CASE COMMENTS/TAX/TAXATION

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A Comment on
Mafatlal Industries Limited v. Nadiad Nagar Palika1

by Dr Arun Kumar Barthakur*

Cite as : (2003) 1 SCC (Jour) 17



The word "octroi" originating from the French word "octroyer" means "to grant" and in its original use meant "an import" or "a toll" or "a town duty" on goods brought into a town. Entry 52 List II of the Seventh Schedule of the Constitution of India authorises the State Legislatures to make law under Article 246(3) with respect to "octroi":

"52. Taxes on the entry of goods into a local area for consumption, use or sale therein."

It would, however, be seen that the word "octroi" has not been used in our Constitution; instead it refers to taxes on entry of goods into a local area for any of the three purposes mentioned in Entry 52 List II, which in common parlance has come to be known as octroi. The various State Legislatures have enacted law under this entry empowering municipalities to impose tax on entry of goods into their area for consumption, use or sale therein. Therefore, whether octroi is leviable on goods brought into the octroi area or not depends on the meaning of the key words "consumption, use or sale therein". These words have been subject to controversy before the Supreme Court of India in various decisions.

In Anwarkhan Mahboob Co. v. State of Bombay2 a five-Judge Constitution Bench of the Supreme Court had occasion to explain the meaning of the word "consumption" in the context of the Explanation to sub-clause (a) of clause (1) of Article 286 of the Constitution. Das Gupta, J., speaking for the Court, explained its meaning thus:

"The production of wealth, as economists put it, consists in the creation of 'utilities'. Consumption consists in the act of taking such advantage of the commodities and services produced as constitutes the 'utilization' thereof. For each commodity, there is ordinarily what is generally considered to be the final act of consumption. For some commodities, there may be even more than one kind of final consumption. ... It may even happen in such cases that, after one consumer has performed part of the final act of consumption, another portion of the final act of consumption may be performed by his heir or successor-in-interest, a transferee, or even one who has obtained possession by wrongful means. But the fact that there is for each commodity what may be considered ordinarily to be the final act of consumption, should not make us forget that in reaching the stage at which this final act of consumption takes place the commodity may pass through different stages of production and for such different stages, there would exist one or more intermediate acts of consumption. Thus, the final act of consumption of cotton may be considered to be the use as wearing apparel of the cloth produced from it. But before cotton has become a wearing apparel, it passes through the hands of different producers, each of whom adds some utility to the commodity received by him. There is first the act of ginning; ginned cotton is spun into yarn by the spinner; the spun yarn is woven into cloth by the weaver; the woven cloth is made into wearing apparel by the tailor. At each of these stages distinct utilities are produced and what is produced is at the next stage consumed. It is usual, and correct to speak of raw cotton being consumed in ginning; of ginned cotton being consumed in spinning; of spun yarn being consumed in weaving; of woven cloth being consumed in the making of wearing apparel. The final product—the wearing apparel—is ultimately consumed by men, women and children in using it as dress. In the absence of any words to limit the connotation of the word 'consumption' to the final act of consumption, it will be proper to think that the Constitution-makers used the word to connote any kind of user which is ordinarily spoken of as consumption of the particular commodity.3"      (emphasis supplied)

The words "consumption, use or sale" once again fell for consideration before a three-Judge Bench of the Supreme Court in S.M. Ram Lal & Co. v. Secy. to Govt. of Punjab4 This is an unreported judgment. J.C. Shah, J., speaking for the Bench explained the meaning of the word "use" as follows:

"The expression 'use' is not defined in the Act. In its ordinary meaning the word 'use' as a noun, is the act of employing a thing; putting into action or service; employing for or applying to a given purpose. But the word 'use' occurs in Entry 52 List II of the Seventh Schedule to the Constitution sandwiched between 'consumption' and 'sale', and it must take colour from the context in which it occurs. It is a settled rule of interpretation that when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take, as it were, their colour from each other, that is, the more general is restricted to a sense analogous to the less general: Maxwell on Interpretation of Statutes, 11th Edn., p. 321. The coupling of three words 'consumption', 'use' and 'sale' connotes that the underlying common idea was that either the title of the owner is transferred to another, or the thing or commodity ceases to exist in its original form. Unless it is proved that the wool brought within the limits of the Notified Area Committee, Faridabad, by the appellant was intended to be so employed that it was to become a new commodity or a component of a new commodity, no octroi would be levied by the Notified Area Committee on the entry of wool.5"     (emphasis supplied)

The following principles emerge from the above decisions of the Supreme Court: if the material brought within the octroi limits is employed or put into action or service, or applied for a given purpose in any production process whereby either some utility is added to such material, or such material loses its original form, the intermediate product so produced becomes a new commodity, or a component of a new commodity which is then available for consumption, or use at the next stage for producing a new commodity, or the component of a new commodity and this process goes on until the ultimate commodity ready for final consumption by the ultimate consumer is produced. At every intermediate stage of production whenever the intermediate commodity is applied for a given purpose, the intermediate commodity is consumed for producing a different or new commodity having utility distinct from the original intermediate commodity. The new commodity so produced also loses the original form of the intermediate commodity. As such, in such events when such a new commodity is re-exported from the octroi limits it would attract octroi in the light of the law laid down by the Supreme Court.

In the light of the above principle let us now discuss the decision in Mafatlal case1 rendered by a three-Judge Division Bench of the Supreme Court comprising S.P. Bharucha, J. (as he then was), S.N. Phukan and Ruma Pal, JJ. In this case the appellant, a textile manufacturing company, brought cloth pieces each of 100 metre length within the octroi limits of Nadiad town. The object of bringing the cloth pieces into the Nadiad town was to cut them into smaller pieces of different sizes as per the demands in the market and also to meet the requirement of the relevant excise rules; and then such cut pieces were re-exported out of the octroi limits of the said town.

The municipality of Nadiad town levied octroi duty on the re-exported cloth pieces under Section 99 of the Gujarat Municipalities Act, 1963 (for short the said Act). Clause (16) of Section 2 of the Act defines octroi as follows:

"2. (16) 'octroi' means a tax on the entry of goods into the limits of a municipal borough for consumption, use or sale therein;"

Clause (iv) of sub-section (1) of Section 99 of the Act provides as follows:

"99. Taxes which may be imposed. — (1) Subject to any general or special orders which the State Government may make in this behalf and to the provisions of Sections 101 and 102, a municipality may impose for the purposes of this Act any of the following taxes, namely —

  (i)-(iii) * * *

(iv) an octroi on animals or goods or both, brought within the octroi limits for consumption, use or sale therein;"

Phukan, J., speaking for the Bench, ruled thus:

"Use and consumption would involve conversion of the commodity into a different commercial commodity by subjecting it to some processing.6"

His Lordship explained that by cutting the 100 metre length cloth pieces into smaller pieces of different sizes, no different commodity was produced, and therefore there was no use or consumption of the cloth within the octroi limits. Therefore he held that octroi duty on such goods was not leviable.

With respect it is submitted that this view is contrary to the rule in Anwarkhan case2 wherein the Constitution Bench had interpreted the word "consumption" "to connote any kind of user which is ordinarily spoken of as consumption of the particular commodity", and that whenever any process of production adds any utility to any material used by it, consumption takes place. It is not necessary for the product to be a final commercial commodity; even an intermediate commodity, which needs to be used in further process of production, can be produced only by consuming the intermediate commodity at the previous stage of production process. Similarly, a three-Judge Bench in S.M. Ram Lal & Co.4 ruled that the underlying common idea in combining the three words "consumption", "use" and "sale" is that either the title of the owner to the material in question is transferred to another, or put into action or service, or applied for a given purpose and any utility is added thereto, or the thing or commodity ceases to exist in its original form so that after completion of the job work it becomes a new commodity or a component of a new commodity. Applying these settled principles to Mafatlal case1 it could be said that the 100 metre cloth pieces were consumed in producing the cloth pieces of various smaller sizes which process resulted in changing the original form of the 100 metre cloth pieces. The smaller sized cut pieces of cloth are commercial commodities distinctly different from the 100 metre cloth pieces, each variety being capable of use as component of a new commodity and each having distinctly different utility to the consumer in a particular segment of the market. Moreover, there was a definite object underlying the process of cutting the 100 metre cloth pieces into various smaller sizes; it was admittedly for meeting the demands in the market from various consumers, inasmuch as the 100 metre cloth pieces—though a commercial commodity for a particular market segment—were not marketable as in their original form they did not have the utility to the consumers targeted by the appellants. As such, the appellant was constrained for commercial purposes to convert the 100 metre cloth pieces into various smaller sizes with the definite object of adding utility to them so as to make them useful for the targeted consumers. The Oxford Dictionary gives the meaning of the word "process" as "a series of actions or tasks performed in order to do, make or achieve something". Therefore, the cutting of 100 metre cloth pieces into various smaller sizes is a process of production. Indeed, the appellant Mafatlal Co. had brought the 100 metre cloth pieces to Nadiad town with the clear object of putting them in the process of cutting into various smaller sizes so as to make them marketable to the consumers. As such, smaller cut pieces cannot be construed to be the same commodity as the 100 metre cloth pieces: they are clearly new commercial commodities or components of new commodities. It should also be appreciated that the cost of cutting the 100 metre cloth pieces into smaller pieces gets added to the value of the cut pieces, so that the total value of the resultant products is higher than the original value of the 100 metre pieces brought into Nadiad town. Hence, the reasoning of Justice Phukan, that such an activity was not a process of production, and the process of cutting the 100 metre cloth pieces into smaller cut pieces did not result in new commercial commodities does not agree with the precedents.

Phukan, J., relied on to the decision of the two-Judge Division Bench in HMM Ltd. v. Administrator, Bangalore City Corpn.7 for his ruling. In this case the appellants brought the milk food powder, "Horlicks", in bulk containers (large steel drums) to their packing station situated within the octroi limits of Bangalore City Corporation. Thereafter, the appellants packed the milk powder into unit containers (glass bottles), and re-exported them outside the octroi limits. The Court held that by the process of packing the milk powder out of the bulk containers into unit containers, the bulk milk powder was neither used nor consumed, and hence, octroi could not be levied. It is respectfully submitted that this decision is per incuriam of the Constitution Bench decision in Anwarkhan case2 and the three-Judge Bench decision in S.M. Ram Lal & Co.4 wherein it was ruled that use or consumption of a commodity takes place whenever the thing or commodity is put into action or service, or applied for a given purpose, or ceases to exist in its original form. The Oxford Dictionary gives the meaning of "form" as "the external shape or appearance of something; to make or produce something in particular shape or form". Patently the milk powder contained in the bulk containers could not be sold in its present form without the further process of packing them into saleable bottles. In a sense, the ultimate consumers do not have any utility8 whatsoever of the bulk milk powders, though they serve as intermediate goods to the producers. The bulk milk containers cannot be sold directly to the ultimate consumers in the market. Therefore, the producer carried out the process of converting them into smaller saleable bottles i.e. into retail commercial goods adding further utility to the product by indicating details of content, weight etc. so that they could easily be sold in the market. The MRP of the retail product would include the cost of the glass bottle, the wrapper affixed thereon, labour cost of packing and usually a mark up for the producer for all the trouble of packing. The end product so produced therefore not only has a different form as distinguished from the bulk powder but also a value higher than the value of the bulk powder. As such clearly the bulk quantity was put into action or applied for a given purpose in a production process changing its original form whereby distinct utility is added to the milk powder. In all respects therefore the bottled Horlicks powder was a different commercial commodity from the milk powder contained in the bulk containers. With respect therefore HMM Ltd. case7 was wrongly decided, and being per incuriam of the Constitution Bench decision in Anwarkhan case2 and the three-Judge Bench decision in S.M. Ram Lal & Co.4 has no precedential value. Justice Phukan's reliance on this decision is therefore wrong.

In conclusion, it is respectfully submitted that in Mafatlal case1 the Supreme Court wrongly held that the process of cutting 100 metre cloth pieces into various smaller sizes did not involve consumption or use. The Court failed to appreciate that the process of cutting the cloth pieces into smaller sizes was carried out for the definite purpose of catering to the targeted buyers in the market, adding utility to the said materials, which had resulted in the production of various new commercial commodities or components of new commodities, each having specific and distinct utility to the consumers. The Court therefore erred in holding that in the process of cutting the 100 metre cloth pieces into various smaller sizes, no utility was added or no new commercial commodity was produced. The decision in Mafatlal case1 wrongly precludes the municipalities from earning their just revenue by levying octroi on goods brought into their limits in accordance with law. Therefore, Mafatlal case1 needs to be reconsidered by the Supreme Court to straighten the law.



1     (2000) 3 SCC 1 Return to Text

*   Advocate, Bombay High Court. Return to Text

  1. AIR 1961 SC 213. This decision was followed by the five-Judge Constitution Bench in Burmah Shell Oil Storage & Distributing Co. of India Ltd. v. Belgaum Borough Municipality, AIR 1963 SC 906, which was followed by another five-Judge Constitution Bench in Hiralal Thakorlal Dalal v. Broach Municipality, (1976) 3 SCC 398. Return to Text
  2. Ibid., at pp. 216-17, para 9 Return to Text
  3. 1969 UJ 373 (SC) : AIR 1969 NSC 37 Return to Text
  4. Ibid., at pp. 374-75, para 3 Return to Text
  5. Supra fn 1, at p. 4, para 14 Return to Text
  6. (1989) 4 SCC 640 Return to Text
  7. Webster's Encyclopaedic Unabridged Dictionary gives the meaning of "utility" as "state or quality of being useful; usefulness". Return to Text
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