 645; U.P. Power Corpn. Ltd. v.  NTPC  Ltd.,(2014)  1  SCC  371;  Associated  Indem  Mechanical  (P)  Ltd.  v.  W.B.  Small  Industries  Development Corpn. Ltd., (2007) 3 SCC 607; Dadaji  v. Sukhdeobabu; Mahalakshmi Oil Mills v. State of  A.P.; Bharat Coop. Bank (Mumbai) Ltd. v. Employees  Union, (2007) 4 SCC 685)

54. By  introducing  the  word  “including”  immediately  after  detailing  the  definition  of  cotton, the legislature has expanded the meaning of  the  expression  “cotton”  for  the  purposes  of  the  Act.  While  the  natural  import  suggests  and  prescribes only unmanufactured cotton in all forms,  the commodities “absorbent cotton wool I.P.” and  “cotton  waste”  manufactured  out  of  “cotton”  are

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intentionally  and  purposefully  included  in  the  relevant entries alongwith cotton in its ordinary  meaning.  

55. In  light  of  the  aforesaid,  we  are  of  the  considered opinion that “surgical cotton/absorbent  cotton wool I.P.” is also “cotton” for the purposes  of the relevant entries in the notifications for  assessment years 1993-94 to 1998-99 and therefore  is liable to exemption from levy of tax under the  Act. In light of the same, we cannot sustain the  judgment and order passed by the High Court for the  assessment years 1993-1994 to 1998-1999.   

56. In  the  result,  the  appeals  are  allowed  in  part and the judgment and order passed by the High  Court is confirmed for the assessment year 1992-93  and the judgment and order of the High Court so far

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as it relates for the assessment years 1993-94 to  1998-99 is set aside. No order as to costs.

Ordered accordingly.

                           ....................J.                [H.L. DATTU]  

                           ....................J.                  [S.A. BOBDE]  

            NEW DELHI, JANUARY 23, 2014.  

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