Holding

The purification of red oil into sandalwood oil does not constitute consumption of the raw material, as the process is reversible and the raw material is not subsumed into the final product, so Section 5A does not apply.

Summary

The appellant, Punjab Aromatics, purchased "red oil" from unregistered dealers and purified it by removing water and impurities to obtain "sandalwood oil". The Department argued that this purification constituted consumption of red oil in the manufacture of sandalwood oil, attracting purchase tax under Section 5A of the Kerala General Sales Tax Act, 1963. The appellant contended that the process was merely a reversible purification and did not subsume the raw material into a new product. The Supreme Court applied the "test of irreversibility" and held that because sandalwood oil can be reverted to red oil by adding impurities, the raw material is not subsumed and no consumption occurs. Consequently, Section 5A(1)(a) and (b) do not apply. The Court allowed the appeal, setting aside the High Court’s decision.

Issues considered

Whether the conversion of red oil into sandalwood oil by removal of impurities amounts to consumption of red oil in manufacture under s.5A(1)(a) of the Kerala General Sales Tax Act, 1963.
Whether the test of irreversibility/subsumption of raw material into the final product is satisfied in the present process.
Whether s.5A(1)(b) concerning use or disposal other than sale can be attracted.
Interpretation of the term "consumption" in tax statutes.

Legislation cited

Kerala General Sales Tax Act, 1963s. 5A(1)(a), s. 5A(1)(b)
Tamil Nadu General Sales Tax Act, 1959s. 7A(1)(a)

Subjects

purchase taxKerala General Sales Tax ActSection 5Amanufacturetest of irreversibilityconsumptionraw materialsandalwood oilred oiltax law interpretation

Judgment

[2008] 6 S.C.R. 235

M/S. PUNJAB AROMATICS A
V.
STATE OF KERALA
(Civil Appeal No. 3160 of 2008)

APRIL 30, 2008
{ B
[S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ.]

Kera/a General Sales Tax Act, 1963 - s.5A -Appellant-
assessee purchased red oil from unregistered dealers and
converted same into sandalwood oil by removing water content c
and other impurities - Whether the process of such conversion
amounted to consumption/use of red oil in manufacture of
sandalwood oil and attracted levy under s.5A - Held, No, as
"test of irreversibility" not satisfied - The final product i.e.
sandalwood oil could be brought back to the original state,
0
namely, red oil by adding impurities - Red oil was not
subsumed into sandalwood oil.
Interpretation of Statutes - Fiscal legislation - Held: In
tax matters, Courts have to keep in mind distinction between
approach and principle - Courts have to go by the principle E
involved in the fiscal legislation.
Appellant-assessee purchased red oil from
unregistered dealers and converted the same into
sandalwood oil by removing water content and other
impurities. F
According to the Department, the said process of
conversion amounted to consumption/use of red oil in
the manufacture of sandalwood oil and attracted levy
under s.5A of the Kerala General Sales Tax Act, 1963. G
Per contra, contention of the assessee is that the
process of purification is not manufacture and removal
of impurities by process of filtration did not amount to
consumption/use in the manufacture of sandalwood oil
235 H
236 SUPREME COURT REPORTS [2008) 7 S.C.R.
,.,.
A in terms s.5A of the Act. It was further contended on behalf
of the assessee that the basic structure and composition
of "red oil" remained same even after the purification
process and, therefore, the Department erred in treating
red oil and sandalwood oil as two separate and distinct
B commodities. ' ~

Allowing the appeal filed by the assessee, the Court
HELD: 1.1. When raw-material is converted into a final
product, one of the important tests to be applied to
c ascertain whether the process of conversion amounts to
manufacture is: whether the raw-material is subsumed
into the final product. In the present case, the highest fact-
finding body is Appellate Tribunal under the Kerala
General Sales Tax Act, 1963. After examining the process,
it came to the conclusion that sandalwood oil (final
D
product) can be brought back to the original state, namely,
red oil by adding impurities, therefore, the process is
reversible. Therefore, red oil is not subsumed into
sandalwood oil. Keeping in mind this basic test, it is clear
that red oil is not consumed/used in the manufacture of
E sandalwood oil. Hence, s.5A(1)(a) or (b) of the Act has no
application. [Para 8] [239-G-H; 240-A-B]
1.2. The "test of irreversibility" is an important
criterion to ascertain as to when a given process amounts
F to manufacture. In the present case that test is not
satisfied. In the circumstances, it cannot be said that red "
oil and sandalwood oil are two separate and distinct
products as held by the High Court overruling the
judgment of the Tribunal. [Para 12] [241-E-F]
G 1.3. In tax matters, Courts have to keep in mind
distinction between approach and principle. The Courts
have to go by the principle involved in the fiscal legislation.
; .
In the present case, the decision of the Tribunal was
objective. It was based on the correct formulation of the
H test of irreversibility involved in the process of
MIS. PUNJAB AROMATICS v. STATE OF KERALA 237
[KAPADIA, J.]

manufacture and, therefore, the High Court was not A
justified in observing that the finding of the Tribunal was
patently absurd and perverse. [Para 17] [242-G-H; 243-A]
Burmah-Shell Oil Storage and Distributing Co. of India
Ltd., Beglaum v. Belgaum Borough Municipality, Belgaum AIR
,.>
f B
(1963) SC 906 and State of Karnataka v. B. Raghurama Shetty
and Others (1981) 2 SCC 564 - held inapplicable.
Mis. Tungabhadra Industries Ltd. v. The Commercial Tax
Officer, Kurnool - (1961) 2 SCR 14; Shyam Oil Cake Ltd. v.
Collector of Central Excise, Jaipur (2005) 1 SCC 264 and c
The State of Tamil Nadu v. Subbaraj and Co. (1981) 47 STC
30 - referred to.
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 3160
of 2008.
D
... J, From the Judgment and Order dated 21.12.2006 of the
High Court of Kera la at Ernakulam in TRC Nos. 78, 79 of 2003,
St. Rev. Nos. 36 of 2003, -409, 411, 315 and 430 of 2004.
Soli J. Sorabjee, Garvesh Kabra, Pratesh Kapoor and
Vishwa Pal Singh for the Appellant. E
T.L.V. Iyer, R. Sathish for the Respondent.
The Judgment of the Court was delivered by
KAPADIA, J. 1. Leave granted.
;" F
2. This civil appeal filed by the assessee raises the
question relating to liability to pay "purchase tax" under Section
SA of the Kerala General Sales Tax Act, 1963 ("1963 Act", for
short).

------!
~ . 3. Appellant-assessee purchases "red oil" from. G
unregistered dealers and converts such red oil into "sandalwood
oil" by removing water content and other impurities. As regards
the processing, there is no dispute between the parties. The
case of the Department, in short, is that the assessee is not
selling red oil as such; that the commodity purchased (i.e. red H
238 SUPREME COURT REPORTS [2008) 7 S.C.R.
...
A oil) by the assessee has undergone manufacture when it is
heated to a specified degree and the same is filtered by which
impurities are removed and, therefore, according to the
Department, conversion of red oil into sandalwood oil attracts
levy under Section 5A of the 1963 Act.
8 4. For the sake of convenience we quote Section 5A of ..,
the 1963 Act which reads as follows:
"SA. Levy of purchase tax. - (1) Every dealer who, in
the course of his business, purchases from a registered
c dealer or from any other person any goods, the sale or
purchase of which is liable to tax under this Act, in
circumstances in which no tax is payable under sub-
sections (1 ), (2), (3), (4) or (5) of Section 5 and either.
(a) consumes such goods in the manufacture of other
D goods for sale or otherwise; or
(b) uses or disposes of such goods in any manner other
" •
than by way of sale in the State;"
5. A short question which arises for determination in this
E civil appeal is : whether the above process amounts to
consumption/use of red oil in the manufacture of sandalwood
as contended on behalf of respondent-Department.
6. Shri Soli J. Sorabjee, learned senior counsel appearing
on behalf of the appellant, submits that the removal of impurities
F by process of filtration does not amount to consumption/use in
"'
the manufacture of sandalwood oil in terms of Section 5A of the
.....--
1963 Act. Learned counsel submits that the assessee has paid
tax on the final product, namely, sandalwood oil sold locally (SEE:
averments made by the assessee in that connection in the
G synopsis of the civil appeal paper book). Learned counsel
submits that process of purification is not manufacture. In this
connection it is submitted that the basic structure and ''
composition of the red oil remains same even after the
purification process and, therefore, the Department has erred
H in treating red oil and sandalwood oil as two separate and
M/S. PUNJAB AROMATICS v. STATE OF KERALA 239
--,· [KAPADIA, J.)

distinct commodities. On the question whether such purification A
process amounts to manufacture or not, learned counsel places
reliance on several judgments of this Court in support of his
contention.
7. Per contra, Shri T.L.V. Iyer, learned senior counsel
.>
appearing on behalf of the Department, submits that red oil and B
sandalwood oil are two separate and distinct commodities.
Learned counsel submits that red oil containing impurities has
no value in the market. According to learned counsel, it is only
the sandalwood oil which has market value. Learned counsel
further submits that Section SA of the 1963 Act has been enacted c
by the Legislature as it wanted to bring, within the scope of
purchase tax, items purchased from unregistered dealers without
payment of tax for consumption/use. In this connection, learned
counsel places reliance on the Amending Act 3 of 1990 by which
.;, Section SA stood amended to bring within the scope of purchase D
tax items purchased from unregistered dealer without payment
of tax for "use". According to learned counsel, in the present
case red oil is a raw-material, that it has been purchased by the
assessee and it has been consumed/used in the manufacture
of sandalwood oil (final product) and, therefore, assessee is E
liable to pay purchase tax on purchase turnover of red oil under
Section 5A(1 )(a) or (b) of the 1963 Act.
8. We find merit in this civil appeal filed by the assessee.
At the outset, it may be stated that process of purification is not
in dispute. The entire process of purification has been discussed F
by the Tribunal in its judgment. The said process eliminates
impurities. In the present case we are required to consider the
words "consumes such goods (red oil) in the manufacture of
other goods for sale or otherwise (sandalwood oil}". These words
find place in Section 5A(1 )(a) of the 1963 Act. When raw- G
, I material is converted into a final product one of the important
tests to be applied to ascertain whether the process of
conversion amounts to manufacture is: whether the raw-material
is subsumed into the final product. In this case, the highest fact-
finding body is Appellate Tribunal under the 1963 Act. After H
240 SUPREME COURT REPORTS [2008] 7 S.C.R.

A examining the process, it has come to the conclusion that
sandalwood oil (final product) can be brought back to the original
State, namely, red oil by adding impurities, therefore, the
process is reversible. Therefore, red oil is not subsumed into
sandalwood oil. Keeping in mind this basic test, it is clear that
B red oil is not consumed/used in the manufacture of sandalwood
oil. Hence, Section 5A(1 )(a) or (b) of the 1963 Act has no
application.

9. In the case of Mis. Tungabhadra Industries Ltd. v. The
Commercial Tax Officer, Kurnool - 1961 (2) SCR 14, the
C question which arose for determination was : whether
hydrogenated groundnut oil continues to be groundnut oil
notwithstanding the hydrogenation process. It was held that
hydrogenation process eliminated impurities and, therefore, in
its essential nature there was no change amounting to
D manufacture. We quote hereinbelow relevant portion of the said
judgment which reads as follows:
"When raw groundnut oil is converted into refined oil, there
is no doubt processing, but this consists merely in
removing from raw groundnut oil that constituent part of
E the raw oil which is not really oil. The elements removed
in the refining process consist of free fatty acids,
phosphotides and unsaponifiable matter. After the removal
of this non-oleic matter therefore, the oil continues to be
groundnut oil and nothing more. The matter removed from
F the raw groundnut oil not being oil cannot be used, after
separation, as oil or for any purpose for which oil could be
used. In other words, the processing consists in the non-
oily content of the raw oil being separated and removed,
rendering the oily content of the oil 100 per cent. For this
G reason refined oil continues to be groundnut oil within the
meaning of Rules 5(1 )(k) and 18(2) notwithstanding that I ' .
such oil does not possess the characteristic colour, or
taste, odour etc. of the raw groundnut oil."
10. The judgment of this Court in the case of Tungabhadra
MIS. PUNJAB AROMATICS v. STATE OF KERALA 241
~·
[KAPADIA, J.)
-·
industries Ltd. (supra) has been considered once again by this A
Court in the case of Shyam Oil Cake Ltd. v. Collector of Central
Excise, Jaipur - (2005) 1 SCC 264. We quote hereinbelow
para 18 of the said judgment in the case of Shyam Oil Cake
Ltd. (supra) which reads as follows:
f
...> "18. Thus, this Court has held that prior to refining, it was B
raw groundnut oil and after refining even though the
characteristic colour, taste and odour may have changed
it remained groundnut oil. In other words, this Court held
that there was no manufacture of a new and distinct
commodity." c
\I
11. Section 5A(1 )(a) of the 1963 Act is similar to Section
7A(1)(a) of the Tamil Nadu General Sales Tax Act, 1959. That
Section 7A(1)(a) of the Tamil Nadu General Sales Tax Act, 1959
came for interpretation before the Madras High Court in the case
D
of The State of Tamil Nadu v. Subbaraj and Co. - (1981) 47
STC 30 in which it was held that the very use of the word
"consume" contemplates that the goods purchased should have
been devoured or exhausted in the process of manufacture with
the result, its identity must have been completely lost.
E
12. The "test of irreversibility" is an important criterion to
ascertain as to when a given process amounts to manufacture.
In the present case that test is not satisfied. In the present case,
the Tribunal has examined the process and has come to the
conclusion that by adding impurities to the sandalwood oil the F
product could become red oil once again. In the circumstances,
it cannot be said that red oil and sandalwood oil are two
separate and distinct products as held by the High Court
overruling the judgment of the Tribunal.
13. One more aspect needs to be mentioned. According G
~
to the impugned judgment of the High Court, even assuming for
the sake of argument that Section 5A(1 }(a} of the 1963 Act is
not applicable still in any event alternatively Section 5A(1 )(b)
stood attracted.
H
242 SUPREME COURT REPORTS [2008) 7 S.C.R.
y·

A 14. The said reasoning in the impugned judgment is
erroneous. Section SA(1)(b) is quoted hereinabove. In that
section the words used are "uses or disposes of such goods in
any manner other than by way of sale in the State". The said
words "uses or disposes of' signifies the test of irreversibility.
B However, as stated above, the Tribunal is the highest fact-finding
~
authority under the Act which has examined the process and
has held that the test of irreversibility is not applicable as
sandalwood oil can be brought back to the original state of red
oil by adding impurities. (SEE: page no.66 of the civil appeal
c paper book).
15. For the aforestated reasons, we are of the view that
,
J

there is no infirmity in the judgment of the Tribunal and that the ,...
High Court had erred in interfering with the said judgment.
16. Before concluding we quote hereinbelow the last
D
paragraph of the impugned judgment of the High Court which
reads as follows:
"We do not know on what basis the Tribunal has assumed
that in order to attract liability under Section SA manufacture
E of a product should be done with the use of chemicals.
We are constrained to observe that the finding of the
Tribunal is patently absurd and perverse. We therefore
allow the Tax Revision cases, reversing the orders of the
Tribunal, upholding levy of tax under Section SA of the Act
F on the purchase turnover of red oil by respondents-
assessees for all the years."
17. To say the least, in tax matters courts have to keep in
mind distinction between approach and principle. Courts have
to go by the principle involved in the fiscal legislation. Keeping
G in mind the distinction between these two concepts, we are of
the view that the High Court was not justified in making the
observation which is underlying hereinabove. The decision of ' '
the Tribunal is objective. It is based on the correct formulation
of the test of irreversibility involved in the process of
H manufacture and, therefore, th-e High Court was not justified
M/S. PUNJAB AROMATICS v. STATE OF KERALA 243
[KAPADIA, J.]

in observing that the finding of the Tribunal was patently absurd A
and perverse.
18. We may, however, refer to the judgment of this Court in
the case of Burmah-Shell Oil Storage and Distributing Co.
of India Ltd., Beglaum v. Belgaum Borough Municipality,
' Belgaum-AIR 1963 SC 906 on which heavy reliance is placed B
by Shri T.L.V. Iyer, learned senior counsel appearing on behalf
of the respondent-Department. In that case proceedings
commenced against the Municipality under Article 226 of the
~
Constitution to prohibit the Municipality from charging octroi from
Burmah-Shell on its products brought inside the octroi limits for c
) sale. The products were petroleum products. They were brought
inside the Municipality area for use or consumption by itself or
for sale to its dealers. The said company had paid octroi on its
products brought within the octroi limits of the Municipality
__..
including the goods not consumed by itself but sold to others. At D
this stage, it may be mentioned that by the impugned
amendment the Municipality Act stood amended to include the
word "sale" in the description of octroi. The company contended
that the tax could not be collected on goods which were merely
sold but not consumed inside the octroi limits. It was urged on E
behalf of the company that the words "consumption or use" must
be contrasted with the word "sale". In support of this contention,
the company referred to Entry 49 of List II of Government of
India Act, 1935, and also to Entry 52 of the State List in the
Constitution. It is in this context that this Court examined the F
word "consumption" vide paras 19 and 20 which are quoted
herein below:
"19. The history of these two taxes clearly shows that while
terminal taxes were a kind of octroi which were concerned
only with the entry of goods in a local area irrespective of G
.t 'I
whether they would be used there or not; octrois were
taxes on goods brought into the area for consumption,
use or sale. They were leviable in respect of goods put to
some use or other in the area but only if they were meant
for such user. When the Government of India Act, in its H
244 SUPREME COURT REPORTS (2008] 7 S.C.R.

A Scheduled Tax Rules, mentioned "octrois", it intended to
give the power to levy taxes in this well-understood sense,
namely, on the entry of goods in a local area for
consumption, use or sale. The Boroughs Act, which was
enacted in 1925 mentioned only "consumption and use."
B Ever since its enactment, no dispute seems to have been
raised by any person that goods brought in for sale were
exempt from octrois. All persons who brought the goods
apparently paid this tax without objection. It was only in
1954 when the Legislature seeking to bring the description
c of octroi in the Municipal Act in line with the Constitution
included the word "sale" also, that the dispute was raised
,,......
'
by persons who were affected, and they were some of the
persons who had paid the tax before, even though the
word "sale" was not there. Of course, the conduct of the
tax-payer is not determinative of the meaning of the words
D
"consumption or use." But it shows how the term was
always understood. The word consumption in its primary
sense means the act of consuming and in ordinary
parlance means the use of an article in a way which
destroys, wastes or uses up that article. But in some legal
E contexts, the word "consumption" has a wider meaning. It
is not necessary that by the act of consumption the
commodity must be destroyed or used up. The word
"consumption" occurs in explanation to sub-Article 1 of
Article 286 of the Constitution. In explaining the ambit of
F that word this Court observed in The State of Bombay v.
The United Motors (India) Ltd. ((1953] S.C.R. 1069, 1084),
as follows :-
"The expression "for the purpose of consumption in that
State" must, in our opinion, be understood as having
G
reference not merely to the individual importer or purchaser
~ ~
but as contemplating distribution eventually to consumers
in general within the State."
20. It is not the immediate person who brings the goods
H into a local area who must consume them himself, the act ..
M/S. PUNJAB AROMATICS v. STATE OF KERALA 245
[KAPADIA, J)

of consumption may be postponed or may be performed A
by someone else but so long as the goods have been
brought into the local area for consumption in that sense,
no matter by whom, they satisfy the requirements of the
Boroughs Act and octroi is payable. Added to the word
·{ "consumption" is the word "use" also. There may be certain B
commodities which though put to use are not 'used up' in
the process. A motor-car brought into an area for use is
not used up in the same sense as food-stuffs. The two
expressions use and consumption together therefore,
connote the bringing in of goods and animals not with a c
1 view to taking them out again but with a view to their
retention either for use without using them up or for
consumption in a manner which destroys, wastes or uses
them up. In this context, the word "consumption", as has
been shown above, must receive a larger meaning than
D
·-'
merely the act of consuming in the generally understood
sense. Recently, in Mis. Anwarkhan Mahboob Co. v. The
State of Bombay (1961) 1 SCR 709 at p.715: AIR 1961
SC 213 at p. 216, while dealing with the Explanation to
Article 286(1 ), this Court observed as follows :-
E
"In answering that question it is unnecessary and indeed
inexpedient to attempt an exhaustive definition of the word
"consumption" as used in the explanation to Art 286 of the
Constitution. The act of consumption with which people
are most familiar occurs when they eat, or drink or smoke. F
Thus, we speak of people consuming bread, or fish or
meat or vegetables, when they eat these articles or food;
we speak of people consuming tea or coffee or water or
wine, when thgy drink these articles; we speak of people
consuming cigars or cigarettes or bidis, when they smoke
·· mese. The production of wealth, as economists put it,
G
~ 1 consists in the creation of "utilities." Consumption consists
in the act of taking such advantage of the commodities
and services produced as constitutes the 'utilization'
thereof. For each commodity, there is ordinarily what is
H
246 SUPREME COURT REPORTS [2008] 7 S.C.R.

A generally considered to be the final act of consumption.
For some commodities, there may be even more than
one kind of final consumption. Thus grapes may be "finally
consumed" by eating them as fruits; they may also be
consumed by drinking the wine prepared from "grapes".
B Again, the final act of consumption may in some cases be ,
spread over a considerable period of time. Books, articles
of furniture, paintings may be mentioned as examples. It
may even happen in such cases, that after one consumer
has performed part of the final act of consumption, another
c portion of the final act of consumption may be performed
by his heir or successor-in-interest, a transferee, or even
one who has obtained possession by wrongful means.
But the fact that there is for each commodity what may be
considered ordinarily to be the final act of consumption,
should not make us forget that in reaching the stage at
D
which this final act of consumption takes place the
commodity may pass through different stages of production
and for such different stages, there would exist one or
more intermediate acts of consumption ............ In the
absence of any words to limit the connotation of the word
E "consumption" to the final act of consumption, it will be
proper to think that the constitution-makers used the word
to connote any kind of user which is ordinarily spoken of
as consumption of the particular commodity."

F 19. We are of the view that the judgment of this Court in
Burmah-Shell (supra) has no application. Firstly, in that case '
the Court was concerned with the interpretation of Entries in the
Legislative Lists. It is well-settled that Entries in the Legislative
Lists have to be read in the widest possiblo sense. The Entries
G in the Legislative Lists demarcates an area/fieltl within which
the competent Legislature is entitled to enact laws. We are not
concerned with interpretation of Entries in the Legislative Lists, T ..

therefore, the said judgment has no application to the facts of
the present case. Secondly, as can be seen from para 20, this
Court has itself clarified that the word "consumption" in the ,
H
M/S. PUNJAB AROMATICS v. STATE OF KERALA 247
[KAPADIA, J.]

Explanation to Article 286 of the Constitution as it stood before A
the Constitution (Sixth Amendment) Act. 1956 has to be read in
a manner different from the act of consumption in the generally
understood sense. For both the aforestated reasons, the
judgment of this Court in Burmah-Shell (supra) has no
application to the present case. B
20. Shri T.L.V. Iyer, learned counsel, also places heavy
reliance on the judgment of this Court in the case of State of
Kamataka v. B. Raghurama Sheffy and Others- (1981) 2 SCC
564. He places reliance on paragraphs 8 and 9 which are quoted
herein below: c
"8. There is no merit in the submission made on behalf of
the assessees that they had not consumed paddy when
they produced rice from it by merely carrying out the process
of dehusking at their mills. Consumption in the true
D
economic sense does not mean only use of goods in the
production of consumers' goods or final utilisation of
consumers' goods by consumers involving activities like
eating of food, drinking of beverages, wearing of clothes
or using of an automobile by its owner for domestic
purposes manufacturer also consumes commodities which E
are ordinarily called raw materials when he produces semi-
finished goods which have to undergo further processes
of production before they can be transformed into
consumers' goods. At every such intermediate stage of
~ production, some utility or value is added to goods which F
are used as raw materials and at every such stage the
raw materials are consumed. Take the case of bread. It
passes through the first stage of production when wheat
is grown by the farmer, the second stage of production
when wheat is converted into flour by the miller and the G
, 1 third stage of production when flour is utilised by the baker
to manufacture bread out of it. The miller and the baker
have consumed wheat and flour respectively in the course
of their business. We have to understand the word
'consumes' in Section 6(i) of the Act in this economic H
248 SUPREME COURT REPORTS [2008] 7 S.C.R.
,...,.
A sense. It may be interesting to note that this is the basis
of the levy of 'Value Added Tax', popularly called as VAT,
which is levied as an alternative to tax on turnover in some
Western countries. The difference between 'Value Added
Tax', and tax on the turnover of sales or purchases is
B explained by Professor Paul A Samuelson in his book
entitled 'Economics' (Tenth Edition, 1976) at page 168
thus:

A turnover tax simply taxes every transaction made : wheat,
flour, dough, bread, VAT is different because it does not
c include in the tax on the miller's flour that part of its value
which came from the wheat he bought from the farmer.
Instead, it taxes him only on the wage and salary, cost of
milling, and on the interest, rent, royalty, and profit cost of
this milling stage of production. (That is, the raw material
D costs used from earlier stages are subtracted from the
miller's selling price in calculating his "value added" and
the VAT tax on value added .... )
9. At every stage of production, it is obvious there is
consumption of goods even though at the end of it there
E may not be fina I consumption of goods but only production
of goods with higher utility which may be used in further
productive processes."
21. In our view the said judgment has no application as in
F that case this Court came to the conclusion that paddy and rice
are two different commodities. It was further held on facts that '
the assessee had consumed paddy in the manufacture of rice.
It is in this context that after coming to the conclusion that paddy
and rice are two different commodities that this Court has
examined the word "consumption" in the economic sense. In
G
the present case, as stated hereinabove, by adding of impurities
sandalwood oil becomes red oil. Therefore, there was no r '·
consumption of red oil in the manufacture of sandalwood oil.
Further, it may be noted that the Explanation to Article 286(1 )(a)
of the Constitution, as it stood prior to the Constitution (Sixth
H
M/S. PUNJAB AROMATICS v. STATE OF KERALA 249
[KAPADIA, J.]

Amendment) Act, 1956, used the word "consumption" in the A
Explanation to the said Article. However, after the Constitution
(Sixth Amendment) Act, 1956 w.e.f. 11.9.1956 the said
Explanation to Article 286(1 )(a) of the Constitution is omitted.
For the aforestated reasons, the judgment of this Court in the
case of B. Raghurama Shetty (supra) has no application. B
22. Accordingly, the civil appeal filed by the assessee
stands allowed and the impugned judgment of the High Court
dated 21.12.06 is set aside with no order as to costs.
B.B.B. Appeal allowed. c

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