1981 (9) TMI 261 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the process of extracting unrefined crude oil from the earth is considered manufacturing.
2. Whether the Commission is entitled to set-off under rule 41 of the Bombay Sales Tax Rules, 1959, for tax paid on parts of drilling rigs.

Detailed Analysis:

Issue 1: Manufacturing Process of Extracting Crude Oil

The Tribunal's decision was challenged on whether the process of extracting unrefined crude oil from the earth constitutes manufacturing under the Bombay Sales Tax Act, 1959. The Tribunal concluded that the Commission's activities, which include the extraction of oil and gas, constitute manufacturing. The State Government argued that the activities should be divided into mining (extraction) and processing (refining), with only the latter qualifying as manufacturing.

The Court examined the definition of "manufacture" under section 2(17) of the Bombay Act, which includes "producing, making, extracting, altering, ornamenting, finishing or otherwise processing, treating, or adopting any goods." The Court emphasized that "extracting" is a broad term that encompasses the Commission's activities. The Court referenced the Supreme Court's decision in Chowgule & Co. Pvt. Ltd. v. Union of India, which held that integrated activities from extraction to processing constitute manufacturing. The Court concluded that the Commission's activities, from drilling to purification, are integrated and constitute manufacturing. Therefore, the Tribunal was justified in its decision.

Issue 2: Entitlement to Set-Off for Parts of Drilling Rigs

The second issue was whether the Commission is entitled to set-off under rule 41 for tax paid on parts of drilling rigs. The Tribunal allowed the set-off, considering the drilling rigs as equipment necessary for the manufacturing process. The State Government argued that if drilling rigs are not considered machinery used in manufacturing, their parts should not qualify for set-off.

The Court noted that the Tribunal had classified drilling rigs as equipment rather than machinery, thus subjecting them to a different tax entry. However, the Court held that since the drilling rigs and their parts are essential for the integrated process of extracting and purifying oil, they qualify as goods used in manufacturing. Consequently, the Tribunal was correct in allowing the set-off.

Conclusion:

The Court answered both questions in the affirmative, in favor of the assessee (the Commission) and against the State Government. The reference by the State Government was rejected, and costs were awarded to the opponent-assessee. The decision underscores the integrated nature of the Commission's activities as manufacturing and affirms the entitlement to set-off for essential equipment and parts used in the manufacturing process.