State of Kerala vs Oppoottil Agencies

Mrs. Manjula Chellur, Actg. C. J.

These two revision petitions are before us by way of reference dated September 12, 2006. The reference reads as follows :

The issue raised, that is classification of the item polystik compound, is squarely covered by the decision of this court reported in State of Kerala v. Shaji Joseph [2003], 129 STC 475 (Ker); [2003] 11 KTR 210. In the said decision, this court has considered the nature and use of the product and held that the item is essentially an adhesive as its main purpose is to fix the rain guard to the rubber tree. The other purpose, such as prevention of leakage to the cut portion of the bark which protects the tree is found to be incidental. However, counsel for the respondent-assessee has relied on an unreported decision of this court in T.R.C. No. 448 of 2002, wherein this court has held that the item is a plant protection chemical. We find from the judgment that the later decision does not refer to earlier judgment. Moreover, this court just followed the certificates issued by two authorities to hold that the item is a plant protection chemical. None of the experts who issued the certificates had stated that the item is plant protection chemical and what they have stated is that the item is chemical. We do not know what is the basis to hold that the chemical has plant-protection property. In fact, the other words used in the entry are pesticides and fungicides. It is common knowledge that polystik compound is essentially derived from bitumen, which is a petroleum product and it in no way is used as a chemical to protect plants. We are of the view that persons, who issued the certificates, based on which judgment is rendered by this court, are not competent to talk about chemicals protecting plants. We therefore do not approve the later decision of this court. We are of the view that since there is conflict of views expressed by two Division Benches, the matter should be referred to Full Bench. Accordingly, we refer this matter to Full Bench for decision by it. Registry will place the matter before the honourable Chief Justice for appropriate orders on posting.

The controversy in these revision petitions is, whether the item polystik compound or the rain guard compound can be classified as an adhesive or a rain guard coat or a chemical for the protection of plants.

According to the learned Government Pleader, the Rubber Board has published material, how rain guarding has to be processed. Literature on rain guarding process indicates what exactly the purpose for which rain guard compound is used, i.e., only as an adhesive and not as a chemical. In other words, the learned Government Pleader contends, the property contained in this particular material has a great adhesive quality. Because of this quality to protect the tapping portion of the plant, so as to protect water entering when it is tapped, a guard is put around the trunk just above the place where the rubber is tapped. In order to put the rain guard as such, polythene material, kora cloth, stapler pin and rain guard compound are used. After putting the polythene cloth and a piece of kora cloth, stapler pin is used to attach the kora cloth and polythene material. A thin layer of rain guard compound is applied to the bark of the rubber plant, then a polythene cover is put around the trunk, where it is cut. Then around the polythene, a kora cloth is tied up and again whole area is covered with rain guard compound as an adhesive. Twice this compound is used to protect the area from rain, in order to see that, the polythene sheets and kora cloth put around the trunk of the rubber plant does not come off during rainy season.

According to the learned counsel for the assessees/respondents, though the product in question has an adhesive quality, the purpose for which it is used is, no seepage occurs so far as the rubber plant is concerned. Therefore, it is only a rain proof material used to prevent seepage of water so as to obstruct any damage to the property, like fungus, etc. According to him, due to heavy water getting in contact with the said portion of the rubber tree the possibility of decay or fungus to the trunk can occur during the rainy season, therefore, the rain guarding is done and this rain guard compound is one of the items of the entire process of rain guarding, so as to see it acts as a water proof element above the trunk of the rubber plant.

The learned Government Pleader brings to our notice various decisions, including the literature on rain guarding process, explained by the rubber Board. According to him, even if a product has more than one quality or purpose, the predominant use of the material, in other words, how it is marketed, is the criterion to decide what is the classification of the product rather than the actual use, a particular purchaser makes use of it.

As against this learned counsel for the respondents contends, the product how in common parlance is understood is nothing but how a common man understands, therefore, the certificate issued by the farmer/common man is the criterion to decide what is the predominant use of the product and not based on the technical terms or technical analysis of a particular product. Hence, the certificates relied upon by the assessees would indicate how the material is used as a protection chemical on the plants, therefore these certificates must be taken into consideration while considering the property of the chemical as such. According to him, the product in question is nothing but a chemical, which is used as a leak proof, protecting the plant from the rain water. The learned counsel for the assessees/respondents, Mr. John Ramesh, in support of his contentions relies upon the following citations, which would be referred to later :

(1) Saraswati Industrial Syndicate Ltd. v. Commissioner of income tax [1999] 237 ITR 1 (SC).

(2) Commissioner of income tax v. D.L.F. United [2000] 243 ITR 855 (SC).

(3) Indo International Industries Vs. Commissioner of Sales Tax, Uttar Pradesh, .

(4) Mukesh Kumar Aggarwal and Co. Vs. State of Madhya Pradesh and Others, and

(5) State of A.P. Vs. General Electronic Corporation, .

As against this the learned Government Pleader relies upon the following citations which would also be referred to later :

(1) State of Gujarat v. Indian Petrochemicals Corporation Ltd. [1992] 86 STC 95 (Guj),

(2) State of Tamil Nadu Vs. Indian Eyelets Industries, , and

(3) Excise and Taxation Officer Vs. T.R. Solvent Oil Pvt. Ltd. and Another, .

The genesis for the present reference are two judgments of this court reported in State of Kerala v. Shaji Joseph [2003] 129 STC 475 (Ker); [2003] 11 KTR 210 (Ker) and the latter unreported decision in the case of State of Kerala v. Well Worth Engineers & Polymers Industrial Estate, Ettumanoor and connected matters (TRC No. 359 of 2002 and connected cases) dated October 29, 2004.

When the question arose before the Division Bench of this Court in State of Kerala v. Shaji Joseph [2003] 129 STC 475 (Ker); [2003] 11 KTR 210 (Ker.) under which entry of the Kerala General Sales Tax Act, the product polystick compound has to fall, their lordships after referring to the main purpose for which the rain guard compound is used, opined that, the purpose of the item in question was to use as an adhesive material in fixing rain guard on rubber tree for tapping during rainy reason. Therefore, the process involved is; clear the round surface of the tree, apply to it polystik adhesive, over which cloth is stitched, which is attached to the rain guard either in the form of a paper or a shade with the help of a stapler and over and above, a binding material may also be used to prevent water leakage. Therefore, the item polystik compound is essentially an adhesive, going by its use and purpose but other purpose of preventing leakage of water is only an additional feature. Therefore, the assessing authority was justified in giving a finding, that the manufacturer and dealer knew well for what purpose it was purchased while transporting the classified item as "adhesive" in the transport document namely delivery note and Form, 27B. In other words, their lordships held that, item 3 of the First Schedule to the Act provides a general item as "adhesive" and the item in question "polystik compound" falls under the said general items.

In the latter decision of the Division Bench of this court, there were two items, which came up for consideration of the Bench, one is rubber coat and rain guarding compound. The contention of the State before the Bench was that the rubber coat is entirely different from a rain guard compound, because rain guard compound is used as a material for fixing the rain guard on patta of a rubber during rainy season, whereas rubber coat though is applied, but it is applied as a chemical to protect the plants from fungicide, etc. Hence, both the items are having different purposes. The Division Bench after referring to the certificates issued by the Director of Common Facility Service Centre, Department of Industries, Government of Kerala, which had the opportunity to see the sample of the rain guarding compound sent by M/s. Wellworth Engineers & Polymers and by one Mr. K.T. Antony B.Sc (Eng.), M.Tech (Chemical Engineer), Enviro Designs & Equipments, Kochi, ultimately opined that, the rain guard compound is a chemical as per the certificates issued by the above Department, therefore opined that the rain guard compound is only a chemical like rubber coat.

When the controversy arose before the Division Bench, whether rain guarding compound was a chemical or otherwise, unfortunately, the earlier decision of this court in State of Kerala v. Shaji Joseph reported in [2003] 129 STC 475 (Ker); [2003] 11 KTR 210 (Ker.) was not brought to the notice of the Division Bench. If only the said decision was brought to the notice of the lordships, the conflicting views would hot have been there. However, the fact remains, because of these two conflicting views, later on, as stated above, this reference came to be made to a larger Bench.

It is pertinent to mention, subsequent to reference order, when matter came up before the Full Bench, on earlier occasions, two orders came to be made on different dates. The first order is dated August 3, 2009, wherein the Bench opined that the Appellate Tribunal did not enter a finding on the fact that, whether polystik compound is used essentially as an adhesive or as a rain guard or as a plant protection chemical, and if there are more than one user, which is the predominant use to which the product is put to. Therefore, their lordships held, since the law has to be decided on the basis of the facts established, and as it is a mixed question of fact and law, directed the Tribunal to give the parties an opportunity to adduce the evidence and enter a finding as to what is the predominant use of the product and six months time was granted to the Tribunal so as to enable the Tribunal to give a fact finding opinion. Later the matter came to be adjourned on two or three occasions, awaiting report from the Tribunal.

By order dated November 26, 2010, the Tribunal ultimately opined that, the polystik compound is used essentially as a sealant for the purpose of preventing water from leaking through the plastic rain guard into the tapping panel. With this fact finding, the matter was placed before us.

Though direction was to identify the product in question, whether a chemical or an adhesive, the Tribunal opined that, it was mainly used for preventing water from leaking through the plastic rain guard into the tapping panel. There is no definite opinion, whether it is a chemical or an adhesive. We note from paragraph 3 of the orders of Tribunal; that the letter dated March 5, 2007 of the Chairman, Rubber Board addressed to the Secretary (Taxes), Government of Kerala, was one of the base for the opinion of the Tribunal, wherein it is noted that, the Chairman in the said letter has stated that rain guarding is a compound used not for its adhesive properties on the trees, but to act as a protectant fungicide. It acts as sealant, which protects the plant from the seepage of water on to the tapping panel. There is another letter, which was taken into consideration by the Tribunal, dated September 6, 1999 of the Rubber Protection Commissioner, who opined that, this is a plant protection compound, though is having bituminous base but is essentially a material used for protecting the tapping panel from infection due to fungus and other microbes and hence it should be classified as a plant protection chemical. According to him rain guarding compound is used not for its adhesive properties on the trees but to act as a sealant to prevent seepage of water. The Tribunal has also referred to the method of rain guarding, described as per the book published by Rubber Research Institute of India--a book on Natural Rubber.

With the above material, we have to decide, whether the product in question is a rain guard compound used as an adhesive or as a plant protection chemical or a sealant, i.e., water proof to prevent the water seepage into the rubber tapping area.

The learned counsel for the assessee relies on several decisions. To contend that the High Court is not entitled to make statements on technical matter, without any material on record, he relied upon Saraswati Industrial Syndicate Ltd. v. Commissioner of income tax [1999] 237 ITR 1 (SC). He also refers to Commissioner of income tax v. D.L.F. United [2000] 243 ITR 855 (SC) to contend that the High Court has no power to reconsider the evidence and arrive at a conclusion contrary to that of the Tribunal.

He refers to Indo International Industries Vs. Commissioner of Sales Tax, Uttar Pradesh, . In this case controversy was, whether hypodermic clinical syringes could be regarded as "glassware" under entry No. 39 of the First Schedule to the U.P. Sales Tax Act, 1948. The lordships, after referring to the purpose for which hypodermic clinical syringes were used, opined that, though the expression "glassware", dictionary meaning means "articles made of glass", however, in commercial sense, glassware would never comprise articles like clinical syringes, thermometers, lactometers and the like which have specialised significance and utility. Therefore in popular or commercial parlance a general merchant dealing in "glassware" does not ordinarily deal in articles like clinical syringes, thermometers, lactometers, etc., which articles though made of glass are normally available in medical stores or with the manufacturers thereof like the assessee in that case. Ultimately, their lordships held that, the clinical syringes, which the assessee manufactured and sold cannot be considered as "glassware" falling under entry 39 of the First Schedule to the Act.

He relies on Mukesh Kumar Aggarwal & Co. v. State of Madhya Pradesh [1988] 68 STC 324 (SC); CDJ 1987 SC 372, to contend that in a taxing statute words which are not technical expressions or words of art, but are 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". In other words, their lordships opined, the words must be used in popular sense and not in a technical or scientific sense. In the above case, timber was the article, which came up for consideration. While referring to the timber, though the timber has two meanings, ultimately, their lordships held the popular meaning of the same has to be taken into consideration and not technical sense.

He places reliance upon State of A.P. Vs. General Electronic Corporation, , wherein their lordships had an occasion to consider what exactly M-seal means, whether, it is an adhesive or not. Ultimately, it was held that M-seal is not an adhesive and it is not covered by entry 191 of the First Schedule to the Andhra Pradesh General Sales Tax Act of 1957. According to them, it was used as a blocking agent to block the leakages of liquids and is covered by entry general goods.

He also relies upon Mukesh Kumar Aggarwal and Co. Vs. State of Madhya Pradesh and Others, , to contend that common parlance test is to be applied and not user test.

As against this, the learned Government Pleader relies upon State of Gujarat v. Indian Petrochemicals Corporation Ltd. [1992] 86 STC 95 (Guj). In this case, the question was whether linear alkyl benzene (LAB) is a petroleum product or not. Their lordships held that though linear alkyl benzene is manufactured from kerosene and benzene, both petroleum products, has to be treated as a petroleum product, unless it can be shown that it ceased to be one after manufacture, especially since persons dealing in the commodity treat (LAB) as a petroleum product.

He relies upon State of Tamil Nadu v. Indian Eyelets Industries [1984] 55 STC 354, wherein the question arose before their lordships was whether Fiksol--S. 69 is a chemical, which attracts expression "dyes and chemicals" in entry 138 of the First Schedule to the Tamil Nadu General Sales Tax Act. Their lordships held that Fiksol-- S. 69 is an all purpose adhesive used for binding various surfaces such as leather, rubber, etc., though made of certain ingredients which are in the form of chemicals, cannot be treated to be a chemical by itself since the use of the product was adhesive for binding purpose, therefore any chemical effect or result in any change cannot be the criterion, ultimately held that, it would not attract the expression "dyes and chemicals".

He also relied upon Excise and Taxation Officer Vs. T.R. Solvent Oil Pvt. Ltd. and Another, . The question therein was what exactly the "de-oiled cake or castor, neem and mahua" means. Their lordships ultimately held that different commodities are classified on the basis of their use and denomination. Generally, a tariff entry is construed by applying common parlance test by considering what sense is to be attributed to an entry in its popular sense by people conversant with the subject-matter.

Among these arguments and decisions, we also have Rubber Board literature on rain guarding. As per rain guarding literature, rain guarding is essential for regular tapping and during rainy season tapping can be carried out by fixing polythene rain guard to the trunk above the tapping cut. It says this process is undertaken to prevent the loss of tapping days during the rainy season. A detailed method of rain guarding as stated in the literature reads as under :

Method of rainguarding

The different steps involved in polythene skirt rainguarding are (Plate 34.b) given below:

&Bull; Frill the polythene at equal distance using a sewing machine, ensuring 40 per cent reduction in length.

&Bull; Using a scraper, lightly scrape the dry bark 10 cm above the tapping cut and parallel to it (Plate 35.a). The scraped brand should extend a minimum of 15 cm from front and back end of the tapping cut.

&Bull; After removing the dust, firmly smear a thin film (roughly 2 mm thick and 4 cm wide) of rainguard compound on the scraped band (Plate 35.b)

&Bull; Fix the frilled polythene on this, ensuring that only the lower half (2 cm) of the rainguard compound is covered by the polythene,

&Bull; Fix the "kora" cloth ribbon of around 2 cm width firmly using suitable stapler pins over the cut end of the polythene in such a that 1 cm width of the cloth will be over the polythene and the remaining portion over the compound (Plate 35.c). It is desirable to use medium-quality cloth, as it ensures infiltration of the rainguard compound and thereby proper binding.

&Bull; Then apply the second coat of the compound to completely cover the cloth ribbon (Plate 35.d)

Apart from this, we also have the benefit of literature of products, i.e. well coat, stick well, well stick and fix well under the brand name of info-mark, manufactured by Well Worth Engineers & Polymers Industrial Estate, Ettumanoor, who was the respondent in TRC No. 359 of 2002 and connected cases (latter judgment of this court), wherein their lordships held the product as a chemical. The information given by the manufacturing company as per the literature shows, well coat is a protection compound and stick well is a high quality, economic and easy to use rain guarding compound, which is a paste used when fixing the plastic sheets to rubber trees to facilitate the tapping during rainy days. Well stick is also their product with a high quality of rain guarding compound. Fix well is another rain guarding compound meant for a customer, who looks primarily for best effect. As a matter of fact, both stick well and well stick are used for the same purpose, i.e., for pasting the plastic sheets to rubber sheet, as per this literature. The rain guarding literature given by the Rubber Board refers to rain guard compound mainly containing bituminous chemical. Bitumen is a non-crystalline viscous material, black or dark brown, which is substantially soluble in carbon disulphide (CS2), possessing adhesive and water-proofing qualities. Bitumen does occur naturally, but for all intents and purposes it is petroleum on which the world relies for its supplies of bitumen of the present world. Bitumen''s main property is that of a very strong and durable adhesive that binds together a very wide variety of other materials without affecting their properties. Its durability is essential to major engineering projects such as roads and waterways where it must do its job for 20 years or more.

We are not concerned with how many types of bitumen are in existence. We are only concerned with the property of the bitumen which is the main chemical used in rain guarding compound. The very process of rain guarding, as mentioned above, shows that a thin coating of a bitumen-based adhesive is smeared on the scraped portion of the trunk of the rubber tree. Then a frilled polythene skirt like material is put, which is covered with a kora cloth and then both kora cloth and polythene cover are stapled to keep it in the proper place and again another coating of adhesive is applied so as to keep the rain guard leak proof. As we understand from this literature, bitumen based compound is mainly used for the rain guarding of rubber trees, because of its high quality of adhesive nature. No doubt, water proofing quality is also one of the properties of the product, but, the fact that, it is used below the polythene sheet and again above the polythene sheet would only indicate that to safeguard the placement of the polythene sheet and kora cloth over the scrapped portion of the trunk of the rubber tree, this product is used. Another layer put above the polythene and kora cloth is, so as to see that kora cloth and polythene cover would not come out from the rubber tree, due to pressure of the water during the rainy season.

The argument of the learned counsel for the assessee, is that, the staple pins with the stapler are used to keep the kora cloth and polythene, but the fact remains over the bitumen based adhesive, the polythene is fixed to see that the polythene sheet gets affixed to the rubber plant, which cannot be easily pulled out by human hand or during the rainy season. The second coat is nothing but a cautious method to see that rain guard proofing does not come out from the rubber tree due to the water or any other external force.

If it is used for the main purpose of coating on scrapped portion of the rubber plant, there was no reason why the second coating is applied on the polythene and kora cloth, as the protection is intended to the rubber plant because a leak proof material is put above the scrapped portion. Therefore, the very exercise how this compound is used during rain guarding process indicates only as a double proof to see that no water enters the scrapped bark of the rubber tree, they make the polythene guard as the skirt affixed to the trunk with double layers of rain guarding compound. The literature in local language (Malayalam) published by the Rubber Board, refers to the rain guarding compound as an adhesive product for the purpose of rain guarding during the rainy season. By no stretch of imagination, the entire process of rain guarding refers to the user of rain guard compound as a chemical or a water proof.

If it has to be used as a water proof, the method of using the product is also very essential to understand, whether it is used as a water proof or chemical to protect the plant or as an adhesive. If it is used as a water proof to the scrapped bark portion of the rubber plant, if rubber has to be tapped out of the cut portion of the bark, this product would definitely obstruct the free-flow of rubber. As a matter of fact, the stages of rain guarding process indicate, this product is not used, where actually rubber is tapped, but it is used at a place, normally 15 cms. above the place where the rubber is tapped. It is used only at the place where the rain guard, i.e., polythene and kora material is affixed by scrapping a portion of the trunk. If the property has to be used as a water proof to prevent fungicide or infection, essentially it has to be used at the place where the rubber is tapped, because that place is exposed to the atmosphere and moisture in the atmosphere can definitely attract not only the fungus but also other insects. If this has to be used as a water proof, then there is no use of polythene and kora cloth above the rain guard compound. The entire process clearly indicates, kora cloth and polythene are put together by stapling the two materials and these two materials are affixed to the rubber tree only with the use of this rain guard compound. Except the rain guard compound, there is no other material which is used in the entire process to affix the polythene material to the rubber plant as such. Therefore, the entire process, what we understand from the literature and also how the product is marketed, would only indicate, that it is marketed as a strong adhesive compound rather than anything else. Therefore, the predominant use of the product would come into play and one has to go by the predominant use of the product rather than other incidental uses of the product in question. In none of the literature, it refers the user of the product as a plant protector, though, at some places, it says, the bitumen can be used as a water proof material. So far as the predominant use of the material and how it has to be dealt with is concerned, we refer to Appplico Vs. State of Kerala, , paragraph 6 of the said decision is relevant which reads as under (pages 569 and 570 in 118 STC) :

Predominant test can be applied with regard to the price, the proportion of the major metallic component and such other relevant factors. In fact in a controversy of this nature common parlance test is a good guide. Expression "common parlance" has a definite connotation. It means, identify of a commodity as understood by a common man or a person in the commercial field dealing with that product. As a necessary consequent of the principle that words are understood in their ordinary or natural meaning in relation to the subject-matter, in legislation relating to a particular trade, business, profession, art or science, words have a special meaning in that context are understood in that sense. Such a special meaning is called the technical meaning to distinguish it from the more common meaning that the word may have. Lord Jowitt, L.C. has stated the rule as follows :

''It is, I think, legitimate in construing a statute relating to a particular industry to give to the words used a special technical meaning if it can be established that at the date of the passing of the statute such special meaning was well understood and accepted by those conversant with the industry.'' As pointed by Lord Esher, M.R.,

''If the Act is one passed with reference to a particular trade, business or transaction and words are used which everybody conversant with that trade, business or transaction knows and understands to have a particular meaning in it, then the words are to be construed as having that particular meaning.''

The same rule applies in construing the words in a taxing statute, which describes the goods that are liable to taxation. The Supreme Court has consistently taken the view that in determining the meaning or connotation of words and expressions describing an article in a tariff schedule, one principle which is fairly well-settled is that those words and expressions should be construed in the sense in which they are understood in the trade by the dealer and the consumer. Reason is that it is they who are concerned with it, and it is the sense in which they understand it which constitutes the definitive index of legislative intention. Similar test is applied for determining when manufacture takes place or in other words whether an article after subjecting it to processing becomes a different article or remains the same. Question to be asked in such cases is : ''How is the product identified by the class or section of people dealing with or using the product ? It is generally by its functional character that the product is so identified''. If a word has acquired a particular meaning in the trade or commercial circles that meaning becomes the popular meaning in the context and should normally be accepted.

We also refer to Deputy Commissioner v. Western India Plywoods (?) Ltd. [1980] 46 STC 331 (Ker); [1980] KLT 592 (paragraph 5) what exactly the predominant user of a product means and how it has to be understood, which reads as under (page 334 in 46 STC) :

Once it is found that the commodity which forms the subject-matter of the transaction of sale or purchase is directly covered by an entry in the First Schedule the benefit of the concessional rate becomes available to the assessee and that will not be lost by reason of the fact that the goods purchased were used by the assessee for a purpose other than what is regarded as the predominant or ordinary use of that article. We are therefore of the opinion that the Tribunal was right in holding that since what the assessee had purchased was only firewood, the fact that a good part of the total quantity purchased during the first two assessment years and the entirety of what was purchased during the 3rd year had been utilised as raw material for the manufacture of hardboard would not operate to deprive the assessee of the benefit of the concessional rate available on account of the inclusion of the commodity in the First Schedule. No interference is, therefore, called for by this Court with the order sought to be revised. These tax revision cases are accordingly dismissed, but, in the circumstances without any direction regarding costs.

In view of the above discussion and reasoning, we are of the opinion, the product in question is to be classified as an adhesive and it is neither a plant protection chemical nor a water proof material. We answer the reference accordingly. In view of our opinion on the reference, review petitions have to be allowed, setting aside the orders of the Tribunal dated January 4, 2002 in T.A. No. 15 of 1998 and dated November 30, 2002 in T.A. No. 232 of 2001. We further opine that the law laid down by the Division Bench of this court in State of Kerala v. Shaji Joseph [2003] 129 STC 475 (Ker); [2003] 11 KTR 210 is upheld and we overrule the view of the Division Bench in the unreported decision dated October 29, 2004 in TRC No. 359 of 2002 and connected matters.