Manufactured chewing tobacco products were taxable, packing charges were included, and excise duty paid on warehouse goods was deductible.

Packets of chewing tobacco were treated as manufactured products because the combined processes of soaking, bulking, flavouring, shredding, packing and labelling transformed the purchased tobacco into a substantially different commercial commodity. On that basis, sales of the packets fell within the taxable category for manufactured products, and the cost of packing materials was included in taxable turnover because the conditions for separate exclusion were not satisfied. Excise duty paid on tobacco removed from a licensed warehouse for manufacture was deductible, since the dealer bore the statutory liability in respect of the goods sold and the turnover rules allowed rebate for duty so paid.

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Issues: (i) whether packets of chewing tobacco prepared and sold by the assessees were liable to sales tax as manufactured products under section 5(vii) of the Madras General Sales Tax Act, IX of 1939, and whether the cost of packing materials was includible in taxable turnover; (ii) whether the assessees were entitled to deduct the excise duty paid by them on the tobacco used in manufacture under rule 5(1)(i) of the Turnover and Assessment Rules.

Issue (i): whether packets of chewing tobacco prepared and sold by the assessees were liable to sales tax as manufactured products under section 5(vii) of the Madras General Sales Tax Act, IX of 1939, and whether the cost of packing materials was includible in taxable turnover.

Analysis: Clause (vii) of section 5 covered products manufactured from tobacco, while clause (viii) dealt with raw tobacco, cured or uncured. On the facts found, the tobacco purchased by the assessees had not itself undergone manufacturing, but the subsequent processes of soaking, bulking, adding flavouring essences, shredding, packing and labelling brought about a product substantially different from the tobacco purchased. The Court accepted the Tribunal's finding that the assessees had first manufactured the packets of chewing tobacco and then sold them as the first sellers in the State. The inclusion of packing charges was also sustained because the statutory conditions for separate exclusion were not satisfied and the prevailing rule and earlier decisions required their inclusion in turnover.

Conclusion: The sales of packets of chewing tobacco were rightly treated as sales of manufactured products liable to tax under section 5(vii), and the packing material cost was rightly included in the taxable turnover.

Issue (ii): whether the assessees were entitled to deduct the excise duty paid by them on the tobacco used in manufacture under rule 5(1)(i) of the Turnover and Assessment Rules.

Analysis: The excise duty was paid when the tobacco was removed from the licensed warehouse for manufacture, and the excise rules imposed the liability on a person storing excisable goods in a warehouse. The payment was therefore made by the dealer in respect of the goods sold by him and satisfied the statutory condition for rebate. The Tribunal's view that the duty was paid only on behalf of the grower was rejected.

Conclusion: The assessees were entitled to deduction of the excise duty from the assessable turnover under rule 5(1)(i) of the Turnover and Assessment Rules.

Final Conclusion: The taxability of the packets of chewing tobacco and the inclusion of packing charges were sustained, but the excise duty paid on the tobacco was allowable as a deduction, so the assessments were to be revised to that limited extent.

Ratio Decidendi: A product becomes taxable as a manufactured product when the dealer's combined processes transform it into a substantially different commercial commodity, and excise duty paid by a dealer under a statutory warehouse liability on goods used in manufacture is deductible where the turnover rules permit rebate for duty paid by the dealer on the goods sold by him.

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