Cochin Cadalas (P) Ltd. vs State of Kerala

H.L. Dattu, C.J.—The only question that arises for consideration and decision in these revision petitions is, whether "craft paper" falls under entry 94(i) or 94(ii) of the First Schedule to the Kerala General Sales Tax Act, 1963 and the rate of tax payable thereon.

The assessing authority for the assessment years in question has classified the commodity in question as a "paper product" coming under entry 94(ii) of the First Schedule to the KGST Act on the sole ground that paper and craft paper are goods of different identity and has different use. The first appellate authority in the appeals filed by the assessee has held that craft paper requires to be classified as an item falling under entry 94(i) of the First Schedule, treating it as paper, relying on the decision of the Supreme Court in the case of Khatema Fibres Ltd. v. State of Uttar Pradesh reported in [2004] 135 STC 193 : [2001] 9 KTR 349. In the second appeal filed by the Revenue, the Appellate Tribunal has taken the view, that, since craft paper is sold to carton manufacturers for the manufacture of packing materials, the commodity in question requires to be classified as an item falling under entry 94(ii) of the First Schedule to the KGST Act and accordingly, has allowed the Revenue''s appeals and has confirmed the orders passed by the assessing authority for the assessment years 1994-95, 1995-96, 1996-97, 1997-98, and 1998-99.

The petitioner is a company incorporated under the provisions of the Companies Act, 1956. It is also a dealer registered both under the Kerala General Sales Tax Act and the Central Sales Tax Act, 1956. The assessee is engaged in the production and sale of craft paper and the product is mainly sold to carton manufacturers.

The common issue involved in all these revision petitions is the rate of tax on the sale of craft paper.

The relevant entries are:

-------------------------------------------------------------------------- Sl. No. Description of goods Point of levy Rate of tax -------------------------------------------------------------------------- 94(i) Paper At the point of first 4% sale in the State by a dealer who is liable to tax u/s 5 94(ii) Newsprint, cardboard, Do. 5% paper products, note books and printed materials including greeting cards. --------------------------------------------------------------------------

Before we consider the submission of the learned Counsel appearing for the parties, it would be useful to refer to the findings and conclusions reached by the Tribunal. The findings and conclusions reached by the Tribunal in the appeal for the assessment year 1996-97, as per order dated February 1, 2002 in T. A. No. 44 of 2002, is as follows:

In the present case before us it is stated that the appellants are engaged in the production and sale of craft papers from waste paper and the product is mainly sold to carton manufacturers, vide para 1 in page 2 of first appellate order. The assessees have not raised any pleadings against this view of the first appellate authority. They have also not made out a case before us to establish that the product manufactured by them was used for any purpose other than for packing materials or they have sold the item to customers other than carton manufacturers. So, when analysing the facts of the case in the light of the principles laid down in the decision quoted above, we hold that the lower authorities are justified in treating craft paper manufactured and sold by the appellants as one coming under entry 94(ii) of the First Schedule taxable at five per cent. So, this contention is found against the appellants.

The appeals for the assessment years 1994-95, 1995-96, 1997-98 and 1998-99 were considered by the Tribunal in T. A. No. 11 of 2003 and connected cases, which were disposed of by a common order dated February 15, 2005, wherein the Tribunal has followed the earlier decision in T. A. No. 44 of 2002 dated February 1, 2003 relating to assessing year 1996-97 and held as follows:

The facts in the two cases are identical. In the above-referred appeal, the assessing authority as well as the first appellate authority found the rate of tax on craft paper at five per cent as coming under item 94(ii) of the First Schedule. The finding was sustained in second appeal by this Tribunal. We see no reasons to deviate from the above finding of the Tribunal. In that view of the matter, we find that the order of the first appellate authority is not legally sustainable. We hold that the assessing authority was justified in treating craft paper manufactured by the assessee as coming under entry 94(ii) of the First Schedule taxable at five per cent. For the reasons stated above, T. A. Nos. 11 of 2003, 528 of 2003, 529 of 2003 and 429 of 2003 are to be allowed setting aside the order of the first appellate authority and restoring the order of the assessing authority.

The assessee in these revision petitions has raised the following questions of law for our consideration. They are:

(i) Whether the Tribunal was right in law and on facts in holding that the kraft paper sold by the petitioner was an item classifiable under entry 94(ii) of the First Schedule to the KGST Act attracting tax at the rate of five per cent ?

(ii) Ought not the Tribunal to have held that the correct classification of the kraft paper sold by the petitioner falls under entry 94(i) of the First Schedule to the KGST Act, more so in view of the decision of the honourable Supreme Court Khatema Fibres Ltd. v. State of Uttar Pradesh [2004] 135 STC 193 : [2001] 9 KTR 349?.

"Craft paper" is a paper produced by the kraft process from wood pulp. It is strong and relatively coarse. Craft paper is usually brown in colour, but can be bleached to produce white paper. The kraft process describes a technology for conversion of wood into wood pulp consisting of almost pure cellulose fibres. The process entails treatment of wood chips with a mixture of sodium hydroxide and sodium sulphide that break the bonds that link lignin to the cellulose. The process name is derived from german kraft, meaning strength/power. The craft paper is used for paper grocery bags, multiwall sacks, envelops and other packaging. (See Wikipedia Encyclopedia).

The meaning of the expression "paper" is explained by the apex court in the case of State of Uttar Pradesh v. Kores (India) Ltd. [1977] 39 STC 8. In the said decision, after referring to various shades of meaning attributed to that expression in dictionaries has summarised, that, in popular parlance the word "paper" is understood as a substance which is used for writing or painting, or for packing, or for drawing on, or for decorating or covering the walls.

The word "product" imports an article which, when made, has characteristics which are apparent to the senses. The word "product" is defined in Webster''s comprehensive dictionary as "anything produced or obtained as a result of some operation or work". In other words, to be a product, it must be something that is brought from either naturally or as a result of effort and work. Apart from the dictionary meaning, even as understood in common parlance, it could only mean, a commodity or a thing which has come into existence either naturally or as a result of effort and work. The expression "paper products" merely means anything produced or obtained from paper, whether such derivation is by a simple physical process or by a chemical reaction would seem to make no difference to the end-produce. Alternatively, "paper product" means an article different from paper and something produced with or out of paper.

In the instant case, the assessing authority has assessed the dealer for the relevant assessment years in respect of sale of "craft paper" treating it as paper product falling under item No. 94(ii) of the First Schedule to the KGST Act taxable at five per cent. The Tribunal applying "user-test theory" has concluded, that, since the assessee is engaged in the production and sales of craft paper from waste paper and product is mainly sold to carton manufacturers, the craft paper requires to be classified as "paper product" and is exigible to tax at the point of first sale in the State, though the stand of the assessee is that "craft paper" is a paper and therefore requires to be classified under item 94(i) of the First Schedule to the KGST Act and taxable only at the rate of four per cent. The Appellate Tribunal while negativing the claim of the assessee has applied the principles stated by the Supreme Court in Khatema Fibres Ltd. v. State of Uttar Pradesh [2004] 135 STC 193 : [2001] 9 KTR 349 (SC).

The contention of Sri Anil D. Nair, learned Counsel for the assessee, is that "craft paper" is a paper and therefore, falls under item 94(i) of the First Schedule to the KGST Act and taxable only at the rate of four per cent. In aid of his submission, the learned Counsel has relied on the observations made by the apex court in Khatema Fibres Ltd.''s case [2004] 135 STC 193; [2001] 9 KTR 349. Per contra, Sri Vinod Chandran, learned Government Advocate submits that, since the assessee has effected sales of craft paper primarily to a dealer engaged in the business of carton manufacture, the commodity in question necessarily has to be classified as paper product.

Let us now first deal with the case law on which reliance is placed by learned Counsel for the assessee, Sri Anil D. Nair. In Khatema Fibres Ltd. Vs. State of Uttar Pradesh and Another, , the factual matrix was, that the assessee was a manufacturer of craft paper which is claimed to be used as packing/wrapping material. The assessee had applied for grant of recognition certificate u/s 4B of the U.P. Trade Tax Act, 1948 to avail exemption provided therein. The assessee was granted the recognition certificate, which enabled it to purchase raw material and packing material without payment of tax in respect of machinery for which purchase was to be made, at concessional rate. The competent authority under the Act, following the observations made by the Full Bench of this Court in the case of Lalji Board Industries v. State of U.P. [2004] 135 STC 197 [App] which had held that craft paper is not a packing material and it is a paper and therefore manufacturers of craft paper are not entitled to any exemption, had issued a notice directing the assessee to show why the commodity "craft paper" should not be deleted from the recognition certificate as it was not a packing material. Since there was pronouncement of the Full Bench of the Allahabad High Court, the assessee did not succeed in its claim either before the authorities under the Act or before the High Court. In the appeal filed before the apex court, while remanding the matter for fresh consideration, the court has observed that the word "paper" in exclusionary clause of notification dated December 31, 1976 issued under the Uttar Pradesh Trade Tax Act, 1948 includes craft paper irrespective of the fact that it is also used for wrapping/packing purposes. The observation made by the apex court in this regard is as under (at page 195 of STC):

... The word ''paper'' in the exclusionary clause of the notification dated December 31, 1976 is used in its generic sense and the term as understood in the common parlance and commercial sense includes "craft paper" manufactured by the appellants. "''Paper'' as understood in common parlance and commercial sense, can be used for writing, printing, packing and wrapping purposes, and therefore, ''craft paper'' does not cease to be ''paper'' merely because it is also used for packing purposes. Indeed, any type of paper can be used for the purpose of packing and packing material as used in the notification in question is such a product which by its manufacturing process or adaptation is meant to be used only as packing material.

Now, let us see whether the observations made by the apox court can be applied for deciding the issue raised in these revision cases.

Section 5 of the Act is the charging provision. It envisages that every dealer, other than a casual trader or agent of a non-resident dealer whose total turnover for a year is not less than two lakhs of rupees and every casual trader or agent of a non-resident, whatever be his total turnover for the year, shall pay tax on his taxable turnover for that year, in the case of goods specified in the First or Second Schedule, at the rates and only at the points specified against such goods in the said Schedule. Item 94 of the First Schedule to the Act is in two parts. Item 94(i) speaks of "paper". It is appropriate to state that the normal legislative practice whenever such expressions are used in the entries attached to the Schedule to the Act, is to use the expression immediately after using generic name of the commodity, "paper of all kinds", but, whenever they included or excluded certain types of paper, it was made clear by appropriate provision. In the absence of any inclusion or exclusion in the expression, "paper", it can be said that it included all kinds of paper. Sub-entry (ii) in item No. 94 of the First Schedule to the KGST Act, speaks of newsprint, cardboard, paper products, note books and printed materials including greeting cards. Therefore, such of those commodities which are enumerated in sub-entry (ii) of entry 94 of the First Schedule to the KGST Act are excluded from sub-entry (i) of entry 94 of the Act, which speaks of paper.

It is now well-established that in a taxing statute, there is no room for any intendment and regard must be had to the clear meaning of the words. The entire matter is wholly governed by the entries in the Schedule or by the language of the notification. In this connection, we may refer to the observations of Lord Watson in Saloman v. Saloman and Co. [1897] AC 22 at page 38:

Intention of the Legislature is a common but very slippery phrase, which, popularly understood may signify anything from intention embodies in positive enactment to speculative opinion as to what the Legislature probably would have meant; although there has been an omission to enact it. In a court of law of equity, what the Legislature intended to be done or not to be done can only be legitimately ascertained from that which it has chosen to enact, either in express words or by reasonable and necessary implication.

In a taxing statute, words which are not technical expressions or words of art, but words of everyday use, must be understood and given a meaning, not in their technical or scientific sense, but in a sense as understood in common parlance, i.e., that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it. Such words must be understood in their "popular sense". The particular terms used by the Legislature in the denomination of articles are to be understood according to the common commercial understanding of those terms used and not in their scientific and technical sense, for the Legislature does not suppose our merchants to be naturalists or geologists or botanists. (See Mukesh Kumar Aggarwal and Co. Vs. State of Madhya Pradesh and Others, .

In the instant case, the Appellate Tribunal has proceeded to determine the nature of the goods by the test of use to which the purchasers have put the commodity in question. In Mukesh Kumar Aggarwal''s case [1988] 68 STC 324 the apex court has observed that the "user test" is logical; but is again, inconclusive. The particular use to which an article can be applied in the hands of a special consumer is not determinative of the nature of the goods.

A Bench of the Gauhati High Court in the case of Shri Chitta Ranjan Saha v. State of Tripura [1990] 79 STC 51, applying the principles laid down in Annapurna Carbon Industries Co. Vs. State of Andhra Pradesh, and the decision in Mukesh Kumar Aggarwal and Co. Vs. State of Madhya Pradesh and Others, , has stated that "user test", i.e., the test, the use to which the goods can be put, can also be considered in interpreting an item in taxing statute. However, this rule of interpretation has got its own limitations. Certain goods may be put to different uses by different persons. That cannot entitle the Revenue to apply different rules of tax to the sales of the very same product by different dealers depending on the use to which they will be put to use by the purchasers. The particular use to which an article can be applied in the hands of a special consumer is not determinative of the nature of the goods. To apply this test, the deciding factor has to be predominant or ordinary purpose or use ; it is its general or predominant use which may determine the category in which an article should fall and once that is done, tax can be charged on sale of such goods only at the rate applicable to goods of the particular category to which they have been held to belong irrespective of their end use.

The Supreme Court has laid down the principles which should be applied in the interpretation of entries in the sales tax legislation. The summary of those decisions appears to be, a sales tax statute, being one levying tax on goods, any particular term used to specify an item of goods on which tax is levied, must, not being a term of science or art, be presumed to have been used in the ordinary sense and therefore, it should be understood according to the meaning ascribed to it at common parlance. Therefore, while interpreting any item subjected to tax under the sales tax laws, resort should be had to their popular meaning or the meaning attached to them by those dealing in them, in the commercial sense and not to the scientific or technical meaning of such term. To consider whether an item falls within the meaning of an entry of a Schedule to an Act, it has to be seen whether its qualities would fall in any one of the entries or in any of the items included in that entry.

The question, therefore, is, whether craft paper is "paper simple" or a paper product, since the assessee primarily sells its products to carton manufacturers. Before we proceed to answer the issue, in our view, we have to find out the intention of the framers of the Schedule in making the entry. The best guide to ascertain their intention is, the language employed by them. The Legislature has carved out two sub-entries in item No. 94 of the First Schedule to the KGST Act. Sub-entry (i) of item 94 speaks of "paper". The paper as understood in common or commercial parlance includes craft paper also. Sub-entry (ii) of item 94 speaks of newsprint, cardboard, paper products, notebooks and printed materials including greeting cards. In the common parlance, newsprint, cardboard are also paper, but the framers of the entry have separately placed them only to indicate, even though in the common parlance or trade circles they are known as paper, but for the purpose of taxation under the sales tax provisions, they are treated as commercially different commodity. Under the same sub-entry, the framers of the entry have grouped paper products, note books, etc. If the entry is read carefully, we are of the considered opinion, the intention of the framers of the entry is to treat the products produced with or out of paper and sold to be taxed at the higher rate, namely, at five per cent. It could be cartons made out of paper, grocery bags made out of paper, multiwall sacks, envelops, etc. Grocery bags are usually made of craft paper for packing light materials. It may not be out of place to state here, that, the tradition of the paper craft in India is fairly old. The paper with its various varieties and wide range of colours offers a very colourful choice to the craftsmen. The combination of different colours of papers in different forms and styles makes paper craft one of the best crafts in India. The paper craft in India has widely been used in different types of decorations. The decorations may be in the form of flowers, kandeels, kites, etc. These paper products are sold in the market as paper products. As we have already noticed, after referring to the dictionary meaning, the word "product" means anything produced or obtained as a result of some operation or work, and the expression "paper product" means anything produced or obtained from paper. If this distinction is kept in mind, the irresistible conclusion would be that, the framers of the entry (ii) of item 94 have used the expression "paper product" to such of those articles which are produced with or out of paper.

Having given our anxious consideration, with respect, we are of the considered view that, the test laid down by the Appellate Tribunal in understanding the meaning of the word "craft paper" with reference to purchaser of the commodity is not a correct test. In our view, the correct test would be to apply common parlance test, and if that test is applied, in our considered view/the craft paper produced and sold by the assessee would not fit into any of the items enumerated in sub-entry (ii) of item 94 of the First Schedule to the KGST Act. Therefore, keeping in view the wider definition that is provided by the apex court in Khatema Fibres Ltd.''s case [2004] 135 STC 193 ; [2001] 9 KTR 349, while explaining the meaning of the expression "paper", we hold, in the facts and circumstances of this case, that, "craft paper" would fit into the description of paper and falls under sub-entry (i) of item 94 of the First Schedule to the KGST Act, taxable only at four per cent.

Consequently, all the revision petitions are allowed. The order passed by the Tribunal for the assessment years in question is set aside and issue is answered in favour of the assessee and against the Revenue.

In view of the orders passed in the revision petitions, all pending interlocutory applications are dismissed. Ordered accordingly.