Holding

Octroi is payable only when goods are brought into municipal limits for consumption, use or sale, which requires conversion into a different commercial commodity; cutting cloth into smaller pieces does not satisfy this condition.

Summary

Mafatlal Industries Ltd, a textile manufacturer, brought cloth rolls of 100 metres into the municipal limits of Nadiad and cut them into smaller pieces before sending them out of the town. The issue was whether octroi duty under Section 99 of the Gujarat Municipal Act, 1963 was payable on those cloth pieces. The Gujarat High Court held that the cutting constituted use and consumption, making octroi payable. The Supreme Court reversed, holding that octroi is levied only when goods are brought into the limits for consumption, use or sale, which requires conversion into a different commercial commodity; mere cutting does not create a new commodity. Consequently, the Court allowed the appeal and held that no octroi duty is payable.

Issues considered

Whether mere physical entry of goods into octroi limits attracts octroi duty.
Whether cutting cloth into smaller pieces constitutes "use" or "consumption" within the meaning of Section 99 of the Gujarat Municipal Act, 1963.
Interpretation of the definition of octroi under the Gujarat Municipal Act and its relation to the constitutional entry on taxes on entry of goods.

Legislation cited

Constitution of Indias. Seventh Schedule, State List Entry 52

Subjects

OctroiMunicipal taxConsumptionUseGujarat Municipal ActConstitutional lawTaxationProcessing of goods

Judgment

J ~
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A MAFATLAL INDUSTRIES LTD.
v.
NADIAD NAGAR PALIKA AND ANR.

MARCH 1, 2000

B [S.P. BHARUCHA, S.N. PHUKAN AND RUMA PAL, JJ.]

Municipalities :

Gujarat Municipal Act, 1963: Sections 16(2) and 99-0cfroi Duty-
Conditions for levy of
c
Constitution ofIndia, 1950: Seventh Schedule-State List-Entry 52-
Taxes bn entry of goods.

Octroi duty-Levy of-Company-Bringing cloth pieces of 100 meters
length within octroi limits-Cloth pieces cut into smaller pieces of different
D sizes and sent out-side octroi limits-Held no octroi duty was leviahle on cloth
pieces brought by appellant-company-Mere entry of goods into municipal
limits does not entail levy of octroi-Goods must be brought in for use or
consumption or sale-Cutting of cloth pieces into smaller pieces did not result
in use. or consumption within the octroi limits.
E
The appellant-company brought cloth pieces of 100 meters length
within the octroi limits of Nadiad town. These cloth pieces were cut into
smaller pieces of different sizes and thereafter sent outside the octroi limits
of the town. The question in this appeal is whether on these pieces of 100
meters length octroi duty was Ieviable under section 99 of the Gujarat
F Municipal Act, 1963? The Gujarat High Court has answered in the af-
firmative. It held that (i) when the cloth pieces were cut to smaller pieces,
some utility was added to cloth because cutting was done to meet the
requirements of excise rules and demands of consumers; (ii) in the process
of cutting the cloth pieces were used as well as consumed. Against the
G decision of High Court, the appellant-company preferred appeal before
this Court.

Allowing the appeal, this Court

HELD : 1. The High Court erred in its conclusion. Mere physical
H entry of goods into the octroi limits would not attract the levy of octroi
52
MAFA1LAL INDUSTRIES LTD. v. NADIAD NAGAR PALIKA [PHUKAN, J.] 53
unless goods are brought in for use or consumption or sale. Use and A
consumption would involve conversion of the commodity into a different
commercial commodity by subjecting it to some processing. [56-D-E]

2. It this appeal, cloth pieces of 100 meters length were brought
within the octroi limits and those cloth pieces were cut into smaller pieces
of different sizes. By doing so, no different commercial commodity is B
shown to have been produced, so it cannot be said that there was use or
consumption of the cloth within the octroi limits. Therefore, no octroi is
leviable on the cloth pieces of 100 meters length brought by the appellant
within the octroi limits ofNadiad town. [56-E-F]

Mis. Anwarkhan Mahboob Co. v. The State of Bombay & Ors., [1961] 1
c
SCR 709; State of Travancore-Cochin v. Shanmugha Vilas Cashew Nut Fac-
tory, [1954] SCR 53; Khatiawar Industries ltd. v. Jaffrabad Municipality,
[1979] 4 sec 56, referred to.

HMM Limited and Anr: v. Administrator, Bangalore City Corporation D
and Anr:, [1989] 4 SCC 640, explained..

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 143 of 1992.

From the Judgment and Order dated 12.4.91 of the Gujarat High Court
in S.C.A. No. 833 of 1985.
E
B.K. Mehta, R.P. Bhat, M.L. Verma, K.G. Shah, Arun N. Mehta, Mrs.
Ketty, M.N. Shroff, Ms. Priya Hingorani, Ms. Hemantika Wahi, Mrs. Tanuja
Sheel, Ms. Anu Sawhney and Chirag M. Shroff for the appearing parties.-

The Judgment of the Court was delivered by
F
PHUKAN, J. This appeal by special leave is against the judgment of
the Gujarat High Court holding that the appellant is liable to pay octroi duty
under Section 99 of Gujarat Municipal Act, 1963 (for short the Act.).

The appellant, a textile manufacturing company, brought cloth pieces G
of 100 meters length within the octroi limits of Nadiad town. To meet the
requirement of relevant excise mles and also demands in the market, cloth
pieces were cut into smaller piece~of different sizes and thereafter sent
outside the octroi limits of the said town.

On the above facts, the High Court held that in the process of cutting, H
54 SUPREME COURT REPORTS [2000] 2 S.C.R.
A the cloth pieces are used as well as consumed, therefore,the cloth pieces·
brought into the octroi limits for this purpose, would attract octroi duty.

The Act is relatable to entry 52 of List - II (State List) of the 7th
Schedule to the Constitution and the said entry runs as follows :

B "taxes on the entry of goods into a local area for consumption, use
or sale therein"

Clause (16) of Section 2 of the Act defines octroi and it is stated as
follows:

c "'Octroi' means a ~ on the entry of goods into the limits of a
municipal borough for consumption, use or sale therein;"

Clause (iv) of sub-section (1) of Section 99 of the Act is quoted below:

"99. Taxes which niay be imposed. - (1) Subject to any general or
D special orders which the State Government may make in this behalf
and to the provisions of sections 101 and 102, a municipality may
impose for the purposes of this Act any of the following taxes,
namely:-

(i) ·····················'···'····
E
(ii) ............................ .

(iii) ····························
(iv) an octroi on animals or goods or both, brought within the octroi
F limits for consumption, use or sale therein;"

In view of the above legal provisions, octroi duty can be levied when
goods are brought into the octroi area for consumption, use or sale - mere
physical entry of the goods into the octroi area would not attract the levy of
octroi.
G
The only question that falls for consideration in this appeal is whether
cloth pieces of 100 meters length brought into octroi area and cutting into
smaller pieces within that area and then exported would be liable to levy of
octroi.

H In Mis. Anwarkhan Mahboob Co. v. The State of Bombay & Ors.,
MAFATI..AL INDUSTRIES LID. v. NADIAD NAGAR PALIKA [PHUKAN, J.] 55
(1961) 1 SCR 709, this Court considered the term consumption with reference .A
to explanation to sub-clause (a) of clause (1) to Article 286 of the Constitu-
tion, which was omitted by the Constitution (6th Amendment Act), 1956. The
said explanation is extracted below :-

,\Explanation. For the purposes of sub-clause (a), a sale or purchase
shall be deemed to have taken place in the State in which the goods B
have actually been delivered as a direct result of such sale or purchase
f~r the purpose of consumption in that State, notwithstanding the fact
that under the general law relating to sale of goods the property in
the goods has by reason of such sale or purchase passed in another
State." C
The facts of that case were that tobacco was purchased and in the State
of Bombay the stem and dust from tobacco were removed. It was contended
that removing of stem and dust from tobacco did not amount to consumption
of tobacco. This Court held that when tobacco was delivered in the State of
Bombay for the purpose of changing it into commercially different articles, D
namely bidi patti, the delivery was for the purpose of consumption, as
conversion of a commodity into a different commercial commodity by
subjecting it to some processing is consumption within the meaning of
explanation of Article 286. This Court gave the example of the process
through which cotton is put before ultimately the final product of wearing . E
apparel is consumed. The Court observed :-

"But before cotton has become a wearing apparel, it passes, through
the hands of different producers, each of whom adds some utility to ·
the commodity received by him. There is fjrst the act of ginning;
ginned cotton is spun into yam by the spinnef; the spun yarn is woven F
into cloth by the weaver; the woven cloth is made into wearing
apparel by the tailor."

At each of these stages distinct utilities are produced and what
is produced is at the next stage consumed and, therefore, it is usual,
and correct to speak of raw cotton being consumed. G

The Court also referred to an earlier decision in State of Travancore-
Cochin v. Shanmugha Vilas Cashew Nut Factory, (1954) SCR 53 and quoted
the following observation of Das, J.:-

"The raw cashew-nuts, after they reach the respondents, ah~ put H
56 SUPREME COURT REPORTS [2000] 2 S.C.R.
A through a process and new articles of commerce, namely cashew-nut
oil and edible cashew-nut kernels, are obtained. It follows, therefore,
that the raw cashew-nut is consumed by the respondents .............. "

The above observation was also made while considering the explana-
tion to Article 286 (1) (a) of the Constitution.
B
This Court in Khatiawar Industries Ltd. v. Jaffrahad Municipality,
[1979] 4 sec 56 considered the question whether the salt manufactured by
the appellant outside the octroi limits and brought within those limits for the
purpose of being crushed into powder in the appellant's factory situated
C within those limits and then exported was liable to octroi. Applying test laid
down by this Court in Mis. Anwarkhan Mahboob Co. (Supra) and Stale of
Travancore-Cochin (Supra) it was held that when uncrushed salt was crushed
in the factory and a commercially different article was produced,the uncrushed
salt must be held to have been consumed.
D Situated thus, we hold that mere physical entry of goods into the octroi
limits would not attract levy of octroi unless goods are brought in for use_
or consumption or sale. Use and consumption would involve conversion of
the commodity into a different commercial commodity by subjecting it to
some processing.
E
In this appeal, cloth pieces of 100 meters length were brought within
the octroi limits and those cloth pieces were cut into smaller pieces of
different sizes. By doing so, no different commercial commodity is shown
to have been produced, so it cannot be said that there was use or consump-
F lion of the cloth within the ocu·oi limits. Therefore, we hold that no octroi
is leviable on the cloth pieces of 100 meters length brought by the appellant
within the octroi limits of Nadiad town.

In Mis. Anwarkhan Mahboob Co. (Supra) while giving the above
illustration of use of cotton, this court noted that after each stage some utility
G to the commodity was put in. Relying on the said observation, the High Court
took the view that when the cloth pieces of 100 meters length were cut to
. smaller pieces, some utility was added as cutting was done to meet the
requirement of excise rules and demands of consumers. We hold that the
High Court erred in coming to the above conclusion inasmuch as it ignored
H the fact that due to above cutting of the cloth, no different commercial

'
"
MAFA1LAL INDUSTRIES LTD. v. NADIAD NAGAR PALIKA [PHUKAN, J.] 57
commodity was shown to have been produced. A
We may refer to decision in HMM Limited and Am: v. Administrator;
I Bangalore City Corporation and Anr., (1989] 4 SCC 640. The facts were
that "Horlicks" milkfood powder was brought into the octroi limits in bulk
containers (large steel drums) and packed at _the packing station in unit
containers (glass bottles) and thereafter exported, outside those limits. On the B
above facts, this Court held that in the process of putting powder from druriis
to the bottles for the purpose of exp01ting or taking out of the municipal
limits, the Horlicks powder was neither used nor consumed and, therefore,
octroi could not be levied or collected. While applying the above ratio to the
facts of the present appeal, the High Court took the view that by. putting c
Horlicks powder into bottles of different sizes no utility was added to the
commodity but in the case in hand by cutting of the cloth pieces some utility
was added to the cloth. In our opinion, the High Court erred in coming to the
above conclusion as by cutting of cloth into smaller pieces no commercially
different article can be assumed to have been produced.
D
For the reasons stated above we hold that in the case in hand cutting
of cloth pieces into smaller sizes would not amount to consumption or use
of the cloth of 100 meters length and, therefore, octroi is not leviable.

In the result the appeal is allowed. Considering the facts and circum-
stances of the case, parties to bear their own costs. E

T.N.A. Appeal allowed.

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