The Hindu Business Line : Flour, ghee and sugar to make bread, biscuits and cakes

ONE OF the kindergarten lessons in finance is the duck and drake rhyme where there is `a halfpenny cake,' and you need to account for a penny `to pay the old baker.' Children may continue singing, `A hop and a scotch is another notch,' but let's get busy with the case of Busy Bakers at Baroda that came up before the Gujarat High Court not long ago.

The problem was not that "the butler of the king of Egypt and his baker had offended their lord the king of Egypt," as one reads in the Old Testament. Just that the taxman wondered if baking is manufacture.

The question before the court, therefore, in Commissioner of Income Tax vs Sidral Food (P) Ltd was whether the tribunal was right in holding that the assessee was entitled to grant of investment allowance in respect of plant and machinery installed and put to use for the manufacture of various products such as bread, biscuits and cakes.

Sidral had claimed investment allowance of Rs 1,30,037, but the assessing officer (AO) disallowed the same holding that running a bakery and preparation of food articles do not constitute manufacture or production. At the Commissioner level too, Sidral faced disappointment, and so the case went to the tribunal.

There, Sidral explained to the tribunal how it used a semi-automatic plant for the manufacture of various types of bread, biscuits and cakes. The company had employed about 25 workers in the manufacturing process, and the plant and machinery was worth Rs 5.2 lakh.

The tribunal found that Sidral used raw materials such as flour, ghee and sugar in the process of manufacturing bread, biscuits and cakes. Also, that Sidral was "employing a mechanical device in the form of sophisticated semi-automatic plant"; and "that the product so obtained is a different commercial commodity as compared to raw materials used in the process of producing the finished products."

On the Department's side, though, the argument was that raw materials were edible items, which remained so after processing, and so "test laid down by the apex court in the case of Deputy CST vs Pio Food Packers" wasn't met.

What was that test? The apex court had said that goods purchased should be consumed, that the consumption should be in the process of manufacture, and that the result must be the manufacture of other goods. "There are several criteria for determining whether a commodity is consumed in the manufacture of another," the court had said then. "The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture."

Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass, explained the court. However, nature and extent of processing may vary, and there may be several stages and types of processing. "With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place," reads the Pio test.

Thus, where there is no essential difference in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another, the apex court had ruled.

Justices D. A. Mehta and H. N. Devani of the Gujarat High Court applied the Pio test, both in its positive and negative aspects, to the Sidral issue, seeking answer to the question if the raw material that underwent the manufacturing process retained its original identity. "The assessee uses flour, ghee, sugar, and so on to prepare/produce bread, biscuits and cakes, and so on. The end product which is obtained after the raw materials are processed/consumed is an article which is regarded in the trade, by those who deal in it, as being distinct in identity from the commodity involved in its manufacture," said the court.

The produced goods are never known or sold to the customer/consumer as flour, ghee or sugar, reasoned the court. "The inputs can no longer be identified as such and the produced article or thing has essentially a different identity vis-à-vis inputs. These are the findings recorded by the Tribunal and in the circumstances, it is not possible to state that the Tribunal has committed any error," ruled the court on October 13, 2005, deciding the case in favour of Sidral.

"Such protest of pepper-gingerbread," you may say, as in King Henry IV.

Jam in a jam

TO GO with bread, here is jam, from Anthoosons Agencies (AA) vs Commissioner of Commercial Taxes, a case that was decided by the Kerala High Court on December 22, 2005.

The question was whether `jam' falls under entry 62 or entry 141 of the First Schedule. The former was about "food including vegetative or animal preparations sold in airtight containers and food colours, essences of all kinds and powders or tables used for making food preparations", and the latter spoke about "squashes, sauces, fruit juices, fruit pulp, soda, mineral water, Horlicks, Boost, Bournvita, Complan, Glucose D, Glucovita and similar other items whether or not bottled, canned or packed".

It seems there have been `conflicting views' jamming into the classification of jam. Therefore, the assessee had approached the Commissioner of Commercial Taxes and sought a clarification on the rate of tax on `jam'. The Commissioner issued `a clarificatory order' in July 2005, saying that entry 141 was apt, and that tax should be at 20 per cent.

AA wasn't happy. So the issue went to the High Court. There, AA pointed out that jam "never appeared in any of the Schedules appended to the Kerala General Sales Tax (KGST) Act, 1963". Looks like nobody thought of defining or explaining jam. So, K. U. Vijayan, arguing for AA, relied upon the dictionary meaning of jam, and also the meaning given in the Prevention of Food Adulteration Rules, 1955.

Vijayan submitted that jam is fit for direct consumption while fruit pulp is not directly consumed. Viewed thus, clarification issued by the Commissioner was `perverse', said Vijayan. He cited the Tatson Food Industries vs State of Kerala case, and said that even by applying the test of commercial identity, jam and fruit pulp are different commodities. "Jam and pulp are understood as different commodities in common parlance and commercial circles."

For the Department, it was Georgekutty Mathew who cited the apex court's decision in State of Maharashtra vs Bradma, and said that a specific entry in the schedule to a taxing statute should override a general entry. One could resort to the residuary heading only when a liberal construction of the specific heading did not cover the goods in question, said Mathew. Jam is made from fruit pulp and since fruit pulp falls under entry 141 jam also must fall in that category, he argued, justifying the Commissioner's clarification.

Justices K. S. Radhakrishnan and K. T. Sankaran heard the case. They said, "We find it difficult to accept the view of the Commissioner." Bread, butter and jam are indispensable food articles in many a household. The expressions `bread' and `butter' are well known, so also, `jam', they said.

Jam is no juice

"Fruit juice is commercially well known. Customer can walk into a fruit stall and ask for fruit juice, but no customer would walk into a fruit shop and ask for fruit pulp instead of jam," said the court, to explain that two are commercially different commodities. "Jam is of course prepared from fruit pulp after that has been crushed, mashed, ground or chopped into pieces."

Jam is also treated as a different commodity in the Prevention of Adulteration Rules 1955, pointed out the court. The Rules explain that jam is a product obtained by processing fresh fruit, canned fruit, dried fruit or fruit pulp with water, sugar, dextrose, invert sugar or liquid glucose either singly or in combination by boiling to a suitable consistency and with or without citric, malic, ascorbic acid; permitted preservative and colours; pectin derived from any fruit, etc.

"One of the most common fruit products is fruit juice. Fruit juice can take on many forms, including a natural style cloudy product a `nectar' type product containing suspended solids, a fully clarified juice, juice concentrate and fruit drinks," noted the court. "The processing of fruit juice involves washing, extraction, clarification and preservation. Entry 141 clearly takes in fruit juice hence there is no difficulty for a common man to understand it."

Accordingly, the court said that if the law intended to include jam, `a very popular commodity', it would have found a place in entry 141. "Fruit pulp cannot be equated to jam. According to us, jam will not fall under Entry 141, resultantly the same, can fall only under the residuary Entry 177," ruled the court, applying the residuary head to jam.

"The rule," as the Queen told Alice, "is jam tomorrow and jam yesterday but never jam to-day."

Tailpiece

"No phishing!"

"No wishing, you may add, talking about Budget!"

Detaxification@TheHindu.co.in

D. Murali

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