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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOs. 1983-2039 OF 2016 [Arising out of SLP(C) NOs. 9733-9789 OF 2014]

The Additional Commissioner of  Commercial Taxes, Bangalore     ...Appellant(s)

                               Versus

Ayili Stone Industries Etc. Etc.     ...Respondent(s)

J U D G M E N T

Dipak Misra, J.

These  appeals,  by  special  leave,  assail  the  common

judgment and order passed by the High Court of Karnataka

in  STA  No.  574-575/2011  and  other  connected  matters

preferred under Section 24(1) of  the Karnataka Sales Tax

Act,  1957 (for  brevity,  “the  Act”),  on  4th December,  2012

whereby  it  has  overturned  the  order  dated  25.02.2011

passed  by  the  Additional  Commissioner  of  Commercial

Taxes, Zone-I, Bangalore in a batch of  suo motu revisions

under  Section  12-A(1)  of  the  Act  whereby  the  revisional

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authority  has  opined  that  there  had  been  an  erroneous

order in the appeal causing loss to the State exchequer and

accordingly  issued  notices  to  the  concerned  assesses

requiring them to participate in the revision petitions and

file written objections and put forth their stand availing the

opportunity of being heard.  As the factual score in all the

cases  has  the  colour  of  similitude  barring  the  numerical

figures and the arithmetical computations, we shall advert

to the facts in the appeal where “Ayili Stone Industries” is

the respondent-assessee.  

2. The respondent-assessee is a dealer under the Act as

well as the Central Sales Tax Act, 1956 (for short, ‘CST Act’)

and  is  engaged  in  the  business  of  manufacturing  and

trading in granite stone.  The assessing authority finalised

the  assessment  for  certain  assessment  years  allowing

exemption  on  polished  granite  stone  on  the  basis  that

polished granite stones were produced from out of the tax

suffered  from  rough  granite  blocks.  Thereafter,  the

assessing  authority  reopened  the  assessment.   While

passing  the  order  of  reassessment,  the  Assessing  Officer

opined  certain  amount  had  been  allowed  exemption  as

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second sale mentioning in the order of assessment that the

granite  stones sold within the State  were polished out  of

unpolished granite blocks locally purchased on demand of

sales tax.  The said authority referred to Entry No. 17(1) of

Part S of second schedule appended to the Act which relates

to granite stones, namely, (a) polished, (b) unpolished and

(c)  chips.   The  Assessing  Authority  observed  that  the

polished and unpolished granite stones are under separate

entries  in  the  said  schedule  and  such  being  the  case,

treating  of  sale  of  polished  granite  sold  within  the  State

which are obtained out of unpolished granite stones as sales

inasmuch as  they  are  suffered  sales  tax  was not  correct

and,  therefore,  the  exemption  had  been  granted

erroneously.   Being  aggrieved by  the  aforesaid  order,  the

assessee preferred an appeal before the appellate authority.

After  referring  to  the  decision  in  M/s.  Vishwakarma

Granites  v.  Commissioner  of  Commercial  Taxes1,  it

opined that the orders passed under Section 12A of the Act

deserves  to  be  set  aside  and  accordingly  allowed  the

appeals.   

1  W.P. No. 13803/05 decided on 21st June, 2006 by Karnataka H.C.

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3. The  revisional  authority  referred  to  the  decision  in

Vishwakarma Granites (supra)  wherein  the  High  Court

had considered the judgments rendered in  Poonam Stone

Processing  Industries  v.  Deputy  Commissioner  of

Commercial Taxes, Gulbarga2, Foredge Granite Pvt. Ltd.

v.  State  of  Karnataka3,  State  of  Karnataka  v.  Goa

Granites4, Chowgale and Company Pvt. Ltd. v. Union of

India5 and came to hold as follows:-

“8. In view of the clear dictum laid down by the Division  Bench  of  this  Court  in  the  case  of Foredge Granite Pvt. Ltd., this Court deems fit to hold that the activity of cutting and polishing of rough  granite  block  will  not  amount  to manufacturing  activity  and  that  the  polished granite stones could be imposed Sales Tax for the second  time  prior  to  1-4-2002  i.e.,  prior  to amendment to Section 6B of KST Act.  Thus, the circular  in  so  far  as  it  relates to  clause-3(a)  is concerned, as extracted above is just and proper. However,  the impugned Circular in so far  as it relates  clause-3(b)  is  concerned,  is  not  proper inasmuch as the same is opposed to the dictum laid down by the Division Bench of this Court in the  case  of  M/s.  Foredge  Granite’s  case  cited supra.

9. The Commissioner has referred to Part-S entry No. 17 of II schedule to the Karnataka Sales Tax at 1957 to hold that the polished and unpolished granite stones are separate commodities.  But he

2  STC Vol. 94 page 182 3  STRP No. 58/1991 decided on 12.12.1994 4  2006 (60) Kar.L.J. 110 5  AIR 1981 SC 1014

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has  failed  to  appreciate  the  fact  that  merely because entry No.17, para-5 to II Schedule refers to  polished  and  unpolished  granites  under  two separate  heads,  it  cannot  be  said  that  the polished  and  unpolished  granites  are  two separate commodities,  as has been held by the Division Bench of this Court in the case of M/s. Foredge Granite Pvt. Ltd. As the granite block is already taxed at the time of its first sale and the subsequent  sale  of  cut  and  polished  granite stones  derived  from  the  original  granite  block cannot  be  treated  as  the  first  sale  and  that therefore, tax could not be levied on the polished granite stones u/s. 5-A and 5-B of the Act prior to amendment of Section 6B of KST Act.

10. It is not disputed that the assessment orders in  these  matters  are  prior  to  01.04.2002,  on which date,  Section 6-B of  the Act  is  amended and the provision relating to levy of re-sale tax is submitted. Thus, the provision of Section 6-B of the Act as introduced by Act No.5 of 2002 with effect  from 01.04.2002 is  not  applicable  to  the matters on hand, inasmuch as, the transactions involved in the cases on hand are much prior to the said amendment.”

4. After noting the said decision, the revisional authority

opined, the question as to whether there is manufacturing

activity involved in obtaining granite tiles out of raw granite

or rough granite stone is not a relevant issue in the case at

hand.  Thereafter, he concluded thus:-

“The issue is whether granite tile obtained out of raw granite stone results in separate and distinct commercial  product  from  raw  granite  stones which is liable to tax as first dealer.   As rough

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granite and granite tiles are separate and distinct as well as different commercial products, granite tiles  obtained  out  of  rough granite   stones  are liable to tax as first dealer.”   

5. The  said  authority  produced  a  passage  from  the

judgment in Goa Granites (supra) which we shall refer to at

a later stage. It has also reproduced passages from Foredge

Granite  (supra)  and  formed  an  opinion  which  is  to  the

following effect:-

“The aforesaid discussions clearly establish that the  appeal  order  is  erroneous  causing  loss  of revenue to the state exchequer.  It is also clear that granite tiles cannot be classified under entry 17(1)  of  para S of  second schedule  to KST Act 1957  as  observed  by  the  learned  re-assessing authority.  This entry covers granite stones in the form  of  polished  granite  stones,  unpolished granite stones and granite chips (Entry 17(i), (ii) and (iii)/part S/second schedule and it does not covers granite tiles all.  There is separate entry in case of tiles located at entry 8 in part T of second schedule  to  KST Act  1957.   At  entry  8(iv),  the granite tiles are covered.  After classifying certain tiles under which granite tiles do not appear as per  entry  8(i),(ii)  &  (iii)  of  part  T  of  second schedule  to  KST  Act  1957,  all  other  tiles  are classified as under.  

“(iv) Other tiles not covered by items  1-4-88 to 31-3-96 Fifteen percent (i), (ii) and (iii) above 1-4-96 to 31-3-98 Twelve percent 1-4-98 to 31-3-01 Ten percent 1-4-01 to 31-03-02 Twelve percent 1-4-02 to 31-5-03 Fifteen percent

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From 1-6-2003 (Sixteen percent)

The granite tiles are covered under the aforesaid entry in entry 8(iv) of part T of second schedule to KST Act 1957. Thus, the rough granite stone and granite tiles obtained out of rough granite stone or  block  are  distinct  and  separate  commercial products and are also separately classified in the respective entries explained above”.

6. The  High  Court  in  appeal  posed  the  question  that

arose for consideration in the following terms:-

“Whether  the  rough  granite  purchased  by  a dealer and the sale, the same after cutting and polishing  into  granite  tiles,  whether  such  a process amount to manufacture and that the said product  constitute  a  different  commodity  to attract Sales Tax U/s.5 of the Sales Tax Act?”

7. As the impugned order would show,  the High Court

after passing the question referred to the authority in Aman

Marble Industries Pvt. Ltd. v. CCE, Jaipur6, reproduced

paragraph 4 of the said judgment and thereafter referred to

a passage from  Foredge Granite  (supra) and opined that

cutting  the  granite  blocks  into  small  sizes  and  polishing

them does not amount to manufacturing process to attract

sales tax under Section 5 of  the Act.   However,  the High

Court observed whether the transactions attract tax under

Section  6B  can  be  looked  into  and  considered  by  the 6  (2005) 1 SCC 279

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Assessing Officer after giving opportunity to the parties, and

consequently allowed the appeals.  

8. We have  heard Mr.  Basava Prabhu S.  Patil,  learned

senior  counsel  for  the  appellants  and  Mr.  Bhargava  V.

Desai, learned counsel for the respondents.   

9. The factual matrix as noticeable is that the assessing

authority  has  allowed  the  exemption  on  sale  of  polished

granite stones on the foundation that the same is produced

from out of  granite  slabs that  had suffered tax as rough

granite  blocks.   After  the  assessment,  the  concerned

authority  referred  to  Entry  17(i)  of  Part  S  of  the  Second

Schedule, which is as follows:-

“Entry No.17(i) of Part “S” of the second Schedule, appended to the K.S.T. Act, 1957, which relates to granite stones reads as under

Sl. No. 17(i) 17(i) Granite stones (a) Polished (b) Unpolished (c) Chips”

10. After  reference  to  the  said  Entry,  the  assessing

authority expressed the view that polished and unpolished

granite stones have separate entries in the said schedule

and, therefore, treating of said sale of polished granite stone

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within the State which is obtained out of unpolished granite

stone as sales suffered would not be correct.  The appellate

authority, as noted earlier, has founded its opinion on the

principle  stated  in  Vishwakarma  Granites (supra).   In

Vishwakarma Granites (supra), the challenge was to  the

circular  No.  19/03-04  (KSA.CR.128/2000-01)  dated

11.11.2003  issued  by  the  Commissioner  of  Commercial

Taxes  in  Karnataka  Bangalore  (hereinafter  referred  to

‘Commissioner’  for  short)  and  consequent  assessment

orders  and  the  orders  levying  penalty  were  called  in

question.  The said circular was under Section 3-A(2) of the

Act  in pursuance of certain observations made in Poonam

Stone  Processing  Industries (supra)  which  reads  as

follows:-

“Cuddaph,  Shahabad and marble  are  stones of special value in the market and the marketable quality of these stones is enhanced by polishing and cutting.  But the substance of the material is not altered.  The article is made more presentable and attractive for the benefit of the users and it cannot  be  said  that  the  activity  is  a manufacturing activity.”

11. Thereafter,  the  Division  Bench  referred  to  various

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aspects of the circular.  It was contended before the High

Court  that  the  activity  of  the  assessee  in  cutting  and

polishing of granite stone will not come within the meaning

of manufacturing activity and the circular had been issued

on an erroneous notion.  The High Court in Vishwakarma

Granites (supra)  has  noted  that  in  Poonam  Stone

Processing Industries (supra) the issue as to whether the

act  of  cutting  and polishing  of  granite  stone  amounts  to

manufacturing activity was not considered as the Division

Bench had held that the said question was unnecessary to

be decided in the writ appeal.  It is worthy to note what has

been  stated  in  Poonam  Stone  Processing  Industries

(supra):-

“3.  On the question whether the petitioner was engaged in a manufacturing activity or not, the Tribunal has considered the same in great detail in para 13 of its order.  The Tribunal has taken into  consideration  the  nature  of  the  business carried on.  It is stated therein that the petitioner purchases rough granite blocks and with the help of the machines run by electrical  energy in his unit,  cut  the  granite  into  required  sizes  and thickness  and  polishes  the  same  to  the requirement of the customers and sells the same. In support of his case, the learned counsel for the petitioner pointed out the objections filed by him before the Revisional Authority and also produced a brochure before us indicating the nature of the

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activities carried on by him.  Neither a perusal of the objections filed by the petitioner nor the very attractive  brochure  produced  before  us  would convince  us  to  come  to  a  different  conclusion from  the  finding  given  by  the  Tribunal.   The Tribunal has looked into the material and correct perspective.  The stones are larger granite blocks purchased by the petitioner, even when cut to the sizes  to  the  requirement  of  the  customers including as regards its thickness or polishing it continues to be granite block.  May be a smaller or  thinner  size,  but  it  would  continue  to  be  a granite block however polished it may be.  Even though it may be used as a building material, the granite block does not cease to be a granite block. Therefore, no manufacturing activity is involved. The finding recorded in this regard is perfectly in order.

5. Merely cutting a rough block of granite into different  sizes  to  the  requirement  of  the customers would not involve any manufacturing activity.   In that view of  the matter,  we do not think the view taken by the Tribunal is wrong in any  manner.   In  the  view  we  have  taken non-production of the valuation certificate in this case does not assumes any significance”.

[underlining is ours]

12. The  High  Court  in  Vishwakarma  Granites (supra)

had referred to the authority in  Goa Granites (supra).  In

Goa Granites’ case the Division Bench of the High Court

posed  the  following  two  questions  which  required

determination by the High Court:-

“I. Whether the Tribunal was right in holding that

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the polished tiles obtained out of  rough granite blocks are to be reckoned as the same goods or commercially  new  commodities  for  allowing exemption  under  Section  5(3)  of  the  CST  Act, 1956? II.  Whether  the  ratio  of  the  decision  of  this Hon’ble Court in the case of Foredge Granite v. State of Karnataka in STRP.No.58/1991 rendered with  reference  to  Entry  17  of  Part  ‘S’  of  the Second Schedule to Karnataka Sales Tax Act, as it stood prior to 1.4.1991 was applicable to the facts of the case of the assesses?”

13. While discussing, the Court took note of the fact that

what is sold or supplied by the dealer-assessee, registered

both under the Act and CST Act, is rough granite block to

an 100% export-oriented unit and it is also not in dispute

that what is exported by the export-oriented unit is polished

and thin slices of tiles made out of big rough granite blocks

supplied by the assessee.  The Division Bench referred to

Sterling  Foods  v.  State  of  Karnataka7 wherein  it  has

been held thus:-

“The test which has to be applied for the purpose of  determining,  whether a commodity  subjected to  processing  retains  its  original  character  and identity  is  as  to  whether  the  processed commodity is regarded in the trade by those who deal in it as distinct in identity from the original commodity or it is regarded, commercially and in the trade the same as the original commodity.  It is  necessary  to  point  out  that  it  is  not  every

7  [1986] 63 STC 239

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processing  that  brings  about  change  in  the character  and  identity  of  a  commodity.   The nature and extent of  processing may vary from one  case  to  another  and  indeed  there  may  be several stages of processing and perhaps different kinds  of  processing  at  each  stage,  with  each process  suffered,  the  original  commodity experiences  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  recognized  as  a  new  and  distinct commodity  that  it  can  be  said  that  a  new commodity,  distinct from the original  has come into being.  The test is,  whether in the eyes of those dealing in the commodity or in commercial parlance the processed commodity is regarded as distinct  in  character  and  identity  from  the original commodity.”

14. While proceeding with the analysis, the Division Bench

posed a question which we think it apt to reproduce:-

“In  other  words,  whether  the  rough  granite blocks,  which  were  sold  were  the  very  goods, which were exported? To be further precise, the controversy in this revision petition is about the identity of  the goods purchased and identity  of the goods sold.”

15. Thereafter, the Court has referred to Delhi Cloth and

General Mills Ltd., vs. State of Rajasthan8, wherein the

Court  has  stated,  that  “it  was fairly  well  settled that  the

words or  expressions must  be  construed in  the  sense  in

which they are understood in the trade, by the dealer and 8 (1980) 46 STC 256

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consumer.  It is they who are concerned with it and it is the

sense  in  which  they  understand  it  that  constitutes  the

definitive index of the legislative intention when the statute

was enacted”.  Thereafter, the Division Bench observed:-

“The question for consideration is,  whether this polished  tiles  obtained  out  of  rough  granite blocks would amount to export of “those goods”, which had been sold by the assessee? It  is the specific  case  of  the  assessee  before  all  the authorities  under  the  Act  that  what  is  sold  in only rough granite blocks to an industrial unit, which is an 100% export oriented unit.  It is also its  case  that  the  export  unit  by  using  heavy machinery, cut these rough granite blocks in to thin  pieces  and  thereafter,  they  have  been polished and exported not as granite blocks but as  polished  tiles.   Under  these  circumstances, they are of the view that they are entitled to get exemption from payment  of  tax  under  the  Act, since the commodity supplied and the commodity exported are  one  and the  same,  except  for  the diminishing size.  In aid of their assertion, they had placed reliance on the observations made by this  Court  in  the  case  of  M/s  Foredge  Granite Pvt. Ltd. vs. The State of Karnataka and Another (STRP.No.58/1991).   At  the  outset,  we  should notice in this case, firstly, that sub-section (3) of Sec. 5 of the CST Act did not fall for consideration of this Court.  The issue that was raised in the said decision was, mere cutting a rough block of granite into different sizes to the requirement of the  customer  would  involve  any  manufacturing activity?  The  facts  which  were  noticed  by  the Court in that case was, that the petitioner had purchased  rough  granite  blocks  and  with  the help of the machines run by electrical energy in its unit, cuts the granites into required sizes and

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thickness  and  polishes  the  same  to  the requirement of the customers and sells the same.

The  case  of  the  assessee  before  the assessing authority was that the business activity of the petitioner is a manufacturing activity and therefore, would be entitled to the benefit of the notification dated 15/16.10.1981, which provided for exemption from payment of tax under the KST Act, 1956, in respect of goods manufactured and sold  by  new  industrial  unit.   The  assessing authority had allowed the claim of the dealer and had granted exemption from payment of sale tax, treating the business activity of the petitioner as a manufacturing activity and therefore, entitled to certain  incentives  and  concession  flowing  from the  notification.   This  order  of  the  assessing authority was revised by the revisional authority by invoking the provisions of Section 21(2) of KST Act and the order so passed was confirmed by the Karnataka  Appellate  Tribunal,  by  rejecting  the appeal filed by the assessee. It is the correctness or otherwise of this order was called in question by  the  assessee  before  this  Court  in  Revision Petition 58/1991.”

And again:-

“On these set of facts, this Court has stated that the stones are large granite blocks purchased by the petitioner and even when cut into the sizes to the  requirement  of  the  customers  including  as regards its thickness or polishing, it continues to be a granite block.  May be a smaller or thinner size,  but  it  would  continue  to  be  granite  block however polished it may be.  Even though it may be used as a building material, the granite block does  not  cease  to  be  a  granite  block  and therefore, no manufacturing activity is involved. The conclusion the Court has reached is,  mere cutting  a  rough  block  of  granite  into  different

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sizes to the requirement of the customers would not involve any manufacturing activity.”

16. The Division Bench distinguished the finding recorded

in  Foredge  Granite  (supra)  as  the  question  that  arose

before it pertained to whether the export of polished granite

tiles obtained out of rough granite blocks would amount to

export of “those goods” which had been sold and supplied.

The Court again referred to the principles stated in Sterling

Foods (supra),  applied  the  said  test  and  proceeded  to

opine:-

“If  this  test  is  applied,  neither  in  common parlance nor in commercial parlance, sliced, thin, polished tiles  cannot  be regarded as the  rough granite blocks.  When rough granite blocks are subjected  to  process  of  cutting,  slicing  into required size and polished and exported as tiles, the  rough  granite  blocks  ceased  to  be  granite blocks  and  become  a  distinct  and  different commercial  commodity  from  the  original commodity.   In  the  trade  circle,  they  are  not considered as one and the same commodity.  If the  purchaser  goes  to  the  market  to  buy  the polished  tiles,  he  will  not  be  given  the  rough granite  blocks.   Converse  of  this  is  also  an indication that they do not retain their identity as rough granite  blocks  when they  are  cut/sliced, polished as tiles and therefore, for the purpose of Section 5(3) of the CST Act, it cannot be said that the  goods  sold  or  supplied  were  those  goods, which  were  exported.   The  granite  stones  are extracted from the quarry and they are cut into small and large blocks.  If they are cut or sawn to

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very specific dimension and sold either as smaller blocks  or  cut  sizes  of  granite  blocks  to  the exporter and if that exporter exports those small cut  sizes  of  granite  blocks,  it  can definitely  be said, that what is sold and what is exported are one and the same commodity. But in the present case,  the  facts  noticed  by  the  fact  finding authorities is that, the exporter before exporting the  cut  sizes  of  granite  blocks,  cuts  them into slices to the actual size of tiles, polishes or effects honing process, which is similar to polishing and the end result is a tile that has a stain or patina finish or polish finish.  If it was a case of mere cutting  or  sawing  to  a  specific  dimension  and beveled edges are polished, it could be a case of export of the same goods and therefore, eligible for tax exemption under Sec. 5(3) of the Act.  In our view, the ‘tiles’ are not simply cut or sawn of a  granite  blocks.   They  undergo  further processing of cutting into thin slices, and process of polishing and emerge as ‘tiles’ and ready to be sold as ‘tiles’  and in commercial  parlance, they are  treated  as  different  commodity  altogether. Even if we have to adopt a value added test, then also,  in  our  view,  there  is  substantial transformation  of  the  original  commodity  into different commercial commodity.  Therefore, what is sold and what is exported is not “those goods” or  the  “same  goods”,  which  is  eligible  for exemption  under  Sec.  5(3)  of  the  Act.   While considering  the  issues  involved  in  this  revision petition,  we  are  not  considering  whether  any manufacturing  activity  is  involved  while  rough granite blocks are cut/sliced into thin pieces as tiles and polished or honed.”

17. Eventually, the Division Bench held:-

“Chemical composition of them may continue to remain as stones when they were supplied and cut into thin sizes, polished and sold as tiles, but

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in common parlance or in commercial parlance or in trade circles or in value added percentage test, in our view, they are not understood as one and the  same  commodity.   The  rough  granites  are processed to an extent that they no more remain as  granites  but  as  tiles  ready  to  be  used  in building construction and other activities. By this process,  there  is  value  addition  to  the  goods. There would be price variation between the rough granite block and cut and polished tiles.  Even in the  trade  circles,  when  a  customer  asks  for polished tiles of required size, the dealer shall not supply him with rough granites.  The converse of this transaction is also an indicative factor how the  trade  circles  understands  the  difference between  rough  granite  blocks  and  polished granite  tiles.   Therefore,  in  our  view,  for  the purpose  of  Sec.  5(3)  of  the  CST  Act,  1956,  it cannot be said that what is supplied or sold are those goods which are exported.  Accordingly, the assesses is not eligible to claim exemption from payment of tax under the Act, on the ground that the sale of  granite blocks to an 100% exported unit is a sale in the course of export or deemed sale to be in the course of export.”

18. The  decision  in  Foredge  Granite  (supra)  was

distinguished by observing that:-

“We further add that the Apex Court in the case of Sterling Foods v. The State of Karnataka(1986) 63 STC 239 has observed that “the character or identity of the commodity has to be determined not  on  the  basis  of  a  distinction  made  by  the State Legislature for the purpose of exigibility to state  sales  tax,  because  even  where  the commodity is the same in the eyes of the persons dealing in it,  the State Legislature may make a classification  determining  liability  to  sales  tax. This question for the purpose of the Central Sales

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Tax Act,  has  to  be  determined on the  basis  of what  is  commonly  known  or  recognized  in commercial parlance”. Therefore, in our view, for deciding the issue raised in this revision petition, reference  to  Entry  17  of  Part  ‘S’  of  Second Schedule to the KST Act is wholly irrelevant.”

19. In  Vishwakarma  Granites (supra)  the  High  Court

distinguished the Division Bench decision by opining that it

was not specifically dealing with the issue of manufacture

and further it was adverting to the exigibility of tax under

Section 5(3) of the CST Act.  The Court distinguished the

two  concepts,  namely,  the  “manufacture”  and  the

recognised test of “common parlance”.  

20. Now,  we may look at  what has been held in  Aman

Marble (supra).  The two-Judge Bench was dealing with the

issue whether the cutting of marble blocks into marble slabs

amounts  to  manufacture  for  the  purpose  of  the  Central

Excise  Act.   In  that  context,  the  Court  referred  to  the

authority  in  Rajasthan  SEB  v.  Associated  Stone

Industries9 and reproduced a passage from the same which

is as follows:-

“This apart, excavation of stones from a mine and thereafter cutting them and polishing them into slabs did not amount to manufacture of  goods.

9  (2000) 6 SCC 141

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The  word  ‘manufacture’  generally  and  in  the ordinary parlance in the absence of its definition in the Act should be understood to mean bringing to existence a new and different article having a distinctive  name,  character  or  use  after undergoing some transformation.  When no new product as such comes into existence, there is no process  of  manufacture.  Cutting  and  polishing stones into slabs is not a process of manufacture for the obvious and simple reason that no new and  distinct  commercial  product  came  into existence as the end product still remained stone and thus its original identity continued.”

and  this  position  was  further  reiterated  as follows: (SCC pp. 147-48, para 16)

“It  is  also  not  possible  to  accept  that excavation of  stones and thereafter  cutting and polishing  them  into  slabs  resulted  in  any manufacture of goods.”

21. At this juncture, it becomes imperative on our part to

analyse  what  has  been  stated  in  Associated  Stone

Industries (supra).  In the said case, the issue that arose

for consideration was whether pumping out water from a

mine  comes  within  the  meaning  of  manufacture,

production,  processing  or  repair  of  goods  as  to  claim

exemption  from  duty  under  notification  issued  under

Section 3 of  Rajasthan Electricity  (Duty)  Act,  1962.   The

Court referred to the authorities in Union of India v. Delhi

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Cloth and General  Mills  Co.  Ltd.10,  CCE v.  Rajasthan

State Chemical  Works11,  wherein  it  has  been  held  that

pumping  of  brine  and  lifting  of  raw  material  constituted

processes in or in relation to the manufacture.  In the said

case, the Court adverted to the facts in  Rajasthan State

Chemical Works (supra) and ultimately concluded thus:-

“In conclusion, it is said that if any operation in the course of  manufacture is  so integrally  con- nected with the further operations which result in the emergence of manufactured goods and such operation is carried on with the aid of power, the process in or in relation to the manufacture must be deemed to be one carried on with the aid of power. Pumping out water, excavation of stones and cutting and polishing them into slabs cannot be said to be integrally connected in the manu- facturing of goods”.

22. At  this  stage,  we  think  it  appropriate  to  refer  to

comparatively a recent pronouncement in ITO, Udaipur v.

Arihant Tiles & Marbles Pvt. Ltd.12  In the said case, the

assessee  was  engaged  in  the  business  of

manufacture/production of polished slabs and tiles which

the assessee exported (partly).  The question that arose for

consideration  is  whether  conversion  of  marble  blocks  by

10  AIR 1963 SC 791 11  (1991) 4 SCC 473 12  (2010) 2 SCC 699

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sawing  into  slabs  and  tiles  and  polishing  amounts  to

“manufacture  or  production  of  article  or  thing”  so  as  to

make the respondent assessee(s) entitled to the benefit  of

Section 80-IA of the Income Tax Act, 1961, as it stood at the

material  time.   Thus,  manufacture  or  production  was

required  to  be  understood  within  Section  80-IA  of  the

Income  Tax  Act,  1961.   The  Court  analysed  the  various

steps  that  is  undertaken  to  reproduce  the  details  of

step-wise activity undertaken by the assessee.  The Court

reproduced the same:-

“(i)  Marble  blocks  excavated/extracted  by  the mine owners being in raw uneven shapes have to be properly sorted out and marked;

(ii)  Such  blocks  are  then  processed  on  single blade/wire  saw  machines  using  advanced technology to square them by separating waster material;

(iii)  Squared  up  blocks  are  sawed  for  making slabs  by  using  the  gang  saw  machine  or single/multi-block cutter machine;

(iv) The sawn slabs are further reinforced by way of filling cracks by epoxy resins and fibre netting;

(v) The slabs are polished on polishing machine; the  slabs  are  further  edge  cut  into  required dimensions/tiles  as  per  market  requirement  in prefect  angles  by  edge  cutting  machine  and

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multi-disc cutter machines;

(vi) Polished slabs and tiles are buffed by shiner.”

23. Thereafter,  the  three-Judge  Bench  analysed  the

distinction/difference between production and manufacture.

We  need  not  advert  to  the  same.   The  Court,  however,

referred to the authority in  Associated Stone Industries

(supra).  Analysing the same, the Court observed:-

“12. The  basic  controversy  which  arose  for determination in Rajasthan SEB case was whether the activity  of  pumping  out  water  from the  mines  came within  the  meaning  of  the  words  “manufacture”, “production”,  “processing  or  repair  of  goods”.  While disposing of the matter, this Court, vide paras 1 and 10, stated that the specific case of the company was that the electrical energy was consumed for pumping out water from mines to make mines ready for mining activity. This aspect is very important. It needs to be highlighted  that  the  case  of  the  company  was  that pumping  out  water  from  mines  to  make  the  mines ready for mining activity came within the ambit of the term  “manufacture”.  This  argument  was  rejected  by this Court, after examining various judgments of this Court on the connotation of the word “manufacture”.”

24. After  so  analysing,  the  Court  observed  the  said

decision had no application to the facts of the case, for only

activity which came up for consideration in Rajasthan SEB

case was the activity of pumping out water from a mine in

order to make the mine functional.  The Court opined that

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the controversy it was dealing with, the said activity was not

required  to  be  considered.   Thereafter,  the  three-Judge

Bench  adverted  to  the  principle  stated  in  Aman Marble

(supra).  The Court distinguished the same by holding that

the word “production” was not under consideration before

the Court in the said case and thereafter noted that in the

said case it had been held that cutting of marble blocks into

slabs  did  not  amount  to  manufacture.   Explaining  the

dictum in the said case, the Court observed:-

“In our view, the judgment of this Court in Aman Marble Industries (P) Ltd.  also has no application to the facts of the present case. One of the most important reasons for saying so is that in all such cases,  particularly  under  the  excise  law,  the Court has to go by the facts of each case. In each case one has to examine the nature of the activity undertaken  by  an  assessee.  Mere  extraction  of stones  may  not  constitute  manufacture. Similarly,  after  extraction,  if  marble  blocks  are cut  into  slabs  per  se  will  not  amount  to  the activity of manufacture.”

25. Thereafter,  the  Court  proceeded  to  deal  with  the

process  undertaken  by  the  assessee  and  in  that  context

stated:-

“In the present case, we are not concerned only

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with cutting of marble blocks into slabs. In the present  case  we  are  also  concerned  with  the activity  of  polishing  and ultimate  conversion of blocks into polished slabs and tiles. What we find from the  process  indicated  hereinabove  is  that there  are  various  stages  through  which  the blocks  have  to  go  through  before  they  become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand,  there  is  certainly  an  activity  which  will come  in  the  category  of  “manufacture”  or “production” under Section 80-IA of the Income Tax Act.”

26. The  Court  referred  to  the  decision  in  CIT  v.  N.C.

Budharaja & Co.13 and ruled thus:-

“25. Applying the above tests laid down by this Court  in  Budharaja  case to  the  facts  of  the present  cases,  we  are  of  the  view  that  blocks converted  into  polished  slabs  and  tiles  after undergoing the process indicated above certainly results  in  emergence  of  a  new  and  distinct commodity.  The original  block does  not  remain the marble block, it becomes a slab or tile. In the circumstances, not only is there manufacture but also  an  activity  which  is  something  beyond manufacture  and  which  brings  a  new  product into existence and therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken  by  the  respondent  assessees  did constitute manufacture or production in terms of Section 80-IA of the Income Tax Act, 1961.

26. Before concluding, we would like to make one observation. If the contention of the Department is  to  be  accepted,  namely,  that  the  activity

13  1994 Supp (1) SCC 280

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undertaken  by  the  respondents  herein  is  not manufacture, then, it would have serious revenue consequences.  As  stated  above,  each  of  the respondents is  paying excise duty,  some of  the respondents  are  job-workers  and  the  activity undertaken  by  them  has  been  recognised  by various government authorities as manufacture. To  say  that  the  activity  will  not  amount  to manufacture or production under Section 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would  plead  that  they  were  not  liable  to  pay excise duty,  sales  tax,  etc.  because the activity did not constitute manufacture.”

27. We  have  reproduced  in  extenso  from  the  aforesaid

authority,  though  the  exposition  of  law  arose  under  a

different enactment.  The three-Judge Bench has explained

the principle stated in Rajasthan SEB’s case as well as in

Aman Marble (supra).   In the  case  at  hand,  though the

High  Court  in  the  impugned  order  posed  the  question

correctly and placed reliance on Aman Marble (supra), yet

it  has  not  correctly  applied  the  principle  in  the  correct

perspective.  In  Aman Marble  (supra) the Court has held

that it was not possible to accept that excavation of stones

and  thereafter  cutting  and  polishing  them  into  slabs

resulted  in  a  manufacture  of  goods.   The  decision  in

Foredge Granite (supra) had been restricted to the concept

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of polished granite block.  The revisional authority, as we

perceive,  has  applied  the  test  of  separate  and  distinct

commercial product that comes into existence from granite

stones  and  for  the  said  purpose,  it  has  relied  on  the

pronouncement  in  Goa  Granites (supra).   We  have

copiously referred to Goa Granites (supra).  It has drawn a

distinction between the slabs and tiles.  Entry 17(i) of Part S

of the Act deals with polished granites, unpolished granites

and chips.  The tiles come under Entry 8 in part T of the

second schedule  to the Act.   At  Entry 8(iv),  the tiles  are

covered.  It is noticeable that in Entry 8, certain tiles have

been classified under Entry 8(i) (ii) and (iii) of Part T.  Under

Entry 8(iv) further tiles are classified.  It is as under:-

“(iv) Other tiles not covered by items  1-4-88 to 31-3-96 Fifteen percent (i), (ii) and (iii) above 1-4-96 to 31-3-98 Twelve percent 1-4-98 to 31-3-01 Ten percent 1-4-01 to 31-03-02 Twelve percent 1-4-02 to 31-5-03 Fifteen percent From 1-6-2003 (Sixteen percent)”

28. There is a distinction between polished granite stone or

slabs  and  tiles.  If  a  polished  granite  stone  is  used  in  a

building for any purpose, it will come under Entry 17(i) of

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Part S of the second schedule, but if it is a tile, which comes

into  existence  by  different  process,  a  new  and  distinct

commodity  emerges  and  it  has  a  different  commercial

identity in the market.  The process involved is extremely

relevant. That aspect has not been gone into.  The Assessing

Officer while framing the assessment order has referred to

Entry 17(i) of Part S but without any elaboration on Entry 8.

Entry 8 carves out tiles as a different commodity.  It uses

the words “other titles”. A granite tile would come within the

said Entry if involvement of certain activities is established.

To elaborate, if a polished granite which is a slab and used

on the floor,  it  cannot be called a tile for the purpose of

coming within the ambit and sweep of Entry 8.  Some other

process has to be undertaken. If tiles are manufactured or

produced  after  undertaking  some  other  activities,  the

position would be different.  A finding has to be arrived at

by  carrying  out  due  enquiry  and  for  that  purpose

appropriate exercise has to be undertaken.  In the absence

of that, a final conclusion cannot be reached.

29. In view of the aforesaid, we allow the appeals, set aside

the orders passed by the High Court and all the authorities

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and  remit  the  matter  to  the  Assessing  Officer  to

re-adjudicate the matter  keeping in view the observations

made hereinabove.  There shall be no order as to costs.  

.............................J.                                                               [Dipak Misra]

............................ J.  [Shiva Kirti Singh]

New Delhi; October 18, 2016