Purchase tax applies where untaxed raw material is used in manufacture and becomes a commercially distinct product.

Purchased red oil from unregistered dealers, when subjected to steam distillation in factory conditions and converted into commercially distinct sandalwood oil, was treated as consumed in manufacture for purposes of section 5A of the Kerala General Sales Tax Act, 1963. The process was not a mere cleaning or separation of impurities; the raw material ceased to exist after use in production. As the purchased goods had not suffered tax and were used up in manufacture or otherwise disposed of otherwise than by sale in the State, purchase tax was attracted on the purchase turnover of red oil.

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Issues: Whether red oil purchased from unregistered dealers and converted into sandalwood oil amounted to consumption or use of goods in manufacture so as to attract purchase tax under section 5A of the Kerala General Sales Tax Act, 1963.

Analysis: The process was not a mere removal of water and impurities. The materials were processed by steam distillation in factory conditions with boilers and equipment, resulting in a commercially distinct final product, sandalwood oil, from the crude raw material, red oil. The statutory scheme of section 5A covered cases where purchased goods were consumed in the manufacture of other goods for sale, and also cases where the purchased goods were used or disposed of otherwise than by sale in the State. Since the red oil had not suffered tax, was sourced from unregistered dealers, and ceased to exist after use in the production process, the statutory conditions for purchase tax were satisfied.

Conclusion: Purchase tax under section 5A was rightly leviable on the purchase turnover of red oil, and the Tribunal's contrary view was unsustainable.

Ratio Decidendi: Where purchased untaxed goods are subjected to a manufacturing process that brings into existence a commercially different product, or are otherwise used up so that they cease to exist for sale, purchase tax is attracted under section 5A.

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