Holding

A circular cannot substitute for the factual determination required to establish tax liability; therefore, the appellants are not manufacturers for the purpose of levy under the Uttar Pradesh Trade Tax Act.

Summary

The appellants, commission agents dealing in timber harvested by farmers, challenged assessments that treated them as "manufacturers" under the Uttar Pradesh Trade Tax Act, 1948 after an amendment to Section 2(ee). The State relied on a circular issued by the Commissioner of Trade Tax, which interpreted purchases from unregistered traders as falling within the definition of manufacturer. The High Court held the appellants were manufacturers and upheld the circular. The Supreme Court reversed, holding that the circular cannot create tax liability and that the definition of "manufacturer" requires a factual determination of sale after manufacture, which the circular did not provide. Consequently, the assessments based solely on the circular were set aside and the assessing officer was directed to reconsider the case without treating the appellants as manufacturers. The appeals were disposed of in favour of the appellants.

Issues considered

Whether the Commissioner’s circular can, by itself, deem commission agents as manufacturers under Section 2(ee) of the Uttar Pradesh Trade Tax Act, 1948.
Whether the appellants fall within the statutory definition of "manufacturer" after the amendment to Section 2(ee).
Whether assessments based solely on the circular are valid under the Act.
Interpretation of Section 3-AAAA regarding tax liability when goods are liable to tax.

Legislation cited

Central Sales Tax Act, 1956
Uttar Pradesh Trade Tax Act, 1948s. 2(ee), s. 3-AAAA

Subjects

Trade taxManufacturer definitionCircularTax liabilityUttar Pradesh Trade Tax ActAssessmentCommission agentStatutory interpretation

Judgment

MIS. JHUNJHUNWALA AND ORS. A
\I.

STATE OF U.P. AND ORS.

SEPTEMBER 22, 2006

[ARIJIT PASA VAT AND S.H. KAPADIA, JJ.] B

Tax/Taxation:

Uttar Pradesh Trade Tax Act, 1948-Sections 2(ee) and 3AAAA-
liability to pay tax as "manufacturer"-Circu/ar issued by Commissioner of C
Trade Tax covering the commission agent under expression 'manufacturer"
when definition of "manufacturer" under the Act not saying so-Effect of
circitlar~Held: Circular cannot be a substitute for factual determination of
tax liability-Assessment under challenge set aside since it was wrongly
done solely on the basis of view expressed in the Circular.
D
Appellants are dealers registered with the concerned trade tax authority
under the Uttar Pradesh Trade Tax Act, 1948. As commission agents, they
, were selling timber grown by agriculturists and were therefore exempt from
tax. But on account of an amendment in S.2(ee) of the Act w.e.f. 1-12-1988,
the Trade tax authorities proposed to levy tax on Appellants. Commissioner E
also issued circular stating that purchasers from farmers who have grown,
cut or sown timber, ballies and bamboos would be covered by expression
'manufacturer'. Though the Appellants submitted that there was no question
of any liability to pay "trade tax" as they could not have been treated as
manufacturers of timber even after the aforesaid amendment and the circular,
the High Court held that the definition of Section 2(ee) was wide enough to F
cover the Appellant and that Section 3AAAA empowered the authorities to
levy and collect tax. Hence the present appeal

Disposing of the appeals, the Court

HELD: LI. The High Court appears to have completely lost sight of
challenge before it and went on to decide issues which are really not relevant. G
1554-q
1.2; According to the High Court, the object of enacting amendment to
Section 2(ee) was to prevent evasion of tax. Even if the aforesaid object is in
549 H
550 SUPREME COURT REPORTS [20061 SUPP. 6 S.C.R.

A any way relevant for the purpose of the present dispute, the object appears to
be to levy tax on manufacturer-dealer. It was, therefore, necessary to be
established that the seller was a manufacturer-dealer. Commissioner's
circular could not have created a liability by drawing inference that the
purchasers from farmers who have grown, cut or sown timbers, ballis,
B bamboos will bring them within the umbrella of expression 'manufacturer'.
The view that tax liability has been prescribed at the manufacturers and
importers points and therefore after the amendment traders who purchase
the timber from unregistered dealers fall within the category of manufacturer
is indefensible. There is no logic for such a conclusion, where the statutory
definition does not say so. It needs no emphasis that the circular cannot create
C tax liability. That is precisely what has been done which the High Court has
failed to notice. Therefore, to that extent the circular cannot be of any
assistance for levying tax. The crucial words in the definitiun of
"Manufacturer" are the sale of goods "after their manufacture". The
expression "manufacture" cannot cover types of transactions referred to in
the commissioner's circular. Whether an activity amounts to manufacture
D has to be factually determined. There cannot be a direction to treat a part1~ular
type of transaction to be a manufacturing activity without examining the factual
scenario. There cannot be a generalization in such matters.
ISS4-E-H; SSS-A-Bf
2. The argument of the State that purchases from a person who is not
E a registered dealer i3 also liable to tax in terms of Section 3-AAAA of the
U.P. Trade Tax Act and that the circular is in order is not acceptable for the
simple reason that in Section 3-AAAA the sine qua non for liability is that
the goods must be liable to tax under the Act. That aspect has to be factually
determined. The Commissioner's circular is not and cannot be a substitute
F for such determination. The assessments in these cases appear to have been
done solely on the basis of the view expressed in the circular. ISSS-C, DI

3. The assessments/appellate orders under challenge are therefore set
aside and the assessing officer is directed to consider the case of the
appellants without treating them to be manufacturers for the purpose oflevy
G of tax, solely on the basis of the Circular. [SSS-El
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3019 of 2004.

From the Judgment and Order dated 6.1.2004 of the High Court of
Judicature at Allahabad in C.M.W.P. No. 730/2003.

WITH
H
JHUNJHUNWALAv. STATEOFU.P. [PASAYAT, J.] 551

C.A. Nos. 202 of2005, 3020 of2004, 3021 of2004, C.A. Nos. 4232 and A
4233/20006.

Dhruv Agarwal, Praveen Kumar and Prashant Kumar for the Appellants.

Dr. R.G. Padia, S.W.A. Qadri, Rajeev Dubey and Kamlendra Mishra for
the Respondents. B
The Judgment of the Court was delivered by

ARIJIT PASA YAT, J. Leave granted in SLP (C) Nos. 5645 of2005 and
5646 of2005.

These appeals involve identical questions and, therefore, are taken up
c
for disposal together. In each of the appeals challenge is to legality of the
judgment rendered by a Division Bench of the Allahabad High Court holding
that the appellant/each of the appellants, as the case may be, was liable to
pay tax as "manufacturer" under Section 2( ee) of the Uttar Pradesh Trade Tax
Act, 1948 (in short the 'Act'). It was also held that the circular dated 13.12.2000 D
issued by the Commissioner of Trade Tax, was valid in law.

Background facts in a nutshell as projected in these appeals are as
follows-

Writ petitioners who are the appellants are dealers registered with the E
concerned trade tax Authority under the Act and the Central Sales Tax Act,
1956 (in short the 'Central Act'). The appellants claim to be doing business
as commission agents to effect the commission business of horticulture
produces of agriculturists. Earlier there was no levy of tax on their transactions
under the Act. They, as commission agents, were selling timber grown by the F
agriculturists and were therefore exempt from tax. On account of the amendment
of Section 2( ee) of the Act with effect from 1.12.1988 the Trade tax authorities
proposed to levy tax purportedly on the basis of the amendment even though
writ petitioners were selling timber grown by the agriculturists on their own
land. It was submitted that there was no question of any liability to pay "trade
tax" as they could not have been treated as manufacturers of timber even after G
the aforesaid amendment as we.II as the circular. The High Court proceeded
on the basis that the definition of Section 2( ee) was wide enough to cover
the case of the appellant. In any event it was held that Section 3-AAAA
empowered the authorities to levy and collect tax. The circular of the
Commissioner of Trade Tax was also held to be legal.
H

/
552 SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.

A In support of the appeals, learned counsel for the appellants submitted
that the High Court proceeded on entirely erroneous premises. There could
be no question of any levy of tax unless the seller is a manufacture-dealer.
The High Court proceeded on the basis as if their case is covered under
Section 2(ee)(ii) of the Act. That provision applies to transactions between
two registered dealers. No liability could have been created by a circular of
B the Commissioner. The definition of"Manufacturer" in terms of Section 2(ee)
does not encompass the case of the appellants.

In response, learned counsel for the State of Uttar Pradesh submitted
that a combined reading of Section 2(ee) and Section 3-AAAA makes the
C position clear that validity of the circular has been rightly upheld by the High
Court.

In order to appreciate the rival submissions, the provisions of the Act
and the circular issued by the Commissioner need to be noted. Section 2( e-
l) defines "Manufacture" and Section 2(ee) defines "Manufacturer" while
O Section 3-AAAA deals with transaction regarding certain services. They read
as follows:-

"2(e-I) 'Manufacture" means producing, making, mining, collecting,
extracting, altering, ornamenting, finishing, or otherwise processing,
treating or adapting any goods; but does not include such manufactures
E or manufacturing processes as may be prescribed;

2(ee) 'Manufacturer' in relation to any goods means the dealer who
makes the first sale of such goods in the State after their manufacture
and includes:

F (i) a dealer who sells bicycles in completely knocked down form;

(ii) a dealer who makes purchases from any other dealer not liable to
tax on his sale under the Act other than sales exempted under Sections
4,4-A and 4-AAA."

(Underlined for emphasis)
G
Sec/ion 3-AAAA. Liabilily lo lax on purchase of goods in cerlain
circums/ances - Subject to the provision of Section 3, every dealer
who purchases any goods liable to tax under this Act.

(a) from any registered dealer in circumstances in which no tax is
H
JHUNJHUNWALA v. STATE OF U.P. [PASA YAT, J.) 553
payable by such registered dealer, shall be liable to pay tax on the A
purchase price of such goods at the same rate at which, but for such
circumstances, tax would have been payable on the sale of such
goods:

(b) from any person other than a registered dealer whether or not tax
is payable by such person, shall be liable to pay tax on the purchase B
price of such goods at the same rate at which tax is payable on the
sale of such goods:

Provided that no tax shall be leviable on the purchase price of
such goods in the circumstances mentioned in clauses (a) and (b), if

(i) such goods purchased from a registered dealer have already
c
been subjected to tax or may be subjected to tax under this Act;
(ii) tax has already been paid in respect of such goods purchased
from any person other than a registered dealer;
(iii) the purchasing dealer resells such goods within the State or in D
the course of inter-State trade or commerce or exports out of the
territory of India in the same form and condition in which he had
purchased them;
(iv) such goods are liable to be exempted under Section 4-A of this
Act. ~

Explanation: For the purpose of this section and of Section 3-AAA,
the sale of- .

(i) ginned cotton after ginning raw cotton purchased as aforesaid;
or
F
(ii) dressed hides and skins or tanned leather, after dressing or
tanning raw hides and skins purchased as aforesaid; or
(iii) rice during the period commencing on September 2, 1976 and
ending with April 30, 1977 after hulling paddy purchased as
aforesaid; G
shall be deemed to be in same form and condition."

The Commissioner's circular dated 13.12.2000 which was impugned before
the High Court reads as follows:
H
554 SUPREME COURT REPORTS [20061 SUPP. 6 S.C.R.

A " .... with regard to the above the tax payability has been prescribed at
the manufacturers and importers points. after promulgation of Section-
2( ee) of the Trade Tax Act such traders purchases or sells from
unregistered traders. falls within the category of manufacturers. Thus
all the produce purchased from the farmers. timbers. ballis. bamboos,
which are being grown, cut or sawing. but their produce does not
B include burning woods have been purchases and sold to other traders
falls within the category of manufacturer under Section 2( ee) of Uttar
Pradesh Tax Act. Keeping in view this provision after 1.12.1998 the
payability of tax is made out on the registered dealer who purchase
the above produce from the unregistered traders.''
c The High Court appears to have completely lost sight of challenge
before it and went on to decide issues which are really not relevant. It took
note of paragraph 3(c)(iii) of the Counter Affidavit filed by the respondent
before the High Court which reads as follows:

D "Many of the big dealers, sells after showing the purchase from
such alleged manufacturer dealer who are not liable to pay tax under
the act and do not pay tax because the manufacturer-dealer liable to
pay tax, only if, its sales exceeds Rs. I lakh in any assessment year.
To prevent the evasion of tax and in the interest of revenue, these
dealers have been brought by bringing in amending Section 2(ee) so
E as to include such within the definition of manufacturer."

According to the High Court, the object of enacting amendment to
Section 2( ee) was to prevent evasion of tax. Even if the aforesaid object is
in any way relevant for the purpose of the present dispute, the object appears
to be to levy tax on manufacturer-dealer and/or manufacturer-dealer who did
F not pay tax as his turnover did not exceed Rs. I lakh in any assessment year.

It was, therefore, necessary to be established that the seller was a
manufacturer-dealer. Commissioner's circular could not have created a liability
by drawing inference that the purchases from farmers who have been grown,
G cut or sawn timbers, ballis, bamboos will brings them within the umbrella of
expression 'manufacturer'. The view that tax liability has been prescribed at
the manufacturers and importers points and therefore after the amendment
traders who purchase the timber from unregistered dealers fall within the
category of manufacturer is indefensible. There is no logic for such a
conclusion, where the statutory definition does not say so. It needs no
-
H emphasis that the circular cannot create tax liability. That is precisely what has
.JHUN.IHUNWALAv. STATEOFU.P.(l'ASAYAT. J.] 555
been done which the High Court has failed to notice. Therefore, to that extent A
the circular cannot be of any assistance for levying tax. The crucial words in
the definition of"Manufacturer" is the sale of goods "after their manufacture".
As noted above, the expression '·manufacture" cannot cover types of
transactions referred to in the commissioner's circular Whether an activity
amounts to manufacture has to be factually determined. There cannot be a B
direction to treat a particular type of transaction to be a manufacturing
activity without examining the factual scenario. There cannot be a generalization
in such matters.

Learned counsel for the State submitted that even purchases from a
person who is not a registered dealer is also liable to tax in terms of Section C
3-AAAA of the tax and the circular is, therefore, in order. The argument is
not acceptable for the simple reason that in Section 3-AAAA the sine qua
non for liability is that the goods must be liable to tax under the Act. That
aspect has to be factually determined. The Commissioner's circular is not and
cannot be a substitute for such determination. The assessments in these
cases appear to have been done solely on the basis of the view expressed D
in the circular.

We, therefore, set aside the assessments/appellate orders under challenge
and direct the assessing officer to consider the case of the appellants without
treating them to be manufacturers for the purpose of levy of tax, solely on
the basis of the Circular. E
The appeals are accordingly disposed of. No costs.

8.8.B. Appeals disposed of.