CA Dr Arpit Haldia

Arpit HaldiaCommon Parlance Test is the most common test used for classification of goods for Levy of Tax under Sales Tax Law. The test has been commonly referred to by the Courts in their judgements. While analysing classification of goods for the purpose of levy of tax, some of the questions and factors which come into the mind are as follows:

a) Common Man’s perception about the Commodity

b) Functions or use for which the goods are being put to use

c) Test most commonly used for the classification of goods

d) Functional Test Vs Common Parlance Test

e) Dictionary Meaning

f) Technical or Scientific Meaning

The matter is a very subjective one and above are only few questions which come to mind while classifying the goods for the purpose of levy of tax. This article aims to analyse and provide a broad understanding on the subject matter.

1. Meaning of Theory of Common Parlance Test:

Broadly Common Parlance Test means that the goods have to be classified in a manner as understood by common man. The theory is formulated on the basic principle that classification of the goods for the purpose of levy of tax has to be made by a common man who knows the goods according to the meaning given to them in normal usage and further he might not be aware of the scientific or technical definitions.

The reason behind the usage of theory of common parlance test has been very aptly described by the Hon’ble Rajasthan High Court in the matter of Assistant Commissioner, Anti Evasion, Rajasthan-I Jaipur Vs. M/s Camlin Limited &Anr. Vide order dated 9th January 2015 as follows:

“The sales tax enactment is one which touches the common man and his everyday life. Therefore, the terms in the said enactment must be in the manner in which the common man will understand them. In other words, the test is as to what a common man viewing or dealing with the article will understand it to be.”

The very basic nature of the Sales Tax Enactment is such that it touches the common man in his everyday life. This very nature of the enactment forms the very basis of the applicability of theory of common parlance test. Further, penalty for wrong classification of goods under incorrect tax rate is also very high, therefore to save a common man from such hassles and penalties and harsh consequences on account of classification of goods on the basis of technical or scientific meaning and otherwise, classification of goods for levy of tax is commonly done as per the general understanding of a common man or as per the meaning he knows the best.

Hon’ble Apex Court in the matter of Porritts & Spencer (Asia) Ltd. A vs State Of Haryana on 6 September, 1978 Equivalent citations: 1979 AIR 300, 1979 SCR (1) 545 summarized the situation as follows:

Where a word has a scientific or technical meaning and also an ordinary meaning according to common parlance, it is in the latter sense that in a taxing statute the word must be held to have been used, unless contrary intention is clearly expressed by the Legislature. The reason is that as pointed out by Story, J., in 200 Chest. (of Tea (supra), the Legislature does “not suppose our merchants to be naturalists, or geologists, or botanists”.

The judgement of the Hon’ble Apex Court provides that legislature also understands that the classification of the goods has to be made by a common man and not by a scientist, botanist or a geologist.

This common man spreads right across from an urban area to a rural area and from being a literate person to being an illiterate person but whoever he may be, he knows the basic characteristics and qualities of the goods in which he is dealing. Its that basic understanding of the goods which the legislature uses for the purpose of classification of goods for the purpose of levy of tax.

Hon’ble Apex Court in the matter of M/s. United Offset Process Pvt. Ltd. Vs. Asst. Collector of Customs, Bombay and Others [1989 Supp.(1) SCC 131], opined about the theory of common pralnace test or trade parlance as follows:

If there is no meaning attributed to the expressions used in the particular enacted statute then the items in the customs entries should be judged and analysed on the basis of how these expressions are used in the trade or industry or in the market or, in other words, how these are dealt with by the people who deal in them, provided that there is a market for these types of goods. This principle is well known as classification on the basis of trade parlance. This is an accepted form of construction. It is a well known principle that if the definition of a particular expression is not given, it must be understood in its popular or common sense viz. in the sense how that expression is used everyday by those who use or deal with those goods.”

Hon’ble Karnataka High Court has summed up the theory of common parlance test in the matter of Diebold Systems Pvt. Ltd. vs The Commissioner Of Commercial … on 31 January, 2005 Equivalent citations: ILR 2005 KAR 2210, 2006 144 STC 59 Kar very aptly as follows:

“38. The Supreme Court in several of its judgment has laid down the rule of interpretation for articles of daily use and commonly traded items, which are mentioned in the Taxing Statutes. The Rule is that if there is no definition in the Statute, we should follow for tax purposes the definition not of the dictionaries or of technical books but of commercial parlance i.e. the popular meaning. The intention of Legislature is, that in Taxing Statutes, when terms are used of common usage, it is the common man’s understanding of the articles which prevails over the technical man’s concept. The place of scientific definition based on technical books, technical literature, dictionaries, etc., is relevant. When the goods are technical, there is no market and so, no market parlance. At the same time, if the goods are not technical, the definition in the market parlance would apply.”

It can be observed from the above that Hon’ble Karnataka High Court in the above decision has laid down the basic criteria wherein the common parlance test can be used. The basic condition for the applicability of the theory of common parlance test is as follows:

i. No meaning has been attributed to the expressions used in the Statute and

ii. There is an open market of the commodity where the commodity is commonly traded

The Following conclusions were arrived at by the Hon’ble Court as above:

a. If the goods are not technical in nature then the meaning associated to the goods in common parlance would be applied.

b. If the goods are technical in nature and do not have a market parlance then only technical meaning would be associated to them.

c. If the goods are technical in nature and if they have a market parlance then in such case also theory of common parlance would be applied.

The last example which can best summarize the use of test of common parlance is as follows:

Hon’ble Apex Court in the matter of Commissioner Of Trade Tax, U.P vs Associated Distributors Ltd on 5 May, 2008 was required to decide that whether bubble gum can be held to be sweatmeat or mithai being sweet in their taste. Hon’ble Apex Court held that

“When we apply common parlance test and in fact ask someone to bring the sweets from the market, he will never bring Bubble-gum. In common parlance, even items of confectionery will not be construed as sweetmeat (mithai). In fact, Bubble-gum is not an item for eating. It is kept in the mouth and after chewing the same is thrown out. The Bubble-gum while kept in the mouth by the children is also inflated as a balloon. In fact, it is used as a ‘mouth freshener’. It is not made only of sugar. It contains gum base, vexes etc. along with sugar.”

Conclusion: It can be concluded that the common parlance test derives its meaning just in the same manner as goods under sales tax are bound to derive the classification i.e. from its popular meaning and as understood in common man language and perception. The test ignores the technical meaning or scientific meaning if open market exists for the commodities commonly traded. This is the most simplest yet most commonly used method.

2. Process for classification of goods for the purpose of determining the category of the goods for levy of tax

The judgement of the Hon’ble Bombay High Court in the matter of Pharm Aromatic Chemicals vs Municipal Corpn. Of Greater … on 28 February, 1994 Equivalent citations: 1995 (1) BomCR 465, 1997 (95) ELT 203 Bom is a landmark judgement as it lays down the basic principles for the application of various test which are available for the purpose of classification of the goods for the levy of tax. The Judgement further provides the conclusion regarding the hierarchy or situations under which various test would be applied so as to arrive at the result.

Landmark judgement of the Hon’ble Bombay High Court in the matter of Pharm Aromatic Chemicals vs Municipal Corpn. Of Greater … on 28 February, 1994 Equivalent citations: 1995 (1) BomCR 465, 1997 (95) ELT 203 Bom laid down the basic process of classification of the goods wherein, the goods have not been defined under the statute:

“10. The principles which govern the interpretation of items in the list of taxable goods are no more res integra. Various principles or tests have been evolved by the Supreme Court from time to time for interpretation of items of taxable goods. One of the well-known principles of interpretation is that words of every day use must be construed not in the scientific or technical sense but as understood in the common parlance. If a statute contains a language which is capable of being construed in a popular sence, such a statute should not be construed according to the strict or technical meaning of the language contained in it but it should be construed in its “popular sense”, meaning thereby the sense which people conversant with the subject matter with which the statute is dealing would attribute to it.

11. Another test akin to the common parlance test is the “commercial parlance test”. According to this test, items in taxing statutes should be judged and analysed on the basis of how theres expressions are used in the trade or industry or in the market or, in other words how these are dealt with by the people who deal in them. This test was applied by the Supreme Court inDelhi Cloth & General Mills Co. Ltd. v. State of Rajasthan, where it was held that if there is one principle fairly well-settled it is that the words or expressions must be construed in the sense in which they are understood in the trade, by the dealer and the consumer. It is they who are concerned with it, and it is the sense in which they understand it that constitutes the definitive index of the legislative intention when the statute was enacted.

12. Though the common parlance or commercial parlance tests are the generally accepted tests, various other tests have been evolved from time to time to interpret items of taxing statutes. One of such tests is “commonsense test” or “commonsense rule of interpretation”. This test was applied by the Supreme Court inTungabhadra Industries Ltd. v. Commercial Tax Officer, Kurnool1995 (75) E.L.T. 95 (Tribunal) = (1960) 11 STC 827, to hold that hydrogenated groundnut oil continued to be groundnut oil. It was followed in Alladi Venkateswarlu v. Government of Andhra Pradesh (1978) 41 STC 394 to decide whether “parched rice” and “puffed rice” fell within the definition of rice. The Supreme Court observed :

“We think that we must give a broad enough interpretation to the term ‘rice’, in accordance with what may perhaps be best described as the ‘commonsense’ rule of interpretation laid down by this Court in Tungabhadra Industries Ltd. v. Commercial Tax Officer, Kurnool (1960) 11 STC 827“. It was accordingly held that the term “rice” as ordinarily understood in English language would include both “parched” and “puffed” rice.

13. Another test, which is sometimes applied by the Courts is “user test”. According to this test the use to which the goods can be put can also be considered in interpreting an item. However, this rule of interpretation has got its own limitations because certain goods may be put to certain uses by different persons. That, however, cannot entitle the revenue to apply different rates of tax to the sales of same goods by different persons depending upon the use to which they will be put by the purchasers.

14. The principles that emerge from the above interpretation can be summed up thus : Where no definition is provided in the statute for ascertaining the correct meaning of a fiscal entry, the same should be construed as understood in common parlance or trade or commercial parlance. Such words must be understood in their popular sense. The strict or technical meaning or the dictionary meaning of the entry is not be resorted to. The nomenclature given by the parties to the word or expression is not determinative or conclusive of the nature of the goods. The same will have to be determined by application of the well-settled rules or principles of interpretation which have been referred to as “common parlance” rule, “trade or commercial parlance” rule, “commonsense rule of interpretation” and “user test”. The application of the principles will again depend on the facts and circumstances of each case. No test or tests can be said to be of universal application. Each case will have to be decided by applying one or more rules of interpretation depending upon the facts of that particular case.”

From the above it can be clearly ascertained that following are the four tests which have been applied for classification of goods for the purpose of levy of tax on goods which have not been defined under the act:

a) Common parlance test and Commercial parlance test

b) Commonsense test or Commonsense rule of interpretation

c) User Test or Functional Test

a) Common Parlance and Commercial Parlance Test:

Common Parlance Test and Commercial Parlance Test are more or less similar test and as has been held by Hon’ble Bombay High Court in the abovementioned decision that Commercial Parlance Test is akin to the Common Parlance Test. Common Parlance Test means that the words must be attributed meaning in the sense which a common man would attribute to it i.e. in popular sense and Commercial Parlance Test means that the words must be attributed the meaning on the basis of how these expressions are used in the trade or industry or in the market or, in other words how these are dealt with by the people who deal in them. The only difference in the test is the Common Parlance Test attributes the meaning as understood by common man and Commercial Parlance Test attributes the meaning as understood in the trade and the industry.

b) User Test or Functional Test:

The next test is the user test which is also known as the functional test. This test provides classification of goods on the basis of the predominant use of the goods. Following are the two situations generally preferred for the applicability of the functionality test:

i) Goods wherein the entry under consideration links the taxable object with its general or ordinary use.

The genesis of the theory has been explained by the Hon’ble Apex Court in the matter of M/s. Annapurna Carbon Industries Co. v. State of Andhra Pradesh, Equivalent citations: 1976 AIR 1418, 1976 SCR (3) 561 wherein following was the question raised before the Hon’ble Court.

“whether sales of Arc carbons, known as “Cinema Arc Carbons”, manufactured by the appellant company, were rightly subjected to sales tax for two assessment years 1965-66 and 1966-77 on the ground that they fall under entry No. 4 of the 1st Schedule of the Andhra Pradesh General Sales Tax Act, 1957, (hereinafter referred to as ‘the Act’).

This entry reads as follows:

“Cinematographic equipment, including cameras, projectors, and sound recording and reproducing equipment lenses films and parts and accesories required for use their with-

The Hon’ble Court observed as follows:

As indicated above, the very name of the Arc Carbons, as commercial commodities, seems to attach the word “Cinema” to them because of the use to which they are generally put. The High Court referred to the fact that the appellants had not produced their account books to show that they had been purchased by persons other than those who ran cinemas or for any other use. Of course, it is very difficult to identify a taxable commodity merely by the use to which it may be put. Nevertheless, it appears that the entry under consideration links the taxable object with its general or ordinary use. The taxing authorities were, therefore, compelled to consider the use which is generally made of the arc carbons. They had concluded that the common or ordinary use of the arc carbons was that they exuded their power foul light cast, through the projectors, on cinema screens.”

The Hon’ble Court specified while applying the user test that the although it’s very difficult to classify commodity according to the use to which it is put as the commodity having multiple use would be put to different use by different users. However, where the entry under consideration had linked the taxable object with its use, the goods can be classified according to the user test.

“Apparently, the deciding factor is the predominant or ordinary purpose or use. It is not enough to show that the article can be put to other uses also. It is its general or predominant user which seems to determine the category in which an article will fall.”

Hon’ble Apex Court in the matter Commissioner Of Central Excise, … vs Carrier Aircon Ltd on 5 July, 2006 further explained the rule of user test wherein the entry prescribes the classification of goods as per the use to which goods are put to.

The Hon’ble Apex Court was faced with the question as follows:

“Whether the chillers manufactured by M/s. Carrier Aircon Limited (respondent herein) are classifiable under Chapter Heading 84.18 of the Schedule to the Central Tariff Act (for short “the Act”) as claimed by them or under Chapter Heading 84.15 as contended by the Revenue?”

Rival tariff headings read as under:-

“84.15 Air-conditioning machines, comprising a motor driven fan and elements for changing the temperature and humidity, including those machines in which the humidity cannot be separately regulated.”

“84.18 Refrigerators, freezers and other refrigerating or freezing equipment, electric or other; heat pumps other than air-conditioning machines of heading No. 84.15.”

The Hon’ble Apex Court held that

“When a commodity falls within a tariff entry by virtue of the purpose for which it is put to, the end use to which the product is put to, cannot determine the classification of that product.

Tariff heading 84.15 covers air-conditioning machines which control and maintain temperature and humidity in closed places. The main function of air-conditioning system is to control temperature, which is not done by a chiller. A reading of the tariff entry 84.15 would show that it is intended to cover only those machines which comprise of elements for changing temperature and humidity and chillers would fall outside the purview of the said entry. The function of the chiller is only to chill water or bring it to a very low temperature, and it is the air handling unit having an independent and distinct function which produces the effect of air-conditioning, controlling the temperature and the humidity. The chiller itself does not do any air-conditioning as it is designed only to refrigerate or produce chilled water/liquid.

Revenue is classifying the impugned chillers as parts of the air-conditioning system as the same is used in central air-conditioning plant of star hotels, airport, hospital, large office complexes and large establishments. The use of the chillers in the air-conditioning system would not take away the primary or basic function of the chiller which is to produce chilled water by using a refrigerating circuit. Heading 84.18 covers refrigerators, freezers and other refrigerating or freezing equipment. Accordingly, the chillers in question shall fall under specific heading 84.18 of the Tariff Act.”

Thus it would be the predominant use of the goods which would be determining the taxable category of the goods and not any other use of goods for which it might also be put to use.

ii) Cases where the meaning of the term in common parlance is derived by the predominant use to which the goods are put to irrespective of the other minor use for which they can also be used:

It was stated by the Hon’ble Apex Court in the matter of Atul Glass Industries (Pvt) Ltd. … vs Collector Of Central Excise, Etc on 10 July, 1986 Equivalent citations: 1986 AIR 1730, 1986 SCR (3) 126

“It is a matter of common experience that the identity of an article is associated with its primary function. It is only logical that it should be so. When a consumer buys an article, he buys it because it performs a specific function for him. There is a mental association in the mind of the consumer between the article and the need it supplies in his life. It is the functional character of the article which identified it in his mind.”

Hon’ble Gujarat High Court in the matter of Haran D. Manufacturing Company Vs. State of Gujarat reported in 1993 (91) STC 130 observed that

“We are inclined to take the view that the term “soap” is understood by the consumers as well as by the traders from its functional aspect.”

The Hon’ble Court finally held that

“11. In the instant case, the term “soap” is not defined in the Act. The product sold by the applicant-dealer was known as “soap” in the particular trade, and it was also used by the consumers as a soap for washing the clothes. The true meaning of this term in the popular parlance would be flowing from its predominant use. We, therefore, hold that in interpreting the term “soap” the real test would be functional test or the test of predominant user, and there is no reason to exclude “detergent soap” from the meaning of the term *16* “soap”.

This concept was also used by the Hon’ble Kerala High Court in the matter of New Prasanthi Automobiles Company Vs. State of Kerala reported in 1993 (91) STC 565 as follows:

“13. A person seeing an automobile jack is not likely to understand it as a mere iron and steel article. He is likely to understand it only as an adjunct to the automobile necessary for its proper and effective use. He will view it as something which is sold by an automobile dealer and as something which every user of an automobile should necessarily possess. Being so, we find it difficult to accept the contention of the assessee that the jack is a mere iron and steel article and not an accessory to a motor vehicle. The statutory authorities were right in holding that the jack was an accessory falling under entries 138 and 125 respectively of the First Schedule before and after July 1, 1987 liable to tax at 15 per cent.”

Hon’ble Apex Court in the matter of State Of Uttar Pradesh vs M/S. Kores (India) Ltd on 18 October, 1976 Equivalent citations: 1977 AIR 132, 1977 SCR (1) 837 held that

“From the above definitions, it is clear that in popular parlance, the word ‘paper’ is understood as meaning a sub- stance which is used for bearing, writing, or printing, or for packing, or for drawing on, or for decorating, or covering the walls.”

iii) Limitation of the user test:

It was held by the Hon’ble Apex Court in the matter of Mukesh Kumar Aggarwal & Ors vs State Of Madhya Pradesh & Ors on 18 December, 1987 Equivalent citations: 1988 AIR 563, 1988 SCR (2) 501

“Here again, pushed to its logical conclusions, the reasoning incurs the criticism of proceeding to determine the nature of the ‘goods’ by the test of the use to which they are capable of being put. 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.”

Hon’ble Gauhati High Court in the matter of Shri Chitta Ranjan Saha vs State Of Tripura And Ors. on 9 June, 1989 Equivalent citations: 1990 79 STC 51

“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 rates of tax to the sales of the very same product by different dealers depending on the use to which they will be put 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 not enough to say that an article can be put to some other uses also and to classify it under the different categories for different sellers. It is its general or predominant user which may determine the category in which an article should fall and once that is done, tax can be charged on sales 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 principle lays that the predominant use of the article would be determining the taxable category of the article irrespective of the fact that the goods might be used for other purposes as well. Once the predominant use would determine the taxable category of the goods, then irrespective of the fact that other users are using the goods for different purpose other than the predominant use, those users would also be subjected to the same tax rate as determined by the predominant use only and not by the use they are putting the goods to. It would not be allowable to charge different rate on the goods by different persons using the goods for different purposes.

c) Commonsense Test:

The Commonsense Test or Commonsense rule of interpretation was first applied by the Hon’ble Apex Court in the matter of Tungabhadra Industries Ltd. v. Commercial Tax Officer, Kurnool (1960) 1961 AIR 412, 1961 SCR (2) 14 wherein hydrogenated groundnut oil (commonly called Vanaspati) was not held to be a different product from groundnut oil. The Hon’ble Apex Court in the matter of Alladi Venkateswarlu v. Government of Andhra Pradesh following the above principle of Tungabhadra Industries Ltd. v. Commercial Tax Officer, Kurnool  laid down that Rice Includes Puffed Rice and Parched Rice and observed as follows:

“Even if parched rice and puffed rice could be looked upon as separate in commercial character from rice as grain offered for sale in a market, yet, keeping in view the other matters mentioned above, it could not be presumed that it was intended to exclude from entry 66 ,.rice”, which at any rate, had not so changed its identity as not to be describable as “rice” at all. ‘Muramaralu’ was after all rice even though it was puffed. ‘Atukulu’ even though parched was still called rice.”

The Hon’ble Court further held that

“It appears, therefore, that “rice in husk” is “paddy”. When it is removed from husk, the husk and rice become separately taxable. But, there are no separate entries for rice and rice reduced into an edible form by heating or parching without any addition of ingredients or appreciable changes in chemical composition. The term “rice” is wide enough to include rice in its various forms whether edible or unedible. Rice in the form of grain is not edible. Parched rice and puffed rice are edible. But, the entry “rice” seems to us to cover both forms of rice.”

The Hon’ble Apex Court held that commonly accepted sense of a term should prevail in construing the description of an article of food and Court must give a broad enough interpretation to the term “rice” in accordance with the common sense rule of interpretation laid down by this Court in M/s Tungabhadra Industries Ltd. v. Commercial Tax Officer, Kurnool, [1961] 2 S.C.R. 14 @ 23.

Therefore, as per commonsense approach, it means that there should be broad interpretation to the entries and particularly relating to the entries relating to the edible goods. The broad aspect for interpretation of entry relating to edible goods as referred by the Hon’ble Apex Court was aptly explained by the Hon’ble Apex Court in the matter of Telangana Steel Industries vs State Of A. P referring to the Judgement of Hon’ble Gauhati High Court in the matter of Modern Candle Works v. Commissioner of Taxes.

Hon’ble Apex Court in the matter of Telangana Steel Industries vs State Of A. P on 4 March, 1994 Equivalent citations: 1994 AIR 1831, 1994 SCC Supl. (2) 259 referred to complexity of classification of goods.

It must however be noted that the below stated were only the observations of the Hon’ble Apex Court in the matter of complexity of the issue and was not a decision in the matter as they had categorically said in their judgement as follows:

“7. The above shows complexity of the concept of a different commercial product coming into existence because of manufacturing process undertaken. It is because of this that we do not propose to decide the controversy at hand, which is whether iron wires are separate commercial goods from wire rods from which they are produced, by trying to answer whether they are one commercial commodity or separate.”

The decision of the Hon’ble Apex Court in the matter of Telangana Steel Industries vs State Of A. P however summarized the issue by referring to its earlier decisions alongwith the decision of Hon’ble Gauhati High Court in the matter of Modern Candle Works v. Commissioner of Taxes . One of the judges in the matter of Telangana Steel Industries vs State Of A. P and Modern Candle Works v. Commissioner of Taxes was common. Hon’ble Gauhati High Court in the matter of Modern Candle Works v. Commissioner of Taxes critically analyzed all the referred below decisions of Hon’ble Apex Court.

These are (1) Tungabhadra Industries Ltd. v. CTO wherein hydrogenated groundnut oil 1 (1960) 11 STC 827: AIR 1961 SC 412: (1961) 2 SCR 14 (commonly called Vanaspati) was not held to be a different product from groundnut oil, (2) Hindustan Aluminium Corpn. Ltd. v. State of Up.2, where rolled products and extrusions were regarded as different commercial commodity from aluminium ingots and billets, (3) Dy. CST (Law), Board of Revenue (Taxes) v. Pio Food Packers3, where pineapple slices sold in sealed cans after processing the pineapples were not regarded as different goods, (4) Alladi Venkateswarlu v. Govt. of A.p.4 where parched rice (Atukulu) and puffed rice (Muramarulu) were held not different from rice, (5) Ganesh Trading Co. v. State of Haryana5 and Babu Ram Jagdish Kumar and Co. v. State of Punjab6 in both of which rice was accepted as a different commodity from paddy, (6) State of Karnataka v. B. Raghurama Shetty7 in which certain observations were made regarding bread being different from wheat flour inasmuch as flour is consumed in the production of bread and so a new commodity comes into existence.”

The Hon’ble Apex Court then referred to the conclusion of  Modern Candle Works v. Commissioner of Taxes of Hon’ble Gauhati High Court in which one of the Hon’ble Judge Hansaria.J. of the Bench of Hon’ble Apex Court was common to both the judgement:

“When the Gauhati High Court was confronted with a similar situation in Modern Candle Works v. Commissioner of Taxes, to which decision one of us (Hansaria, J.) was a party, it had to labour hard to find out as to whether any principle as such can be culled out from large number of decisions noted in that case. Saikia, C.J., as he then was, stated for the Bench that different considerations Would apply when the court is concerned with edible articles ill contrast to non-edible articles. As to what test should be applied in both types of articles were then stated as below in paragraph 18 :

“From the above decisions involving edible articles some of the criteria found are – whether the entry article is a genus of which the test article is a species; whether the essential characteristics of the entry article are still to be found in the new article; whether there has been addition of external agents thereby making it different; and whether there has been a process of transformation of such a nature and extent as to have resulted in the production of a new article as commonly understood in the market where it is dealt with. So long it does not result in a new article, the nature, duration and transformation of the original commodity would not be material.

In the other line of decisions involving articles which are not as such edible, we find that it is the concept of the consumption of the original commodity in the course of production of a new commodity as understood commonly by the people who use it would be material. The nature and extent of the process, whether the labour is manual or mechanical, whether the duration is short or long, whether the production requires expertise or not would no doubt be relevant but would not alone be decisive.”

Further the Bench of Hon’ble Apex Court in the matter of Telangana Steel Industries vs State Of A. P also referred to the decision of Hon’ble Apex Court in the matter of Rajasthan Roller Flour Mills Assn. v. State of Rajasthan wherein Hon’ble Judge Jeevan Reddy was common in both the judgements .

“6. The above adequately shows how a valiant effort was made to read a common thread running through different judgments noted in the decision. A Bench of this Court as well had gone through this exercise recently in Rajasthan Roller Flour Mills Assn. v. State of Rajasthan9, (hereinafter the Rajasthan case) 3 1980 Supp SCC 174: 1980 SCC (Tax) 319: (1980) 46 STC 63 4 (1978) 2 SCC 552: 1978 SCC (Tax) 112: (1978) 41 STC 5 (1974) 3 SCC 620: 1974 SCC (Tax) 100: (1973) 32 STC 623 6 (1979) 3 SCC 616: 1979 SCC (Tax) 265: (1979) 44 STC 159 7 (1981) 2 SCC 564: 1981 SCC (Tax) 134: (1981) 47 STC 369 8 (1988) 71 STC 362 (Guj) 9 1994 Supp (1) SCC 413: JT (1993) 5 SC 138 in which, one of us (Jeevan Reddy, J.) delivering judgment for a two-Judge Bench noted some leading decisions on this aspect of the matter and held that flour, maida and suji are different commercial commodities from wheat.”

Conclusion: If we analyze the very basis of the decisions of Hon’ble Apex Court in the matter of Tungbhadra Industries and Alladi Venkateswarlu and subsequent appraisal in the matter of Telangana Steel by referring to the decision of Modern Candle, it can be clearly culled out that more particularly in the matter of edible goods, the entry should be given a wider reference. The various conditions to be satisfied in the test had been discussed in the matter of Alladi Venkateswarlu and Modern Candle referred to in Telangana Steel. The term broader interpretation can be clearly analyzed in the decision of Hon’ble Apex Court in the matter of Alladi Venkateswarlu. The Hon’ble Apex Court first observed that

“Parched rice and Puffed rice could be looked upon as separate in commercial character from rice as grain offered for sale in a market. “

This is the most important consideration that even though Parched Rice and Puffed rice are separate in commercial character as grain offered in the market but still as below three conditions have been fulfilled, rice was held to include puffed rice and parched rice by the interpreting the entry in commonly accepted sense of the term rice.

a. Parched Rice and Puffed Rice have not so changed its identity as not to be describable as “rice” at all. ‘Muramaralu’ was after all rice even though it was puffed. ‘Atukulu’ even though parched was still called rice. Parched rice and Puffed ric retain the original characteristics of rice in them.

b. There were no separate entries for rice and rice reduced into an edible form by heating or parching without any addition of ingredients or appreciable changes in chemical composition.

c. The term “rice” should be given a wide enough to include rice in its various forms whether edible or unedible. Rice in the form of grain is not edible. Parched rice and puffed rice are edible. But, the entry “rice” seems to us to cover both forms of rice.

The common sense approach seeks to lay down the principle that interpretation of the entries should be in a broader manner as referred to by the Hon’ble Apex Court in its decisions provided the conditions laid down are satisfied. The approach has a limited use and should be used looking to particular facts and circumstances.

d) Common Parlance Test Vs User Test: Which test to be preferred over other

It can further be observed that although common parlance test, commercial parlance test and the commonsense test are broadly founded upon a common basis of the common sense or popular sense in which the goods are understood whether by the traders or by the common public as the case may be on the basis of the peculiar facts of the matter but user test has been founded on a the basis of the functionally or the use to which the goods are put to.

Now the question arises that out of common parlance test and functional, which test has to be preferred over the other and which test is most suited for the purpose of classification of goods under the sales tax law and should be commonly used.

Hon’ble Apex Court in the matter of G.S. Auto International Ltd vs Collector Of Central Excise … on 15 January, 2003 held as follows:

“68. In construing these items, what is the proper test to be applied? Is it the functional test or is it commercial identity test which would determine the issue. It seems to us that this question is no longer res Integra. It fell for consideration of this Court earlier and it was laid down that the true test for classification was the test of commercial identity and not the functional test. It needs to be ascertained as to how the goods in question are referred to in the market by those who deal with them be it for the purposes of selling, purchasing or otherwise.”

Hon’ble Kerala High Court in the matter of Eldho Paul vs State Of Kerala on 24 June, 2008 further held that

“The Gauhati High Court in the case of Shri Chitta Ranjan Saha vs. State of Tripura, [1990] 79 STC 51 has expressed, which view we concur, observed that, the user-test has got a very limited application. It is neither a safe guard to interpretation nor is it conclusive. Unless other tests are found to be unsatisfactory or inadequate, this test should not be applied. Besides, even in cases where resort is taken to the “user-test” it has to be limited to decide as to what category or entry, a particular item or product would generally fall and once it is so decided, the same will apply to all sales under the Act, no matter by whom it is made or to whom it is made. In other words, the user of the goods thereafter will have no relevance. It can’t be used to levy tax on different dealers at different rates depending upon the use to which the goods are put or the purpose for which it is purchased.”

Conclusion: It can be concluded from the above judgements that generally common parlance or the commercial identity test is the primary test for determining the taxable category of the goods for the purpose of levy of tax and user test is the last test to be used if other test fails or provide inconclusive result.

3. Landmark Decision applying the test of common parlance for determination of classification of goods for levy of Tax

a) In Camlin Limited (2015) (55 taxmann.com 369) Rajasthan High Court while deciding that whether stamp pad and ink of stamp pad, eraser would be stationery item or not, it was held that

These items would be available in a stationery shop alone. If one had to purchase such items, one would have to go to a shop of stationery only to get those items rather than from a textile or a grocery shop. Therefore, in my view, all these items can be understood according to the common commercial understanding of these terms and in my view, all these forms part of stationery items and cannot be termed as falling in general category.

b) It was held as follows by the Hon’ble Apex Court in the matter of Shree Baidyanath Ayurved Bhavan Ltd. Vs. Collector of Central Excise, Nagpur etc. [(1996) 9 SCC 402]. in relation to `Dant Manjan’ (Tooth powder) that it is not a medicine:

“Tooth powder is never treated to be a medicinal preparation. It is a toiletary preparation. No evidence on record therein was produced to prove that common man who uses `dant manjan’ daily to clean his teeth consider it as a medicine and not as a toilet requisite. It does not have a limited use for a limited time. The said decision, in our opinion having regard to the entry contained in the Schedule “K” appended to the Drugs and Cosmetics Rules cannot be said to have any application in the instant case.”

c) It was held by the Hon’ble Madras High Court in the matter of Kishan Chand Chellaram v. Joint Commercial Tax Officer, Chintradripet (1) (1970) 25 S.T.C. 151. (2) (1968) 21 S.T.C. 367 that Terylene, Terene, Decorn, Nylon, Nylex etc., came within the expression “artificial silk”

Terylene, Terene, Decorn, Nylon, Nylex etc., came within the expression “artificial silk” occurring at item no. 4 in the Third Schedule to the Madras General Sales Tax Act, 1959. It was observed that the import and content of those words which have not been defined in the Sales Tax Acts and the Courts are bound to have recourse to the meaning attributable to such words by persons who are dealing in and utilising such goods. The extreme, peculiar and scientific meaning of the goods which might sometimes deviate from the popular meaning, cannot prevail. The meaning which the trade, Government officials and statutes attribute to the words “artificial silk” was considered by the High Court to be the ordinary and popular meaning of that expression.

d) It was held by the Hon’ble Apex Court in the matter of Ramavatar Budhaiprasad Vs. Assistant Sales Tax Officer, Akola 1961 (12) STC 286 while deciding that betel leaves were not covered by the term vegetable as follows:

“The word “vegetables” in item 6 of Schedule II of the C.P. and Berar Sales Tax, 1947, must be construed not in any technical sense nor from the botanical point of view but as understood in common parlance. It has not been defined in the Act and being a word of everyday use it must be construed in its popular sense meaning “that sense which people conversant with the subject matter with which the Statute is dealing would attribute to it.” It is therefore to be understood as denoting class of vegetables which are grown in a kitchen garden or in a farm and are used for the table. Consequently “betel leaves” are not vegetables and would not be exempt from sales tax under item 6 of Schedule II of the C.P. and Berar Sales Tax Act, 1947.”

e) It was held by the Hon’ble Apex Court in the matter of Commissioner of Sales Tax, M.P. Indore v. Jaswant Singh Charan Singh that the Word “coal” would include “charcoal”, it being observed that, while interpreting items in statutes like the Sales Tax Acts, resort should be had not to the scientific Or technical meaning of such terms, but to their popular meaning or the meaning attached to them by those dealing in them, that is to say, to their commercial sense.

f) It was held by the Hon’ble Apex Court in the matter of Sales Tax Commissioner/ U.P. v. Ladha Singh Mal Singh that cloth manufactured by means of power-looms was held by this Court not to fall within the words ” cloth manufactured by mills” in the Notification dated June 8, 1948, issued under s. 3A of the Act and the sale of such cloth was held not liable to be taxed at the higher rate of 6 ps. in a rupee. According to this decision power-loom cloth in popular language is never associated with mill cloth.

g) It was held by the Hon’ble Supreme Court of India in the matter of Commissioner Of Sales Tax U.P vs M/11S. S. N. Brothers, Kanpur on 2 November, 1972 Equivalent citations: 1973 AIR 78, 1973 SCR (2) 852‘Food colors’ and ‘syrup essences’ are not covered by entries ‘dyes and colors’ and ‘scents and perfumes’ respectively,

“The words ‘dyes and colors’ and the words ‘scent and perfumes’ have to be construed in their context and in the sense as ordinarily understood and attributed to these words by people usually conversant with and dealing in such goods. Similarly, the words ‘food colors’ and ‘syrup essences’, which are descriptive of the class of goods, the sales of which are to be taxed under the Act, have to be construed in the sense in which they are popularly understood by those who deal in them and who purchase and use them. ‘Food colors’ and ‘syrup essences’ are edible goods, whereas ‘dyes and colors’ and ‘scents and perfumes’, as specified in entries 10 and 37, prima facie do not connote that they are edible goods. The scheme of the list in the notification also suggests that, apart from undoubted edible goods, in cases where the import of the specified goods is wide enough to include both edible and non-edible categories, then the intention has been clearly expressed whether or not to include edible goods. Therefore, entries 10 and 37 are not intended to extend to edible colors like ‘food colors’ and edible essences like ‘Syrup essences’.”

h) Hon’ble Karnataka High Court in the matter of Utracon Structural Systems Pvt … vs State Of Karnataka on 25 March, 2013 were required to assess that wire rods and stranded rods made from clubbing and twisting of wire rods are same thing and as wire rods have been held to be a declared goods under Central Sales Tax Act whether stranded rods made form clubbing of wire rods would be entitled for being held as declared goods. It was held that

“Though stranded rods are formed out of wire rods, it cannot be said that in market parlance, both of them are treated as the same. Further, the said product is not used by the people at large throughout the Country. It is a specialized product meant for a specific purpose which is not commonly used by the people at large throughout the Country. In that view of the matter, the Authorities were justified in holding that the stranded rods do not fall within the word “wire rod” and is not entitled to the benefit of concessional rate of tax and therefore, it falls under general category under Section 4(1)(b) of the Karnataka VAT Act.”

i) It was held Hon’ble Orissa High Court in the matter of State Of Orissa vs Janata Medical Stores on 30 September, 1975 Equivalent citations: 1979 CENCUS 190 D, 1976 37 STC 33 Orissa wherein they were required to decide that whether thermometers, lactometers, syringes, eye-wash glasses and measuring glasses would be covered by the entry of Glassware:

“”Glassware” as understood from the Shorter Oxford English Dictionary is “articles made of glass”. In popular sense glassware would ordinarily refer to articles made of glass. In general use, when glassware is referred to one’s mind, thermometers, lactometers, syringes or eyewash glasses or even measuring glasses do not occur. A general merchant dealing in glassware ordinarily does not deal in these articles. These are articles which are normally available in a medical shop such as that of the assessee before us. Thermometers and lactometers and also syringes are not only made of glass but there are other components. Though their bodies may be of glass, the additional’ materials of non-glass origin therein which really make them marketable and goods of utility have a predominant place. Therefore, they do not strictly come within the common parlance meaning of glassware. Undoubtedly, eye-wash glass and measuring glass are made of glass, but when one refers to glassware, these specialised materials are not understood to be glassware as such.”

j) It was held by Hon’ble Bombay High Court in the matter of M/S Gopalanand Rasayan. Ig vs The State Of Maharashtra on 8 April, 2010 that Steam is not chemical. It was observed by the Hon’ble Court as follows:

“In common sense, the steam is treated as byproduct of water and for preparation of the steam the process is just to boil water. Therefore, the common man always treat the steam as part and parcel of water. It is a fact that in taxing statute the words which are not of technical expressions or words of art but are words of every day use, must be understood and given a meaning, not in their technical or scientific sense, but in a sense as understood in common parlance.”

It was finally held that

“32 It is clear from the above mentioned authorities that in the absence of meaning of any term given in the enactment, the meaning of that term in common parlance or commercial parlance must be adopted. In this case though the Assessee has produced the experts’ opinion, some articles published in the magazine viz. Outlines of Chemical Technology, opinion of Dr.Sunil Bhagwat from the Chemical Engineering Department of the University of Bombay and extract from the Chamber Dictionary, in support of his contention that the steam is chemical, but there is nothing to indicate that the term steam in common parlance or commercial parlance is considered or treated as chemical. Therefore, for the purpose of taxing under the Sales Tax laws it is not possible to hold *20* that the steam is chemical.”

k) Hon’ble Karnataka High Court in the matter of Diebold Systems Pvt. Ltd. vs The Commissioner Of Commercial … on 31 January, 2005 Equivalent citations: ILR 2005 KAR 2210, 2006 144 STC 59 Kar while deciding that ATM Machine is not a computer or computer terminal but an electronic device held as follows:

“An Automatic Teller Machine, in our view, is an electronic device, which allows a bank’s customer to make cash withdrawals, and check their account balances at any time without the need of human teller, probably that most widely used means of “electronic funds transfer”. From the literature and the books on computers produced before us, we are of the view, that ATM is not a computer by itself and it is connected to a computer that performs the tasks requested by the person using ATM’s. The computer is connected electronically to many ATM’s that may be located from some distance from the computer. In common parlance, it is understood as electronic device and therefore, the revisonal authority is justified in holding that ATM’s are electronic goods and the levy of tax and the sale of ATM’s requires to be made under Entiy 4 of Part ‘E’ of Second Schedule to the Act.”

l) It was held by the Hon’ble Apex Court in the matter of M/S.Mamta Surgical Cotton … vs Asstt. Commnr.(Anti-Evasion), … on 23 January, 2014 that surgical cotton is different from raw cotton applying the common parlance test as follows:

“The aforesaid view is further fortified by the common parlance test. It can be said when a consumer requires surgical cotton, he would not be satisfied with cotton being provided to him and the same principle would reversibly apply that a customer of cotton would not use surgical cotton as a substitute. Further the purposes for which cotton and surgical cotton are used are diametrically opposite. While surgical cotton finds utility primarily for medical purposes in households, dispensaries, hospitals, etc, raw cotton being, inter alia, non-sterlised and riddled with organic impurities cannot be used as such at all.”

m) This concept was aptly explained by the Hon’ble Kerala High Court in the matter of New Prasanthi Automobiles Company Vs. State of Kerala reported in 1993 (91) STC 565 while deciding the category of nuts and bolts as follows:

The Hon’ble Court held while deciding the categorization of Nuts and Bolts as follows:

“9. It is the way in which a common man dealing with the article will understand it, that is determinative of the character of the goods. There cannot be any dispute that nobody will understand these bolts and nuts as spare parts of automobiles/tractors, but only as iron and steel articles dealt with in an hardware shop. We therefore hold that the bolts and nuts dealt with by the Assessee cannot be treated as spare parts of automobiles or of tractors; on the other hand, they have to be classified only as nuts and bolts which squarely fall as iron and steel articles not otherwise provided under entry No.45 or 99 of the First Schedule during the respective periods.”

Conclusion: It can be observed from the above that the common parlance test always considers the goods in terms of how a common man or the people associated with the goods in the trade of goods perceive it. The judgements above have been given in detail alongwith the reasoning so as to highlight the common reasoning running at the heart of all the judgements and how a principle which we are using in our day to day life is the very basis for determining the taxable category of the goods.

4. Dictionary meaning not being relevant for arriving at the true meaning of the words

The Dictionary meaning in general is never accepted for the purpose of interpreting the terms in taxing statute unless a contrary intention has been specified in the statute or in peculiar circumstances as may be applicable to a particular case.

Hon’ble Gauhati High Court in the matter of Shri Chitta Ranjan Saha vs State Of Tripura And Ors. on 9 June, 1989 Equivalent citations: 1990 79 STC 51 Gauhati held as follows.

“13. Before concluding discussion on the various tests that are applied in interpreting items in taxing statutes, it may be appropriate to note that the Supreme Court has firmly ruled that in finding out the true meaning of the entries mentioned in the Sales Tax Act, the dictionary meaning is not relevant. [Ganesh Trading Co. v. State of Haryana [1973] 32 STC 623 (SC)]. This position was reiterated by the Supreme Court in Collector of Central Excise, Kanpur v. Krishna Carbon Paper Co. [1989] 72 STC 280, where it was held by Sabyasachi Mukherji, J : “It is well-settled that in order to ascertain the correct meaning of a fiscal entry reference to a dictionary is apt to be somewhat delusive guide, as it gives all the different shades of meaning.”

Hon’ble Madhya Pradesh High Court in the matter of Commissioner of Commercial Tax v. Modern Agency [2006] 146 STC 1 (MP) held that the term stationery needs to be given a much wider meaning as per the common understanding of the goods than as contemplated in the dictionary as follows:

“15. As observed supra, in our opinion, it can be so held in favour of dealer. The expression “stationery” is not a legal term but it is a word taken by the Legislature from English language used by common man in commercial world. Though Oxford dictionary explains the meaning of this word to mean “materials for writing paper, pens and envelopes”, in our opinion, this definition cannot be construed to mean and confine its operation to what is specified in it. In other words, the definition cannot be read to mean that stationery means only “paper, pen and envelope”. This definition has to be taken as illustrative in nature and therefore, anything alike or similar to what is mentioned in the definition or anything which is required to make effective use of these items in day to day use would be regarded as stationery. It is for the reason that in daily use, there are hundred of items which can be described as stationery articles and hence, it cannot be said that those items which are not mentioned in dictionary meaning cannot be termed as stationery article.”

Further Hon’ble Gujarat High Court in the matter of Bhuji Products vs State Of Gujarat on 22 July, 1991 provided an insight wherein the use of dictionary meaning is allowed provided the same is in line with the common meaning of the words as follows:

“The learned counsel for the dealer submitted that even when the Tribunal applied the common parlance test while determining the nature and classification of a particular goods, the Tribunal has applied the technical meaning or dictionary meaning of the term xerographic machine. Therefore it is submitted that the Tribunal has committed error in applying the correct legal principle. The submission cannot be accepted for the simple reason that in the instant case, the dictionary meaning or the technical meaning of the term as understood by the people who deal in the commodity is the same. It is not the law that where the meaning of the term as understood by the people who deal in the commodity is in conformity with the technical meaning or dictionary meaning, the dictionary meaning should not be treated as supporting to the conclusion that may be arrived at by the adjudicating authority. All that the Tribunal has done is that even as per the literature upon which the learned counsel for the dealer has relied, supported the meaning as understood by the people who deal in the commodity. Therefore, the submission that the Tribunal has preferred the technical meaning or the dictionary meaning of the term and has discarded the common parlance test, has no merits and the same cannot be accepted.”

5. Benefit should be given to the consumer wherein two views are possible for classification of goods

Hon’ble Gauhati High Court in the matter of Shri Chitta Ranjan Saha vs State Of Tripura And Ors. on 9 June, 1989 Equivalent citations: 1990 79 STC 51 Gauhati by referring to various judicial decision further held that benefit should be given to the consumer wherein two views are possible for classification of goods

“14. It is also by now well-settled that if two views are possible regarding classification of certain goods the benefit must go to the tax payer. If a tax payer seeks advantage, which was not intended by the legislature, but to which he was entitled on a construction of the statute he must be given that advantage [See Atkinson v. Goodlass Wall and Lead Industries Ltd. [1950] 31 TC 447 (HL) at page 472 ; Commissioner of Income-tax v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) ; State of Bombay v. Automobile and Agricultural Industries Corporation [1961] 12 STC 122 (SC) and Commissioner of Income-tax v. M.P. Jatia [1976] 105 ITR 179 (SC) ; (1976) 4 SCC 92 at page 96].”

6. Conclusion:

The process of interpretation of the entry for the purpose of classification of the goods to arrive at the correct tax rate is a subjective process and it’s hard to lay down fixed criteria for the same but general conclusions from above discussion can be culled out as follows:

i) There are following tests which are commonly applied for classification of goods for the purpose of levy of tax on goods which have not been defined under the Act:

  • Common parlance test and Commercial parlance test
  • Commonsense test or Commonsense rule of interpretation
  • User Test or Functional Test

ii) The sales tax enactment is one which touches the common man and his everyday life. Therefore, the terms in the said enactment must be in the manner in which the common man will understand them.

iii) The dictionary meaning in general is not relevant in finding out the true meaning of the word.

iv) If two views are possible for classification of goods, then the benefit must go to the tax payer.

v) Common Parlance Test or the Commercial Parlance Test are the most commonly used test.

vi) Common Parlance Test is generally applied where no meaning has been specified under the Statute and open market for the commodity exists where the commodity is generally traded.

vii) Where the commodity is Technical in nature and the commodity does not have an open market then in such case, technical or scientific meaning of the word may be applied.

viii) Commonsense Test or the Commonsense Rule of Interpretation is applied for understanding the meaning of the word in broader manner and in a commonly accepted sense of a term. An extension of the rule suggests that the edible goods should be given a wider context and meaning while interpreting the law.

ix) The user test is applied in case where the entry has linked the taxable object with the use to which it is put to or cases where the meaning of the goods in common parlance is derived by the predominant use to which the goods put to irrespective of the other minor use for which they can also be put to.

x) User Test has got its own limitations. Certain goods may be put to different uses by different persons. That cannot entitle the revenue to apply different rates of tax to the sales of the very same product by different dealers depending on the use to which they will be put 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 not enough to say that an article can be put to some other uses also and to classify it under the different categories for different sellers.

xi) Out of the Common Parlance Test and User Test, Common Parlance Test is the most appropriate and conclusive Test. User Test is generally applied in cases where other tests result in an inconclusive result.

At the end it can only be said that what is needed to analyze the entries in sales tax is the common knowledge with which we associate the goods in our day to day life. We do not need technical knowledge of the goods for the purpose of classification of goods unless otherwise in special circumstances or specifically mandated in the statute. The law has tried to lay down the simplest of the principle for analyzing the entries but complexities have become the part and parcel of the process.

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