STATE OF KARNATAKAversusB. RAGHURAMA SHETTY ETC.

    280

A                              STATE OF KARNATAKA
                                             v.
                         B. RAGHURAMA SHETTY ETC.

                                     March 24, 1981
B
                 [V.D. TULZAPURKAR, E. S. VENKATARAMJAH AND
                                  A. N. SEN, JJ. ]

       Karnataka Sales Tax Act, 1957 Section 6(i) Paddy-and rice-Whether distincl
c   commodities-Milling of Paddy-whether involves manufacturing process-Con-
    sumption-meaning of.

          The assessees (respondents) are the owners of rice mills and are registered
    dealers under the Karnataka Sales Tax Act, J 957. In the course of their business,
    they purchase paddy and after milling paddy, sell the resultant rice. During
    the assessment years, fhe assessees purchased paddy from agriculturists who
    were not liable to pay sales tax. 1 he assessing authority under the Act levied
    on the assessee in each of these cases purchase tax on th~ purchase turnover
D   of paddy under section 6(i) of the Act. The appeals filed by the assessees were
    dismissed by the Appellate Authority except the one, holding that the conver-
    sion of paddy into rice. did not involve any manufacturing process and that the
    purchase turnovers of paddy in those cases were not liable to tax under section
    6(i) of the Act. In the case of the other assessee, the Tribunal held that the
    turn over was liable to be taxed as he had manufactured milled rice out of the
    paddy purchased by him.
E
          The appellant filed revision petitions in the High Court and the assessee
    filed revision petition in the last case. The High Court after holding that the
    turn overs in questiou were not liable to tax under section 6(i) of the Act dis-
    missed the petitions filed by the appellant and allowed the petition of the last
    assessee. The High Court granted a certificate of fitness to this Court.

F         The appellant argued that the sale price of paddy which is a taxable commo-
    dity having not been subjected to tax under section 5, the assessees were liable
    to tax under section 6(i) of the Act as they had consumed it in the manufacture
    of rice which was a different commodity for sale. The respondent argued that
    they had not consumed paddy when they produced rice from it by merely carry-
    ing out the process of dehusking at their mills.

G         Allowing the appeals,

         HELD : 1. {i) Paddy and rice are two distinct commodities.        The milling
    of paddy involves a manufacturing process. [284 B]

          (ii) The levy in question is not impermissible even though paddy and rice
H   are liable to be taxed at a single point, as in fact there is no double taxation on
    the same commodity. [286 F-G]
           KARNATAKA v. B.R. SHETTY (Venkataramiah, J.)                    281

        Ganesh Trcding Co. Karna/ v. State of Haryana and Anr. 32 S.T.C. 623,       A
Babu Ram Jagdish Kumar and Co. v. The State of Punjab and Anr. 44 S.T.C.
J 59 affirmed.

      2. Consumption in the true economic sense does not mean only use
of goods in the production of consumer goods or final utilisation of consumer
goods by consumers involving activities like eating of food, drinking of bevera-
ges, wearing of clothes or using of an autom~bile by its owner for domestic         B
purposes. A manufacturer also consumes commodities which are ordinarily
called raw materials when he produces semifinished goods which have to undergo
further processes of production before they can be transformed into consumer
goods. At every such intermediate stage of production, some utility or value is
added to goods which are used as raw materials and at every such stage the raw
 materials are consumed. [284 D-E]

      3. At every stage of production there is consumption of goods even though
at the end of it there may not be final consumotion of goods but only production
                                                                                    c
of goods with higher utility which may be used in further productive processes.
                                                                       [285 B-B]

      M/s. Anwar Khan Mahboob Co. v. The State of Bombay and Ors. [1961] 2
S.C.R. 709 at pp. 715-716; Economics (Tenth Edition 1976) at page 168 by Pro-
fessor' Paul A. Samuelson, referred to.                                             D
      In the instant case, the assessees had consumed that paddy purchased by
them when they converted it into rice which is commercially a different commo-
dity for sale. The case of assessees therefore, squarely falls under section 6(i)
the Act. [286 CJ

       State of Tcmil Nedi v. M. K. N. Kandaswami etc. etc. [1976] I S.C.R. 38,     E
 Ganesh Prasad Dixit v. Commissioner of Sales Tax, [1969] 3 S.C.R. 490, referred
 to.

      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1801-1805
 of 1975.

      From the Judgments and Orders dated the 27th January and
                                                                                    F
 3rd February 1975 of the Karnataka High Court at Bangalore in
 STRPs Nos. 14, 15, 19, 26 & 32 of 1974.

        N. Nettar for the Appellant.

        J. Ramamurthy and Miss R. Vaigai for the Respondent.                        G

        Ex-parte Respondents in CAs 1801-1803 & 1805/75.

        The Judgment of the Court was delivered by
       VENKATARAMIAH, J. The question which arises for considera-
                                                                                    H
 tion in these appeals by certificate is whether the respondents (here-
    282                   SUPREME COURT REPORTS             [1981] 3 S.C.R.

A   inafter referred to as 'the assessees') are liable to pay purchase tax
    under section 6(i) of the Karnataka Sales Tax Act, 1957 (hereinafter
    referred to as 'the Act') on the tur.nover consisting of the price paid
    by them for purchasing paddy for the purpose of converting it into
    rice for sale, in their respective rice mills.

B          The assessees are owners of rice mills in the State of Karnataka
    and are registered dealers under the Act. In the course of their
    business, they purchase paddy and after milling paddy sell the resul-
    tant rice. During the assessment years, the assessees purchased
    paddy from agriculturists who were not liable to pay sales tax. The
    assessing authority under the Act levied on the assessee in each of
c   these cases purchase tax on the purchase turnover of paddy under
    section 6(i) of the Act. The appeals filed by the assessees against
    the said assessments were dismissed by the appellate authority.
    The Karnataka Sales Tax Appellate Tribunal allowed the appeals
    filed by the assessees against the orders of the appellate authority
    except the one filed by the assessee who is the respondent in Civil
D   Appeal No. 1805 of 1975 holding that the conversion of paddy
    into rice did not involve any manufacturing process and that the
    purchase turnovers of paddy in those cases were not liable to tax
     under section 6(i) of the Act. In the case of the assessee who is
    the respondent in Civil Appeal No. 1805 of 1975, the Tribunal held
     that the turnover was liable to be taxed as he had manufactured
E   boiled rice out of the paddy purchased by him. Aggrieved by the
    decisions of the Tribunal, the State Government filed revision peti-
    tions before the High Court under section 23( I) of the Act in the
    first four cases and the-assessee filed a revision petition in the last
    case. The High Court after holding that the turnovers in question
    were not liable to tax under section 6(i) of the Act dismissed the
F   petitions filed by the State Government and allowed the petition of
    the assessee who is the respondent in Civil Appeal No. 1805 of
     1975. Thereafter the High Court granted by a common order a
     certificate of fitness in all these cases to prefer appeals before this
     Court to the State Government. On. the basis of said certificate,
     these appeals have been filed by the State Government against the
G    orders of the High Court. Since these appeals involve a common
     question of law, they are disposed of by this common judgment.

          The relevant part of section 6 of t~e Act reads :
H              "6. Levy of purchase tax under certain circum-
          stances. --Subject to the provisions of sub-section (5) of
                  KARNATAKA v. B.R. SHETTY (Venkataramiah, J.)


     section 5, every dealer who in the course of his business            A
     purchases any taxable goods in circumstances in which no
     tax under section 5 is leviable on the sale price of such
     goods and,

          (i) either consumes such goods in the manufacture
     of other goods for sale or otherwise or disposes of- such            B
     goods in any manner other than by way of sale in the
     state,

                                      or

           (ii)                                                           c
     shall be liable to pay tax on the purchase price of
     such goods at the same rate at which it would bave been
     leviable on the sale price of such goods under section 5."

      The contention of the State Government before the High
Court was and before us is that the sale price of paddy which is a
                                                                          D
taxable commodity having not been subjected to tax under section
5 the assessees are liable to tax under section 6(i) of the Act as they
had consumed it in the manufacture of rice ·which was a different
commodity for sale. The assessees' contention which was accepted
by the High Court is that paddy and rice being the same it cannot
be said that they had manufactured 'other goods' out of paddy and
                                                                          E
hence section 6(i) is not attracted.

      Paddy and rice have been held to be different commodities by
this Court in Ganesh Trading Co., . Karna! v. State of Haryana &
Anr.(1) in which it is observed thus :
                                                                          F
           "Now, the question for our decision is whether it
     could be said that when paddy was dehusked and rice was
     produced its identity remained. It was true that rice was
     produced out of paddy but it is not true to say that paddy
     continued to be paddy even after dehusking. It had changed
     its identity. Rice is not known as paddy. It is a misnomer
                                                                          G
     to call rice as paddy. They 'are two different things in
     ordinary parlance. Hence quite clearly when paddy is
     dehusked and rice produced, there has been a change in the
     identity of the goods".
                                                                          H
    (1)   32 S.T.C. 623
        284                    SUPREME COURT REPORTS          [1981) 3 S.C.R

              The above view has been followed by this Court in Babu Ram
A       Jagdish Kumar and Co. v. The State of Punjab 4 Ors.(1)

              It is unfortunate that the High Court as well as the Tribunal
        have tried to distinguish the decision of this Court in Ganesh
        Trading Co.' s case (supra) on insubstantial grounds, a detailed
        reference to which is unnecessary We reiterate the view expressed
B       in the above two cases and hold that paddy and rice are two dis-
        tinct commodities and that the milling of paddy involves a manu-
        facturing process.
                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
c       mills. Consumption in the true 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. A
         manufacturer also consumes commodities which are ordinarily
D        called raw materials when he produces semi-finished goods which
         have to undergo furthi:.r 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
         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
E
         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 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 busi-
          ness. We have to understand the word 'consumes' in section 6(i)
F
           of the Act in this economic 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 explained by
           Professor Paul A. Samuelson in his book entitled 'Economics' (Tenth
    G
            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 include in the tax on the miller's flour that part of its
    H
              (!)   44 S.T.C. 159
           KARNATAKA v. B.R. SHETTY (Venkataramiah, J.)           285

     value which came from the wheat he bought from the                  A
     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 costs used from earlier stages are sub-
     tracted from the miller':: selling price in calculating his
     "value added" and the VAT tax on value added ......... )"           B

       At every stage of production, it is obvious there is consump-
tion of goods even though at the end of it there may not be final
consumption of goods but only production of goods with higher
utility which may be used in further productive processes.
                                                                         c
      While construing the word 'consumption' which was found in
the Explanation to Article 286(1)(a) as it stood prior to its deletion
by the Constitution (Sixth Amendment) Act, 1956, this Court in
M/s. Anwarkhan Mahboob Co. v. The State of Bomhay & Ors.( 1)
observed thus :
                                                                         D
            "The Act of consumption with which people are most
      familiar occurs when they eat, or drink or smoke. Thus,
      we speak of people consuming bread, or fish or meat or
      vegetables, when they eat these articles of food; we speak
      of people consuming tea or coffee or water, when they
                                                                         E
      drink these articles; we speak of people consuming cigars or
      cigarettes or bidis, when they smoke these. The production
     .of wealth, as economists put it, 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 commo-          F
      dity, there is ordinariiy what is 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". Again, the final act of consump-           G
      tion 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 portion of the final act         H
    (!) (1961] l.S.C.R. 709 at pp. 715-716
    286                       SUPREME COURT REPORTS           [1981] 3 S.C.l\.

A          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 which this final act of con-
B          sumption 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 con-
           sumption."

           Applying the above test, it has to be held that the assessees
c   had consumed the paddy purchased by them when they converted
    it into rice which is commercially a different commodity.

          Since it is not disputed that the sales of paddy, which is a
    taxable commodity, in favour of the assessees had not suffered tax
    under section 5 in view of the circumstances in which they had taken
D   place and it is held that the assessees had consumed paddy in the
    manufacture of rice which was a different commercial commodity
    for sale, the case of the assessees squarely falls under section 6(i)
    of the Act. The charge under section 6(i) should, therefore, be given
    due effect. This view is in accord with the opinion of this Court in
    State of Tamil Nadu v. M. K. Kandaswami etc. etc.(1) and in Ganesh
E   Prasad Dixit v. Commissioner of Sa/es-tax,(2) where provisions
    corresponding to section 6(i) of the Act arose for consideration.

          It is next contended that since the assessees would be exposed
    to! double taxation both as buyers of paddy and as sellers of rice we
       '                                                          ,
     should hold that the levy in question is impermissible because paddy
F
     and rice are liable to be [taxed at a single point. No provision is
    shown to us which bars such taxation when the commodities are
    different. In fact, in this case there is no double taxation on the
    same~commodity. A similar contention was rejected by this Court
    in the case of Babu Ram Jagdish Kumar (supra) thus :
G
               "We may at this stage refer to one other subsidiary
          argument urged on behalf of the appellants. It is argued
          that because paddy and rice are not different kinds of goods

H      (1) [1976] ! S.C.R. 38.
       (2) [ 1969] 3 S. C.R. 490.
             KARNATAKA    v. B.. R. SHETTY (Venkataramiah, J.)         287

          but one and the same, the inclusion of both paddy and              A
          rice in Schedule C to the Act would amount to imposition
         of double taxation under the Act. There is no merit in
r        this contention also because the assumption that paddy and
         rice are one and the same is erroneous. In Ganesh Trading
         Co., Karna/ v. State of Haryana (1973) 32 S.T.C. 623 (S.C.),
         arising under the Act, this Court has held that although            B
         rice is produced out of paddy, ,..it is not true to say that
         paddy continued to be paddy even after dehusking; that
         rice and paddy are two different things in ordinary parlance
         and, therefore, when paddy is dehusked and rice produced,
         there is a change in the identity of the goods."
                                                                             c
           In the result these appeals are allowed, the judgments of the
    High Court against which these appeals are filed are set aside and
    the turnover in question in each case is held to be taxable under
    section 6(i) of the Act. There shall, however, be no order as to
    costs.
                                                                             D

    N.K.A.                                                Appeals allowed.