Deputy Commissioner (Law), Board of Revenue (Taxes) Vs. Thiruvananthapuram Regional Co-operative Milk Producers Union Ltd. - Court Judgment

1. State is the revision petitioner. Assessee is the respondent. The assessment year is 1991-92. The matter arises under the Kerala General Sales Tax Act, 1963, for short, 'the Act'.

2. The respondent/assessee is a milk marketing co-operative society at Kollam. For the assessment year 1991-92, the assessee filed a return disclosing a total turnover of Rs. 7,63,47,185.39 and claimed exemption on a turnover of Rs. 7,07,51,515.89. The assessee admitted only a taxable turnover of Rs. 62,13,269.22. The assessing authority after verification of the books of accounts of the assessee completed the assessment on a taxable turnover of Rs. 62,13,270 as per order dated November 28, 1992 (annexure A). The question is whether 'skimmed milk powder' when sold as milk after adding water is 'fresh milk'.

3. The Deputy Commissioner, AIT & ST, Kollam initiated suo motu proceedings under Section 35 of the Act stating that on a scrutiny of the assessment records for the year 1991-92, it is seen that the assessee had effected inter-State purchase of skimmed milk powder for Rs. 65,41,200 and considering the opening and closing stock of the above item, there is sale or consumption of skimmed milk powder valued at Rs. 64,57,934. The Deputy Commissioner also observed that as the assessee had sufficient purchase of fresh milk, it cannot be presumed that the milk powder was used for making milk and that the society had not produced any evidence to show that skimmed milk powder purchased was used for making milk. It was further stated that 'fresh milk' is exempted from tax under S.R.O. No. 342 of 1963. The Deputy Commissioner, therefore, was of the view that the turnover of Rs. 65,41,200 representing the purchase turnover of skimmed milk powder has escaped assessment. The assessee filed objection to the notice issued by the Deputy Commissioner. However, rejecting the said objections the Deputy Commissioner passed the order dated September 25, 1996 (annexure B) setting aside the assessment order for the year 1991-92 and remanding the matter to the assessing authority for fresh disposal in accordance with law. The petitioner challenged the said order before the Sales Tax Appellate Tribunal, Trivandrum. Before the Tribunal, the petitioner contended that milk procurement in dairies is highly influenced by seasons, which in dairy parlance is termed as 'flush and lean seasons'. Acute shortage of milk procurement is a grave phenomenon felt during the lean months of January to April every year. This situation necessitates reconstitution of skimmed milk powder in order to maintain the fluid milk stock and sustain the marked demand during the lean months. It is further stated that during lean season, the petitioner usually procures skimmed milk powder from neighbouring State since the said powder is less voluminous than fluid milk and can be transported without incurring substantial transportation costs. Being dried form of fresh milk, buffer stock of SMP can be stored in the dairy by which the appellants can assure the milk availability during lean months. It was also contended that reconstitution of skimmed milk powder to make fresh fluid milk is legally permitted and that reconstituted milk is not a product but a liquefied form of fresh skimmed milk powder. The process is also explained. In the dairy, 'S.M.P' reconstituted milk is pasteurised, standardised and converted into fresh pasteurised toned milk for sale. It is further contended that ever since from the commencement of their business, the department has completed the assessments for all the previous years by accepting the return and the books of accounts. The assessee also contended that the Deputy Commissioner had no material or data before him for invoking the suo motu proceedings under Section 35 of the Act and that the assessment was set aside on mere surmises and presumptions. The Tribunal found force in the contention of the petitioner that there is no material on record before the Deputy Commissioner to establish that the appellants have effected any sales of skimmed milk powder as such. The Tribunal accordingly set aside the order of the Deputy Commissioner and restored the order of the assessing authority.

4. We have heard the learned Government Pleader appearing for the petitioner and Sri A. Kumar learned Counsel appearing for the respondent/assessee. The assessing authority had completed the assessment of the petitioner for the year 1991-92 without including the turnover of skimmed milk powder in the taxable turnover. However, the Deputy Commissioner, on verification of the assessment records, noted that the assessee had effected inter-State purchase of skimmed milk powder for Rs. 65,41,200 during the assessment year and on verification of the opening stock and closing stock of this item, it was found that the assessee had disposed of skimmed milk powder to the tune of Rs. 64,57,934 during the assessment year concerned and that the assessee had not disclosed this transaction in the accounts. The Deputy Commissioner also noted that the assessee had not produced any evidence to show that skimmed milk powder had been used for making milk and further that only fresh milk is exempted from tax. The Deputy Commissioner further noted that the assessing authority had omitted to include the turnover of skimmed milk powder in the taxable turnover. It is in this view of the matter, the Deputy Commissioner had set aside the assessment and directed the assessing authority to redo the assessment afresh and in accordance with law.

5. The contention of the assessee is that the skimmed milk powder purchased by the assessee from outside the State was not sold as such, but had used the same for making milk. The process employed by the assessee, it is stated, is that skimmed milk powder is used along with the fresh milk for maintaining a particular standard and quality and for use during lean period. According to the assessee, since the skimmed milk powder is used along with fresh milk obtained from the farms for producing more milk for sale and for maintaining the quality, the skimmed milk powder so used must also be treated as fresh milk for the purpose of levy of tax under the Act. The further contention of the assessee is that since fresh milk is exempted from tax under S.R.O. No. 342 of 1963 and later by including it as item No. 22 in the Third Schedule to the Act, the turnover of skimmed milk powder is also entitled to exemption.

6. In order to appreciate the rival contentions, it is necessary to refer to the relevant entries in the Act. Entry 122 of the First Schedule to the Act as it stood during the assessment year 1991-92 reads :

First Schedule

Goods in respect of which single point tax is leviable under Sub-section (1) or Sub-section (2) of Section 5

____________________________________________________________________________Serial Description of Point of levy Rate of taxNo. goods (%)____________________________________________________________________________(1) (2) (3) (4)____________________________________________________________________________*** *** *** ***122. Milk products, including milk At the point of first 8%powder, baby food, sale in the State byghee, cheese and butter a dealer who isexcept curd, butter milk, liable to tax underHorlicks, Boost, Bournvita, Section 5Complain and similar itemswhether bottled, canned orpacked.*** *** *** ***____________________________________________________________________________Here it must be noted that from the assessment year 1992-93, the above entry was numbered as entry 84 with a change in the rate of tax from 8 per cent to 10 per cent.

7. Fresh milk was exempted from tax under Notification S.R.O. No. 342 of 1963 of the Act. The milk powder purchased by the assessee no doubt would fall under entry 122 of the First Schedule to the Act. Here it must be noted that entry 122 of the First Schedule deals only with milk products and not milk. Since milk is not an item, specifically included in any of the entries in the First, Second and Third Schedules to the Act during the relevant assessment year, it is exigible to tax under the Act as a multi point item under Section 5(1)(ii) of the Act. It is in those circumstances, fresh milk is exempted from tax as item No. 24 in the Notification S.R.O. No. 342 of 1963. Admittedly, the petitioner had purchased skimmed milk powder from outside the State by issuing C form declaration provided under the Central Sales Tax Act, 1956. One of the conditions for issuance of the declaration in C form is that it must be an item specified in the certificate of registration issued to the dealer. Another condition is that the goods purchased by issuing C form is intended either for resale by him or for use by him in the manufacture or processing of goods for sale. In the assessee's case as already noted the skimmed milk powder purchased by issuing C form has been used for processing the fresh milk for sale and therefore the provisions of Section 8(3)(b) of the Central Sales Tax Act, 1956 and the declaration in C form had been satisfied.

8. As we have already noted, milk powder has been separately dealt with under entry 122 of the First Schedule to the Act, the sale of which is liable to tax at the point of first sale by a dealer, who is liable to tax under Section 5 of the Act at the rate of 8 per cent. The claim of the assessee, as already noted, is that it is entitled to exemption in respect of the turnover of skimmed milk powder under S.R.O. No. 342 of 1963 since it is used in the processing of fresh milk. As already noted, item No. 24 of the notification exempts only fresh milk. Skimmed milk powder is a product of milk and it is reconstituted as milk. It can never be understood as fresh milk falling under item No. 24 of S.R.O. No. 342 of 1963. A division Bench of this Court in Ernakulam Regional Co-operative Milk Producers Union v. State of Kerala (2001) 9 KTR 459, considered the question whether skimmed milk powder converted as milk, pasteurised the same and sold to customers would fall within the expression fresh milk. It was held that, in order to fall under fresh milk, it must be the original milk, that is the milk obtained from the farm. The division Bench in the above decision understood the meaning of the word 'Fresh' as 'original'/'new'. However, another division Bench of this Court to which one of us (Justice G. Sivarajan) was a party considered this question in the judgment dated January 29, 2003 in W.A. No. 159 of 2003. In that case, the co-operative society sought for a declaration that 'fresh milk' in entry 23 of the Third Schedule to the Act prior to January 1, 2000 includes pasteurised milk, toned milk and reconstituted milk. In that case, contention was taken on behalf of the assessee that the appellants cannot sell fresh milk in its original form without undergoing some process for satisfying the standards prescribed by the Prevention of Food Adulteration Act and that the Legislature had subsequently amended the particular entry No. 23 regarding 'fresh milk', including pasteurised, toned and reconstituted milk also within the entry of 'fresh milk' and further contended that the decision of the division Bench of this Court in Ernakulam Regional Co-operative Milk Producers Union's case (2001) 9 KTR 459 and the decision in T.R.C. No. 299 of 2000 and connected cases required reconsideration. The division Bench however, found that the decision rendered in Ernakulam Regional Co-operative Milk Producers Union's case (2001) 9 KTR 459 has to be followed. Another division Bench of this Court in the judgment Pooja Milk Foods (P) Ltd. v. State of Kerala dated 4th August 2003 in O.P. No. 5975 of 2002 and connected cases distinguished the decision in Ernakulam Regional Co-operative Milk Producers Union's case (2001) 9 KTR 459 in paragraph 12 of the judgment as follows :

According to the plain language of the statute, the taxable event is the passing of property in goods. Under the provision, the sale of 'fresh milk' is not taxable. If the entry is literally construed, milk may be treated as fresh only at the moment it is 'drawn from the cow'. Thus, even when it is sold after an hour, it may be contended that it was already an hour-old. It was not fresh at the time of sale. Such could not be the intention of the Legislature. In fact, -while granting exemption in respect of the sale of fresh milk, the obvious intention was that the benefit shall be admissible if the milk was fresh at the time of its reaching the consumer. It is to ensure freshness that the dealer has to subject milk to a process of heating and cooling. Pasteurisation only preserves the product and does not let milk go sour or stale before it reaches the customer. Since the process of heating and cooling does not result in a new product, the milk continues to be 'fresh milk' and its sale cannot be subjected to the levy of tax.

Under the above circumstances, the division Bench held that pasteurised milk is also fresh milk for the purpose of exemption under entry 23 of the Third Schedule to the Act.

9. Hence it must be noted that the above division Bench considered the decision in Ernakulam Regional Co-operative Milk Producers Union Ltd. case (2001) 9 KTR 459 relied on by the counsel for the Revenue and observed as follows :.

The division Bench was considering a case where the dealer was receiving milk from farms, milk co-operative societies or making milk by adding water to the skimmed milk powder. It was claimed by the assesses that there was no difference 'between fresh milk and pasteurised milk or milk made using skimmed milk powder'. This claim was not accepted by the court. However, such is not the position in the present case. The petitioner is not adding anything to milk. It is not combining the fresh milk with milk prepared by adding water to the skimmed milk powder and then pasteurising the whole product. Thus, the decision of the division Bench is really not applicable to the facts of the present case. .

The facts of this case is different. In the instant case, according to the assessee, the assessee had used skimmed milk powder with fresh milk by adding water to satisfy the requirement of maintaining quality for the purpose of the Prevention of Food Adulteration Act during the period when sufficient quantity of fresh milk is not available. This is not the situation in the decision last mentioned. Hence the said decision has no application to the present case. This case squarely falls within the ambit of the other decisions already referred to earlier.

10. There is one more reason to hold that the assessee is liable to pay sales tax on the turnover of skimmed milk powder, for the items milk powder squarely falls within entry 122 of the First Schedule to the Act as it stood at the relevant time. As such when the assessee had disposed of the skimmed milk powder obtained from outside the State either as such or in some other form, is exigible to tax under the Act at the rate specified in the First Schedule to the Act. As already noted, item 24 of the Notification S.R.O. No. 342 of 1963 only exempts fresh milk, which according to us will not take in any item falling under entry 122 of the First Schedule to the Act. The items considered in entry 122 are only products of milk and not milk itself.

11. In fairness to the counsel for the assessee we will refer to a decision of the Andhra Pradesh High Court in State of Andhra Pradesh v. Guntur District Milk Producers Co-operative Unit Ltd. [1990] 79 STC 211. In that case the division Bench was considering a case where the Andhra Pradesh Government by a notification issued under Section 9 of the Andhra Pradesh General Sales Tax Act, 1957 exempted 'the sale of pasteurised milk by the Guntur District Milk Producers Co-operative Unit Limited, Vadlamudi, from the levy of sales tax payable under the said Act with effect from 1st August, 1978'. For the assessment years 1982-83 and 1983-84 the society sold a certain quantity of skimmed milk powder. Tax was levied on the turnover of skimmed milk powder treating it as different goods. In the appeal the Tribunal held that skimmed milk powder is nothing but milk and, therefore, covered by the exemption notification. The division Bench held thus :

We are inclined to agree with the Tribunal. Since the milk cannot be preserved for long period, it is converted into powder and sold as such. It is nothing but dehydrated form of pasteurised milk, which is exempted under G.O. Ms. No. 20. In our opinion, the interpretation subserves the object of exemption and must, therefore, be adopted.

In view of the decision of this Court discussed above and in the light of the provisions of the KGST Act--item 122 of the First Schedule and item 24 of S.R.O. No. 342 of 1963 no inspiration can be derived from the decision of the Andhra Pradesh High Court discussed above.

12. For all these reasons, we are in full agreement with the Deputy Commissioner of Sales Tax that the assessing authority had omitted to include the turnover of skimmed milk powder in the taxable turnover for the year 1991-92. In these circumstances, though the Sales Tax Appellate Tribunal had cancelled the order of the Deputy Commissioner, only on the ground that there is no material before the Deputy Commissioner to invoke the suo motu jurisdiction vested under Section 35 of the Act, we find that the said finding of the Tribunal is factually incorrect and legally unsustainable. Accordingly, we set aside the order of the Tribunal and restore the order of the Deputy Commissioner (annexure B).