TaxTMI 
TaxTMI 
1997 (3) TMI 74
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Government of India, Ministry of Finance, Department of Revenue (respondent No. 1) on January 10, 1996, holding that the provision of section 206C(1) shall be applicable in the case of kendu leaves traders as the exception carved out in the proviso to sub-section (1) of section 206C is not applicable in their case. The petitioners' case is that they purchase the kendu leaves from the forest department or from the Bihar State Forest Development Corporation (hereinafter referred to as " the Corporation ") and after processing the same they sell them to manufacturers of bidis. The Corporation invites tenders for advance sale of kendu leaves on lump sum basis every year in accordance with the terms and conditions of the tender notice read with the relevant rules. The successful tenderers have to take delivery of the kendu leaves within 48 hours after the same are plucked from the bushes or brought to the collection centre. If delivery is not taken within the aforesaid period there is every chance of deterioration of the leaves. After taking delivery they dry the leaves for a period of five days. The drying process is to be skillfully done so that the whole kendu leaves may be dried....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y such traders. The Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, by letter dated January 23, 1989, informed the president of the aforesaid Association that the operations of drying and sprinkling of water, etc., on the kendu leaves purchased by the traders would constitute processing. No tax would be collectible at source in respect of the purchases made by such traders and their profit and loss would be computed in accordance with the provisions of the Income-tax Act. A copy of the said letter has been annexed as annexure-1 to the writ application. Accordingly, the petitioners used to apply for grant of certificate of exemption under the provisions of rule 37C of the Rules and the authorities used to issue necessary exemption certificate in Form No. 27C. They applied for the exemption certificate for the year 1966-67 (sic), but no exemption certificate was granted and thereafter they approached the higher authority but no relief was, granted on the ground that the Central Board of Direct Taxes issued another letter dated January 10, 1996, withdrawing the clarification dated January 23, 1989, and has opined that the operations car....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rading purpose then it is an admitted position that the tax has to be collected at source by the seller from the buyers of leaves at the rate mentioned in sub-section (1) of section 206C. However, if the goods purchased by the petitioners are utilised for the purposes of processing then the proviso will be applicable and the petitioners are entitled to certificates of exemption. The answer to this question depends upon the determination of the question as to whether the activities of the petitioners, namely, drying, sprinkling, sorting out, bundling of kendu leaves, etc., amount to processing of the bidi leaves or not. To consider the rival contentions of the parties it will be apt to refer to the relevant provisions having a bearing on the question in controversy. Section 206C of the Act runs as follows :--- " (1) Every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (4) Any amount collected in accordance with the provisions of this section and paid under sub-section (3) shall be deemed as payment of tax on behalf of the person from whom the amount has been collected and credit shall be given to him for the amount so collected on the production of the certificate furnished under sub-section (5) in the assessment made under this Act for the assessment year for which such income is assessable. (5) Every person collecting tax in accordance with the provisions of this section shall within ten days from the date of debit or receipt of the amount furnish to the buyer to whose account such amount is debited or from whom such payment is received, a certificate to the effect that tax has been collected, and specifying the sum so collected, the rate at which the tax has been collected and such other particulars as may be prescribed. (5A) Every person collecting tax in accordance with the provisions of this section shall prepare half yearly returns for the period ending on 30th September and 31st March in each financial year, and deliver or cause to be delivered to the prescribed income-tax authority such returns in such form and verified in such manne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n for a fresh certificate may be made, if required, after the expiry of the period of validity of the earlier certificate. (4) The certificate shall be valid only for the person named therein." The clarification dated January 10, 1996, contained in annexure-2 runs as follows : " I am directed to refer to your letter F. No. CCIT/MP/Tech. 5/3146 of 1994-95/Vol. III/5563, dated February 13, 1995, on the subject mentioned above. The issue for consideration was whether the operations of drying, sprinkling of water, bundling of tendu leaves, etc., constitute processing and place tendu leaf-traders outside the purview of sections 44AC and 206C of the Income-tax Act, 1961. It is found that the operations carried out by the tendu leaf-traders do not change the nature and character of the leaves and these are performed only to maintain the leaves in a saleable and marketable condition. Further, such operations do not result in any change in the product. Therefore, mere drying, sprinkling of water, bundling of tendu leaves, etc., cannot be equated with processing. Various judicial pronouncements, available abuses subsequent to be issue of the aforesaid clarification, dated January 23, 19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurising, fruits and vegetables by sorting and repacking '. Where, therefore, any commodity is subjected to a process or treatment with a view to its ' development or preparation for the market ', as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of section 8(3)(b) and rule 13. The nature and extent of processing may vary from case to case ; in one case the processing may be slight and in another it may be extensive ; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Sri Om Prakas Gupta v. CCT [1965]....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es a new distinct commodity. The meaning of the word " processing " was again considered by the apex court in the case of Delhi Cold Storage Pvt. Ltd. v. CIT [1991] 191 ITR 656. In that case the question for consideration was whether the assessee, a private limited company, was an industrial company as defined under section 2(7)(c) of the Finance Act for the purpose of the First Schedule to that Act so that it is entitled to concession in the matter of taxation. The industrial company as defined under section 2(7)(c) of the Finance Act was a company which was mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. The assessee was running a cold storage. Its assertion was that the activities carried out by it for preventing the goods from their natural decay would amount to processing of goods. The apex court after relying upon the observations made in Chowgule's case [1981] 47 STC 124 (SC) held that processing is a word of wide amplitude and it is has different meanings in different contexts and it involves bringing into existence a different s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ising under the Excise Act or the Sales Tax Acts it has normally been interpreted to mean bringing out a new commodity. But that meaning would be out of context for interpreting the word in this Act for the simple reason that where a word has not been defined in the Act, its meaning has to be gathered from the context in which it has been used. The expression used in the definition " processing fish for export " does not mean bringing out a new commodity or making it marketable but rendering it suitable for export. Delhi Cold Storage's case [1991] 191 ITR 656 (SC) was also considered and it was held that the word " processing " was used in a different context. Thus, according to the decision of the apex court, the meaning of the word " processing " in the context of the Income-tax and Sales Tax Acts is to bring out a different substance from what the material was at the commencement of the process. In other words, when a commodity under goes a change by virtue of operation or operations, then such operation or operations would amount to processing of the goods or commodity. Learned counsel for the petitioners has relied upon several judgments of the High Courts regarding the mean....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re blended uniformly to get average export type quality. These activities carried out by the assessee were claimed as processing of the goods. The Bombay High Court relying upon Chowgule's case [1981] 47 STC 124 (SC) held that the aforesaid activities on the raw wool carried out by the assessee after purchase must be regarded as processing of goods. In that case, the court found that the wool sold by the assessee after carrying out the activities after purchase was a commercial commodity different from the raw wool purchased by the assessee. On the facts of that case it was held that the activities amounted to processing in the light of the law laid down by the apex court. In CIT v. Industrial Ancillaries P. Ltd. [1993] 200 ITR 514 (Delhi), the assessee industrial company under the Finance (No. 2) Act was engaged in purchasing of moulds from manufacturers and after reshaping and polishing them sold the same to other parties. It was held that as a result of reshaping and polishing, the original shape of the moulds was not retained and accordingly that amounted to processing of the goods. Taking into consideration the nature of the activities carried out by the assessee it was found....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... patti, a commercially different article, after receiving the same in the State of Bombay, as such the same amounted to sale within the State of Bombay. The case relied upon by the petitioners in the case of State of Madras v. Bell Mark Tobacco Co. [1967] 19 STC 129 (SC), is also irrelevant as in that case the raw tobacco was converted into chewing tobacco after going through the several processes. It was held that the various processes to which the raw tobacco was subjected amounted to a manufacturing process, and, therefore, the chewing tobacco was not the same commodity as raw tobacco. Learned counsel appearing for the Revenue referred to the decision of the apex court in the case of CST v. D. S. Bist [1979] 44 STC 392. In that case the question for consideration was as to whether the tea leaves grown by the assessee in his own garden and sold after processing and packing them is an agricultural produce or ceased to be so and was liable to sales tax under the provision of section 2(i) of the U. P. Sales Tax Act. As a matter of fact it was found that the tea leaves were first of all subjected to withering in shadow in rooms on a wooden floor for 14 hours. Then they were crushe....