2010 (2) TMI 1068 - HC - VAT and Sales Tax

Whether the abovementioned fuels like natural gas, furnace oil, diesel oil and naphtha would come within the meaning of the expression raw materials processing materials or consumable stores ? Held that - The fuels consumed, namely, natural gas, furnace oil, light diesel oil, naphtha, etc., by the industry to generate electricity which is then used in the manufacture of end-products, namely, caustic soda, industrial chemicals, etc., can be considered to be raw material or processing material or consumable stores for the purpose of section 15B of the Gujarat Sales Tax Act, 1969 or for the purpose of rule 42 or for the purpose of exemption notification issued from time to time under the Act. We are also of the view that the test laid down by the honourable Supreme Court in the case of Coastal Chemicals 1999 (10) TMI 599 - SUPREME COURT OF INDIA would not apply but the tests laid down in the case of J.K. Cotton 1964 (10) TMI 2 - SUPREME COURT OF INDIA and in the case of Ballarpur Industries 1989 (9) TMI 102 - SUPREME COURT OF INDIA would apply, while deciding the above question, to the Gujarat law. Though we have held that fuels consumed by the industry to generate electricity which is used in the manufacture of end-product are considered to be raw material or processing material or consumable stores for the purpose of section 15B, rule 42A or exemption notifications issued from time to time under the Act, as per the decision of the apex court in the case of Maruti Suzuki Limited v. Commissioner of Central Excise 2009 (8) TMI 14 - SUPREME COURT , the excess electricity used for any other purpose including by grid for distribution or by joint ventures or by vendors, etc., and that too for a price (sale), the process and the user test fails to this extent. In such a case, the nexus between the process and the use gets disconnected. In such a case, it cannot be said that the electricity generated is used in or in relation to the manufacture of final product. Therefore, to the extent of use of electricity for the purposes other than manufacturing activities or not connected therewith would not be considered as raw materials, processing materials or consumable stores.

Issues Involved:
1. Validity and retrospective effect of the circular dated September 2, 2005.
2. Classification of fuels (natural gas, furnace oil, light diesel oil, naphtha) as "raw material," "processing material," or "consumable stores."
3. Applicability of tests from Coastal Chemicals case versus J.K. Cotton and Ballarpur Industries cases.
4. Interpretation of statutory provisions and rules under the Gujarat Sales Tax Act, 1969.
5. Application of the principle of noscitur a sociis.
6. Principle of promissory estoppel regarding the circular of February 19, 2001.
7. Contemporaneous exposition by administrative authorities.

Detailed Analysis:

1. Validity and Retrospective Effect of the Circular Dated September 2, 2005:
The petitioners challenged the circular dated September 2, 2005, which revoked the earlier circular dated February 19, 2001, with retrospective effect. The court held that the circular dated September 2, 2005, shall not operate with retrospective effect. The respondents were not entitled to reopen completed assessments, and notices issued for reassessment were quashed. The court clarified that the February 19, 2001, circular held the field until it was withdrawn by the September 2, 2005, circular.

2. Classification of Fuels as "Raw Material," "Processing Material," or "Consumable Stores":
The court considered whether fuels like natural gas, furnace oil, light diesel oil, and naphtha used to generate electricity for manufacturing end-products could be classified as "raw materials," "processing materials," or "consumable stores." The court concluded that these fuels could be considered as such for the purposes of section 15B of the Gujarat Sales Tax Act, 1969, rule 42, and relevant exemption notifications. This was based on the expansive interpretation of "manufacture" to include all processes integrally connected with the production of goods.

3. Applicability of Tests from Coastal Chemicals Versus J.K. Cotton and Ballarpur Industries:
The court determined that the tests laid down in the J.K. Cotton and Ballarpur Industries cases should apply to the Gujarat law, rather than the tests from the Coastal Chemicals case. The court noted that the provisions of the Gujarat Act were not pari materia with the Andhra Pradesh Act considered in Coastal Chemicals. The court emphasized that the interpretation of "raw materials," "processing materials," and "consumable stores" should align with the broader definitions provided in the J.K. Cotton and Ballarpur Industries cases.

4. Interpretation of Statutory Provisions and Rules Under the Gujarat Sales Tax Act, 1969:
The court analyzed the relevant statutory provisions, including section 15B of the Gujarat Sales Tax Act, 1969, rule 42, and entries 118 and 255 of the notifications issued under section 49(2) of the Act. The court concluded that the fuels used in generating electricity for manufacturing purposes fell within the definitions of "raw materials," "processing materials," or "consumable stores."

5. Application of the Principle of Noscitur a Sociis:
The court rejected the application of the principle of noscitur a sociis, which suggests that the meaning of a word should be determined by the words surrounding it. The court found that the terms "raw materials," "processing materials," and "consumable stores" in the Gujarat Act were distinct and not interconnected, thus not warranting the application of this principle.

6. Principle of Promissory Estoppel Regarding the Circular of February 19, 2001:
The court did not explicitly address the principle of promissory estoppel due to the favorable ruling for the petitioners on other grounds. However, it noted that the petitioners' argument concerning promissory estoppel was based on the consistent interpretation and application of the 2001 circular by the Department.

7. Contemporaneous Exposition by Administrative Authorities:
The court considered the consistent interpretation by the Department since 1987, which treated fuels as "consumable stores" or "processing materials." The court held that this long-standing interpretation should be accepted as correct, supporting the petitioners' claims.

Conclusion:
The court answered the questions referred by the Supreme Court affirmatively, holding that the fuels used by industries to generate electricity for manufacturing end-products could be considered "raw materials," "processing materials," or "consumable stores" under the Gujarat Sales Tax Act, 1969. The court also determined that the tests from the J.K. Cotton and Ballarpur Industries cases applied to the Gujarat law, rather than the Coastal Chemicals case. The petitions were disposed of in favor of the petitioners, with no costs awarded.

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