SC disallows ‘packing material’ as ‘raw material’ for the purpose of exemption under Karnataka Entry Tax Act [Read Judgment]

Ambiguity - Supreme Court - Tax - Taxscan

While dismissing an appeal filed by Hindustan Lever Ltd (Hindustan Lever Ltd vs State of Karnataka), the two judge bench of Supreme Court of India observed that, the packing material cannot be regarded as raw material, component parts or inputs used in the manufacture of finished goods in the context of the Karnataka Entry Tax Act read with Schedule I, such packing material is neither exempt nor chargeable at 1%.

The appellant Hindustan Lever Ltd is a public limited company having a tea manufacturing unit at Dharwad and various other units which also manufacture tea. The tea manufactured by the appellant is of three types, namely, packet tea, tea in tea bags, and quick brewing black tea.

The appellants submitted that the Dharwad Unit, as opposed to the other units manufacturing tea, is a new unit and is, therefore, exempt altogether from payment of entry tax on packing material of tea under a notification dated 31.3.1993 issued under Section 11A of the Karnataka Tax on Entry of Goods Act, 1979.

The Court was considering the question, whether “packing materials” which enter the local area for consumption therein, that is for packing tea that is manufactured by the appellant, can be said to be raw material, components, or inputs used in the manufacture of tea.

The bench comprising of Justice A K Sikri and Justice R F Nariman observed that, “on a perusal of the definition of “goods” in Section 2(A)(4a) of the Entry Tax Act, the said definition is an exhaustive one including all kinds of movable property and livestock. It is obvious from a reading of this definition that marketability does not appear to be a sine qua non for something to qualify as “goods” under the Entry Tax Act, unlike the Central Excise Act, and this basic fact will have to be kept in view while dealing with some of the judgments that have been cited before us. This is for the reason that anything that is tangible, without more, and enters a local area for consumption, sale or use therein is taxable, the taxable event being ‘entry’ and not ‘manufacture’ of goods, which, as has been noticed hereinabove, brings in the concept of marketability in the context of a duty of excise, which is absent in the context of entry tax”.

The Court also added that “Section 2(A)(8a) wherein the “value of the goods” is defined, also makes a distinction between “goods” as such, and “packing material”, making it clear that charges borne by a dealer as cost of packing would have to be included in the “value of goods”. In the context of the Entry Tax Act, the difference between ‘goods’ used in the manufacture of goods and “packing material” is also brought out by Schedule I. Packing materials are separately defined in Entry 66. On the other hand, raw materials, component parts and inputs, which are used in the manufacture of an intermediate or finished product, are separately and distinctively given in Entry 80 thereof. The context of the Entry Tax Act therefore is clear. When raw materials, component parts and inputs are spoken of, obviously they refer to materials, components and things which go into the finished product, namely, tea in the present case, and cannot be extended to cover packing materials of the said tea which is separately provided for by the aforesaid Entry 66”.

The notification dated 23.9.1998 issued under Section 3 uses identical language as that contained in Entries 66 and 80 of Schedule I to the Entry Tax Act. Equally, notification dated 31.3.1993 is an exemption notification issued under Section 11A which also uses the identical language of Entry 80 of Schedule I. This being the case, it is clear that neither notification can be read to include “packing material” as “raw materials, component parts or inputs used in the manufacture” of tea, the bench also said.

The bench while rejecting the contentions of Senior Advocate Arvind P Datar, observed that “Explanation II makes it clear that though packing materials may be liable to tax at 2%, yet if they fall in Explanation II, they would be liable to tax at the rate of 1%. This would fly in the face of the scheme of Schedule I of the statute which, as has been held earlier, makes it clear that in no case can packing materials be said to be raw materials, component parts or inputs used in the manufacture of finished goods. For this reason alone we find it difficult to construe the notification dated 23.9.1998 in the manner suggested by the appellants”.

While upholding Karnataka High Court Judgment, the court observed that, “a manufacturer for the purpose of the said order is specifically a person who produces value added products commercially known as tea. The context of the said definition is for the purpose of registering manufacturers or producers and buyers of tea, having relevance therefore to the sale aspect of tea. As has already been held by us, the context of entry tax being different”.

Read the full text of the Judgment below.