Tea Estate’s Silver Oak Trees Agricultural Produce, Not Taxable Timber

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Case Name

M/s. United Nilgiri Tea Estates Company Ltd. vs. The Tamil Nadu Sales Tax Appellate Tribunal (Additional Bench) & Others

Court Name: High Court of Judicature at Madras

Case No.: W.P. Nos. 46464 to 46470 of 2006

Pronounced on: 29th July 2022

Key Takeaways

1. Silver Oak shade trees grown in tea estates = Agricultural Produce: Since these trees require human effort and labour to grow (they don’t grow wild), they qualify as agricultural produce under the TNGST Act, 1959.

2. Sizing for transportation Processing: Just cutting and sizing the trees for the convenience of transportation does not amount to any physical, chemical, or other process that would disqualify them from being “agricultural produce” under Explanation (1) to Section 2® of the TNGST Act, 1959.

3. Selling in cubic metres doesn’t make it “timber”: The Revenue’s argument that selling wood in cubic metres (rather than by weight) proves it’s timber was rejected. The court said the ‘user test’ (determining goods by how they’re used) is inconclusive for classification purposes.

4. Precedent from the same company’s earlier case was binding: A previous Division Bench decision in the petitioner’s own case (reported in 45 STC 10) had already settled this issue — and the Tribunal was wrong to ignore it.

5. No need to decide firewood vs. timber: Once the court concluded the trees are “agricultural produce,” the question of whether they are firewood or timber became irrelevant.

Issue

The central legal question was:

Are cut and sized Silver Oak trees (shade trees grown in a tea estate) “agricultural produce” exempt from sales tax under Section 2® of the Tamil Nadu General Sales Tax Act, 1959 — or are they taxable as “timber”?

And as a secondary/alternative question:

Even if not agricultural produce, do they qualify as “firewood” and thus exempt under Entry 52 of Part B of the Third Schedule to the TNGST Act, 1959?

Facts

• The Company: M/s. United Nilgiri Tea Estates Company Ltd., based in Coimbatore, runs tea estates in Tamil Nadu.
• The Trees: They grow Silver Oak (Grevillea robusta) trees as shade trees in their tea estates. These are exotic trees originally from Australia, planted and maintained with human effort at specific intervals to provide shade for the tea plants.
• The Sale: The company cut these shade trees, sized them (cut them into specific measurements) purely for the convenience of transportation in lorries, and sold them. The sales were made in cubic metres.
• The Tax Dispute: The tax authorities (Assessing Authority) said — “You’re selling timber, and timber is taxable!” They pointed to the fact that the wood was sold in cubic metres (not by weight) as proof that it was timber, not firewood.
• The Company’s Stand: The company said — “These are agricultural produce grown by us on our own land. They should be excluded from ‘turnover’ altogether. Alternatively, they are firewood and exempt from tax.”
• Appeals: The company lost before the Assessing Authority, then lost again before the First Appellate Authority, and then lost again before the Tamil Nadu Sales Tax Appellate Tribunal. All three authorities said it was timber and taxable.
• Writ Petitions: The company then came to the Madras High Court filing W.P. Nos. 46464 to 46470 of 2006, covering assessment years 1997-98 to 2003-04.

Arguments

Petitioner’s Arguments (The Tea Company):

1. Primary Claim — Agricultural Produce: The Silver Oak trees are grown with human effort and labour on their own tea estate land. They are therefore “agricultural produce” and the sale proceeds should be excluded from “turnover” under Section 2® of the TNGST Act, 1959. Sizing them for transportation doesn’t change their character.

2. Alternative Claim — Firewood: Even if not agricultural produce, the cut/sized Silver Oak should be treated as “firewood”, which is exempt under Entry 52 of Part B of the Third Schedule to the TNGST Act, 1959.

3. Precedent: A Division Bench of the same High Court had already decided this issue in the petitioner’s own earlier case (reported in 45 STC 10), holding that shade trees cut/sized for transportation are agricultural produce. The Tribunal was wrong to ignore this binding precedent.

Revenue’s Arguments (Tax Authorities):

1. It’s Timber, Not Agricultural Produce or Firewood: The wood sold is neither agricultural produce nor firewood — it is timber, which is taxable.

2. Sold in Cubic Metres = Timber: Firewood is normally sold by weight, not by cubic metre. Since the company sold the wood in cubic metres, this proves it is timber. The sale bills were cited as conclusive evidence.

3. Sizing Changes the Character: Once the shade trees were cut and sized into logs of specific measurements, they ceased to be firewood or agricultural produce and became timber.

Key Legal Precedents

Statutory Provisions:

Section 2 of the Tamil Nadu General Sales Tax Act, 1959 — defines “turnover” and excludes proceeds from the sale of agricultural or horticultural produce (other than tea and rubber) grown by the assessee on their own land.

Explanation (1) to Section 2® — clarifies that “agricultural or horticultural produce” does not include produce subjected to any physical, chemical, or other process to make it fit for consumption — except mere cleaning, grading, sorting, or drying.

Entry 52 of Part B of the Third Schedule to the TNGST Act, 1959 — provides exemption for “firewood.”

Case Laws Cited:

1. CIT vs. Raja Benoy Kumar Sahas Roy (31 ITR 426) — Supreme Court held that “some basic operation prior to germination involving application of human effort on the land itself was necessary to constitute agriculture.” This was used to establish that Silver Oak trees, which require human effort to grow, qualify as agricultural produce.

2. CIT vs. Sundara Mudaliyar (18 ITR 259) — Madras High Court held that “irrespective of the nature of the produce or the product of the land, whatever is grown on land aided by human labour and effort, whatever does not grow wild or spontaneously on soil without human labour or effort, would constitute agricultural produce.” This reinforced the finding that Silver Oak is agricultural produce.

3. Division Bench decision in the petitioner’s own case (45 STC 10) — This is the most critical precedent! A previous Division Bench of the Madras High Court had already ruled in the same company’s earlier case that:

• Cut/sized shade trees are not firewood (since they were not split with an axe into firewood).
• But they are agricultural produce and thus exempt from tax.
• Sizing for transportation does not change their character as agricultural produce.
• This precedent was binding and the Tribunal had wrongly brushed it aside.

4. Porritts and Spencer vs. State of Haryana [(1978) 42 STC 433] — Cited to establish that the ‘user test’ (classifying goods based on the use they are put to) is inconclusive for determining classification, unless the Entry itself refers to the nature of use.

5. Andavar and Co. vs. State of Tamil Nadu [(1995) 97 STC 141] — Also cited on the same point about the inconclusive nature of the ‘user test.’

6. State of Tamil Nadu vs. Modern Mill Stores [(1996) 102 STC 539 SC] — Again cited to support the principle that the ‘user test’ is not determinative of classification.

Judgement

Winner: The Tea Company (Petitioner)

The High Court of Madras (Division Bench of Justice R. Mahadevan and Justice Mohammed Shaffiq) ruled in favour of M/s. United Nilgiri Tea Estates Company Ltd. Here’s the reasoning:

1. Silver Oak Agricultural Produce: The Silver Oak trees are grown with human effort and labour. They don’t grow wild or spontaneously. Therefore, they satisfy the definition of “agricultural produce.”

2. Sizing Processing: Cutting and sizing the trees for transportation convenience does not amount to any process that would disqualify them from being “agricultural produce” under Explanation (1) to Section 2®. The sizing was purely for logistical convenience, not to make the produce fit for consumption.

3. Selling in Cubic Metres is Irrelevant: The Revenue’s argument that selling in cubic metres proves it’s timber was rejected. The ‘user test’ is inconclusive for classification purposes.

4. Binding Precedent Applies: The earlier Division Bench decision in 45 STC 10 (the petitioner’s own case) had already settled this issue and was binding. The Tribunal was wrong to ignore it.

5. No Need to Decide Firewood vs. Timber: Since the trees are agricultural produce and fall outside the scope of taxable turnover, the court didn’t need to decide whether they were firewood or timber. That question became purely academic.

Order:

“The order of the first respondent/Tribunal is set aside and all the writ petitions are allowed. No costs.”

FAQs

Q1: Why did the company lose before the lower authorities but win in the High Court?

The lower authorities (Assessing Authority, First Appellate Authority, and Tribunal) focused too narrowly on the fact that the wood was sold in cubic metres and concluded it was timber. The High Court took a broader view, applying the correct legal test (whether the trees were grown with human effort) and also applied the binding precedent from the company’s own earlier case that the lower authorities had ignored.

Q2: What’s the significance of selling in “cubic metres” vs. “by weight”?

The Revenue argued that firewood is sold by weight, so selling in cubic metres must mean it’s timber. But the High Court rejected this reasoning, saying the manner of billing or measurement is not the right test to classify goods for tax purposes. The ‘user test’ is inconclusive.

Q3: Does sizing/cutting the trees change their nature as agricultural produce?

No! The court clearly held that sizing the trees for the convenience of transportation does not amount to any physical, chemical, or other process that would strip them of their character as “agricultural produce.” The key is that no further process was applied to make them fit for consumption.

Q4: What is the “user test” and why was it rejected?

The ‘user test’ means classifying goods based on the use to which they are put (e.g., “this wood is used as timber, so it’s timber”). The court rejected this approach, citing Porritts and Spencer vs. State of Haryana [(1978) 42 STC 433], Andavar and Co. vs. State of Tamil Nadu [(1995) 97 STC 141], and State of Tamil Nadu vs. Modern Mill Stores [(1996) 102 STC 539 SC], which held that the user test is inconclusive unless the tax entry itself refers to the nature of use.

Q5: What does this mean for other tea estates selling shade trees?

This judgment is very significant for tea estates in Tamil Nadu! It establishes that shade trees (like Silver Oak) grown with human effort in tea estates, when cut and sized for transportation, are “agricultural produce” and their sale proceeds are excluded from taxable turnover under the TNGST Act, 1959. Other tea estates in similar situations can rely on this judgment.

Q6: What about the firewood exemption claim?

The court didn’t need to decide this because it already ruled in favour of the company on the “agricultural produce” ground. However, it’s worth noting that the earlier precedent in 45 STC 10 had already rejected the firewood claim — the trees were not split with an axe into firewood, so they couldn’t be called firewood.

Q7: Were there any costs awarded?

No. The court allowed all the writ petitions but did not award any costs to either party.

Heard both sides and perused the materials available on record.

2. A common order is passed in this batch of writ petitions as the issues

involved herein are identical and the petitioner is aggrieved by the common order dated 09.05.2006 passed by the first respondent/ Tamil Nadu Sales Tax Appellate Tribunal in CTA Nos.453/02, 520/02, 521/02, 522/02, 523/02, 69/05 and 120/05, relating to the assessment years from 1997-98 to 2003-04.

3. The short question that arises for consideration herein is, whether

the sales of cut / sized Silver Oak (Scientific name : Grevillea robusta) grown as shade trees in the Tea Estates of the petitioner admittedly in cubic metre and charged per cubic metre would constitute "agricultural produce" in terms of Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 (for the sake of brevity, "TNGST Act, 1959") or would constitute sales of "firewood" and thus exempt in terms of Entry 52 of Part B of the Third Schedule to the TNGST Act, 1959 or would constitute sales of "timber" liable to tax under the TNGST Act, 1959.

4. At the outset, it may be relevant to note that the following facts are

not in dispute viz.,

a. That the wood sold is cut/ sized Silver Oak grown as shade tree in

the Tea estate of the petitioner.

b. That the sale is effected by the petitioner in cubic metres and not by

weight.

5. The petitioner during the proceedings for the relevant assessment

years, raised a two fold claim, viz.,

(a) That the sale of cut/sized Silver Oak, would constitute "agricultural

produce", thereby falling outside the purview of “turnover” in terms of Section 2(r) of TNGST Act, 1959.

(b) Alternatively, the sale of cut/sized Silver Oak represents the sale of

"firewood" and is thus, exempt in terms of Entry 52 of Part B of the Third

Schedule to the TNGST Act, 1959.

6. To the contrary, it was the case of the Revenue that the wood/ goods

sold by the petitioner is neither agricultural produce nor firewood, but sale of timber, liable to tax in terms of the TNGST Act, 1959. In support of the said contention, reliance was placed on the sale bills, which would show that the wood was sold in cubic metre and not by weight. According to the Revenue, firewood is normally sold by weight and not in cubic metre. It is only the timber that is sold by length/cubic metre. The said factum was taken to be conclusive proof of the fact that the wood sold was neither agricultural produce nor firewood, but sale of timber and thus, liable to tax.

7. Aggrieved by the orders of the Assessing Authority rejecting the

claim of the petitioner that the wood sold was agricultural produce or

alternatively firewood, the petitioner preferred appeals before the First Appellate Authority, who confirmed the orders of assessment, while placing reliance on the sale bills and the fact that the wood was sold in cubic metre and not by weight. Though the First Appellate Authority referred to a number of judgments on what would constitute firewood, reference is not made to those judgments in this order as it may not be necessary to examine the same in view of the conclusion that we propose to draw.

8. Before we examine the order of the Tribunal, it is necessary to note

that the First Appellate Authority found that the wood sold by the petitioner was "shade tree", cut / sized only, for the sake of convenience of transportation. The following extracts from the order of the First Appellate Authority are relevant and thus extracted below:

i) Admission of the Addl. Departmental Representative that wood sold

by the petitioner was "shade tree":

"6. Thus, the learned Additonal Departmental Representative's point

was that once the shade trees were cut and sized into logs, it would

automatically be derived that the item ceased to be firewood...."

ii) Finding the sale is of shade tree by the First Appellate Authority,

affirmed by the Tribunal:

11. The main point is to be ascertained here is whether the shade

trees, though being claimed to be an "agricultural produce" whether felled in pursuance of contract for sale and cut into sizes of specific measurements, to the indenter.....The shade trees sold by a tea estate company after sizing them for convenience for transportation in lorries would be the agricultural produce and exempt from sales tax under the TNGST Act, 1959. Though the High Court has observed in an earlier case of the appellants that the shade trees cut into sizes and sold were not liable to tax under the TNGST Act, 1959, there is a treak of difference in the facts of the earlier case and the present case, since the shade trees in the present case had been cut into sizes only with an intention to sell as

timber, as evidenced by using measurements to describe the commodity in the

bills and charging at the unit rate per cubic meter....."

9. The attempt by the Respondents to treat the sale of shade trees cut/

sized as "timber" by relying on the fact that measurements were made at unit rate per cubic meter, in other words, applying the 'user' test to determine the classification / rate of tax after admitting that the wood that was sold is shade trees cut/ sized only for the purpose of transportation may not take the case of the Respondents forward inasmuch as 'user' test, that is determination of the nature of the goods by finding out the use to which the goods are capable of being put to, has been held as inconclusive in determining the classification, unless the Entry itself refers to the nature of use as relevant. In this regard, it may be relevant to refer to the following judgments:

a. Porritts and Spencer vs. State of Haryana [(1978) 42 STC 433];

b. Andavar and Co. vs. State of Tamil Nadu [(1995) 97 STC 141]; and

c. State of Tamil Nadu vs. Modern Mill Stores [(1996) 102 STC 539 SC].

10. The above orders of the First Appellate Authority were carried in

appeals to the Appellate Tribunal, which again affirmed the orders of the

Authorities below on the premise that the petitioner had effected sales of timber. The said conclusion was drawn primarily on the basis that the wood was sold in cubic metre and not by weight, which is an unusual practice, when it comes to sales of firewood. The Tribunal brushed aside the argument of the petitioner that the wood sold was "agricultural produce" and the issue was covered by a decision of the Division Bench in respect of the petitioner's own case, reported in 45 STC 10 stating that the same was considered by the First Appellate Authority.

11. The present writ petitions are filed by the petitioner against the

order of the Tribunal challenging the levy of tax, on the premise that sale of shade trees cut/sized for the purpose of transportation, would still constitute "agricultural produce" and would fall outside the purview of turnover under the TNGST Act, 1959. In any event, the sale of shade trees cut/sized would constitute firewood and the authorities below have misdirected themselves in looking to the manner of billing to decide the classification viz., whether the wood/ goods sold was timber or fire wood or agricultural produce.

12. In our view, whether shade trees grown in tea estate cut/sized and

sold would constitute "agricultural produce", may be the principal question that needs to be answered first. If the answer to the said question is in the affirmative, the need to travel beyond and examine, whether the wood sold is firewood or timber, may not even arise. This is, in view of the fact that once it is "agricultural produce", then, it goes outside the purview of the turnover under the TNGST Act, 1959. In this regard, it may be relevant to refer to Section 2 (r) of the TNGST Act, 1959 and Explanation I thereto, which reads as under :

"Section 2(r) : " turnover " means the aggregate amount which

goods are bought or sold , or delivered or supplied or otherwise disposed

of in any of the ways referred to in clause (n), by a dealer either directly

or through another, on his own account or on account of others whether

for cash or for deferred payment of other valuable consideration ,

provided that the proceeds of the sale by a person of agricultural or

horticultural produce other than tea, and rubber (natural rubber latex)

and all varieties and grades of raw rubber grown within the State by

himself or on any land in which he has an interest whether as owner,

usufructuary mortgagee, tenant or otherwise, shall be excluded from his

turnover.

Explanation (1) - " Agricultural or horticultural produce " shall not

include such produce as has been subjected to any physical, chemical or

other process for being made fit for consumption, save mere cleaning,

grading , sorting or dying . "

13. A reading of the above would show that to fall within the exclusion

under the above provisions as agricultural / horticultural produce, the following requisites have to be satisfied viz.,

a. The proceeds of sale must be of "agricultural or horticultural"

produce.

b. The produce should be grown within the State.

c. The activity of growing the produce must be by the assessee himself.

d. The claimant of the exemption / exception must have a substantial

and not merely a formal interest in the land whereon the agricultural produce is grown.

14.1. To understand, what would constitute "agriculture", it may be

relevant to refer to the following judgments of the Hon'ble Supreme Court and the Madras High Court:

(i) CIT vs. Raja Benoy Kumar Sahas Roy ( 31 ITR 426 ) wherein it was

held that "some basic operation prior to germination involving application of human effort on the land itself was necessary to constitute agriculture".

(ii) CIT vs. Sundara Mudaliyar ( 18 ITR 259 ) wherein it was pointed

out that "irrespective of the nature of the produce or the product of the land whatever is grown on land aided by human labour and effort, whatever does not grow wild or spontaneously on soil without human labour or effort, would constitute "agricultural produce".

14.2. The shade trees that have been cut/sized and sold are Silver Oak.

These trees have their origin in Australia, an exotic plant variety and they are used as shade trees in tea estates in southern parts of India. These shade trees viz., Silver Oak need to be attended to periodically and they have to be planted and grown at particular intervals/distance to serve its purpose as shade trees for growth of tea plants. It is not the case of the Revenue that the growth of Silver Oak is wild or spontaneous, rather it is the case of the petitioner, which remains uncontroverted, these require human effort/labour and attention and thus, would constitute “agricultural produce”.

15. Keeping the above aspects in mind, we find that the above question

had already arisen for consideration in the case of the petitioner’s tea estate reported in 45 STC 10, wherein a Division Bench of this Court, while rejecting the claim of exemption on firewood, had however upheld the petitioner’s claim that what was sold, was agricultural produce and thus, outside the purview of turnover in terms of Explanation 1 to Section 2(r) of the TNGST Act, 1959. The relevant paragraph of the said decision may be set out below:

Claim of sale of firewood rejected:

"In respect of the turnover relating to the sale of shade trees, it is true

that they were capable of being used as firewood. We are, however,

concerned with the character of the trees were cut, and not with the

purpose for which the purchasers are likely to use them. It is a

misnomer to call the sales as sales of firewood as they were cut and

sold as trees or logs, and not as firewood by splitting them with an

axe. The sales were actually of shade trees after they were cut. They

were sized for enabling convenient transportation. Timber by being

sized does not become firewood......"

(emphasis supplied)

16. The above extract would show that the claim of the petitioner that

the cut / sized Silver Oak / shade tree would constitute "firewood", was rejected.

However, this Court had taken the view that the cut/ sized Silver Oak would

constitute "agricultural produce", thus, not liable to tax. The following extract would make the position clear:

"...Thus, that were agricultural produce is clear from this finding. We

shall presently examine whether they lost the character. But, as they were

agricultural produce, they would be eligible for the exemption from tax.

The Hon'ble Supreme Court has pointed out in Commissioner of Income-

tax vs. Raja Benoy Kumar Sahas Roy that some basic operation prior to

germination involving an application of human effort on the land itself

was necessary to constitute agriculture. In an earlier decision of a Bench

of this Court in Commissioner of Income-tax vs. Sundara Mudaliar,

Viswanatha Sastri, J., pointed out that irrespective of the nature of the

produce or product of the land, whatever is grown on land aided by

human labour and effort, whatever does not grow wild or spontaneously

on the soil without human labour or effort, would be agricultural produce.

In the above case, the court was dealing with the assesseability to income-

tax of the income derived from the sale of casuarina trees and it was held

to be agricultural income. Judged by the test propounded in the above

decision also, in the present case, the trees would constitute agricultural

or horticultural produce.

The exclusion contemplated by the explanation would not apply to

the present case because there is no process employed for making them fit

for consumption. The timber was sized only for the purpose of convenient

transportation so as to enable their sale. There is no material to show that

the timber was not merely sized but was split further so as to convert them

into firewood. The sizing in this case was necessary only for convenience

of transportation in lorries. Sizing them for convenience of transportation

is different from splitting them into firewood which would be a different

commercial commodity. Further, operations would be necessary to

convert them into firewood. We are, therefore, satisfied that the assessee is eligible for exemption in respect of sales of the shade trees for the two

years." (emphasis supplied)

17. In view of the above, it is clear that the cut/ sized shade trees would

constitute "agricultural produce" and therefore, fall outside the purview of

TNGST Act, 1959. In the light of the conclusion that we have arrived at, we are of the view that it may not be necessary to examine the other question viz., as to whether the wood/ goods sold was firewood or timber, though a number of decisions were cited by both sides, in this regard. The said exercise would be purely academic, which we do not intend to enter into.

18. For all the reasons stated above, the order of the first respondent /

Tribunal, is set aside and all the writ petitions are allowed. No costs.

[R.M.D., J.] [M.S.Q., J.]

29.07.2022