STATE OF KERALA Vs. UNIVERSAL ENTERPRISES CALICUT

JUDGEMENT

(1.) THE short question arising in these connected Tax revision Cases pertaining to two assesses is whether they are liable to pay purchase tax under Section 5a of the Kerala General Sales Tax Act, hereinafter called the Act on the purchase turnover of red oil which was converted by them in their factory to sandalwood oil and sold by them as such. THE assessments pertain to the year 1989-90 to 1995-96. Since the main order of the Tribunal is produced in TRC 419 of 2000 the facts referred to in the said TRC are considered by us for our decision. In fact all the subsequent orders of the tribunal are based on their order produced in TRC 419 of 2000.

(2.) THE assesses were admittedly engaged in massive purchase of red oil from unregistered dealers who have not collected or remitted any sales tax on their sales to the assesses. Red oil is manufactured out of sandalwood, source of which is only forest in Kerala and Karnataka. In fact the assessing officer rightly pointed out that layman from whom assesses claimed to have purchased red oil cannot produced and sell the same because red oil can be extracted from sandalwood through an elaborate process which could be done in a factory. It is a notorious fact that accounted sandalwood oil production has no relation to the quantity of sandalwood sold by the Forest department and instances of theft of sandalwood from Forest with the patronage of Govt. officials and production of oil from it in factories run clandestinely in Kerala were hitting the headlines of newspapers. Even though enquiry could have been conducted and assesses should have been made to disclose the identity of persons who supplied red oil to them, failing which the source of red oil could have been attributed to the very same assesses, the assessing officer even after doubting the genuineness of the transactions accepted the purchases and levied tax under Section 5a of the Act on the purchase turnover of red oil on the ground that the assesses have consumed red oil in the manufacture of their final product, namely, sandalwood oil. THE case of the assesses is that the process of manufacture of sandalwood oil is only removal of impurities and water from red oil by heating it. However, it is admitted fact that assesses have established factories and used steam generated in boilers for heating the raw material, namely, red oil to make sandalwood oil. It is also conceded that assesses are registered under the central Excise Act and are remitting excise duty on the manufactured product namely sandalwood oil. THE main reason for the first appellate authority for holding that there is manufacture of product is the payment of excise duty by the assesses. THE contention of the assesses before the Tribunal was that there was no chemical use in the manufacture and all what is achieved in the process engaged in the factory is removal of impurities and water from red oil. THE assesses relied on several decisions including that of the Supreme Court in tungabadhra Industries Limited, 11 STC 827. THE Tribunal accepted the contentions of the assesses and held that there was no manufacture of a new product as the process involved did not involve use of any chemical and all what the assesses have done is removal of impurities and water from red oil.