2012 (9) TMI 894 - HC - VAT and Sales Tax

Whether Appellate Tribunal was legally justified in restoring levy of entry tax on diesel brought into local area for use as raw material/input in the generation of electrical energy which is exempted from tax levy under entry Sl. No. 15 of the Second Schedule to the Karnataka Entry Tax Act? Whether levy of entry tax at two per cent in respect of hexane which is an input used in the extraction of solvent oil is legally justified as against the rate of tax at one per cent applicable under entry 80 of the First Schedule to the Karnataka Tax on Entry of Goods Act, 1979 read with Sl. No. 3 of Government Notification No. FD CET 98 (2) dated March 31, 1998? Held that - The assessee has caused entry of diesel into local area, which is a scheduled goods under entry 67 of the First Schedule under the KTEG Act. The assessee is manufacturing and selling solvent oil from the oil-cake from its plant. The assessee has caused entry of diesel for generating the electric energy for running its machine. The assessee has never sold electrical energy. Hence, diesel cannot be treated as raw material or component part or an input used in the manufacture of some other goods. Hence, we find that there is no infirmity or irregularity in the order passed by the Karnataka Appellate Tribunal confirming the order passed by the assessing authority. With regard to the second question, the assessing authority has not noticed the notification dated March 31, 1998 wherein it was specifically mentioned that the raw materials, component parts and input which are used in the manufacturing of intermediate and finished products other than those specified in the Second Schedule is at the rate of one per cent. The assessing authority as well as the Karnataka Appellate Tribunal has not considered the said notification. Hence, the order passed by the assessing authority is required to be modified and the tax has to be levied on hexane at the rate of one per cent. Revision partly allowed.

Summary

Issues Involved:
1. Legality of restoring levy of entry tax on diesel used as raw material/input for generating electrical energy.
2. Legality of levying entry tax at two percent on hexane used in the extraction of solvent oil.

Issue-wise Detailed Analysis:

1. Legality of Restoring Levy of Entry Tax on Diesel:

The primary question was whether the Karnataka Appellate Tribunal was justified in restoring the levy of entry tax on diesel brought into the local area for use as raw material/input in the generation of electrical energy, which is exempted from tax levy under entry Sl. No. 15 of the Second Schedule to the Karnataka Entry Tax Act. The assessee argued that diesel used for generating electricity should not be subjected to entry tax as it falls under the Second Schedule, making it a raw material/input exempt from such tax. However, the Karnataka Appellate Tribunal, referencing the High Court's decision in Nestle India Ltd. v. State of Karnataka, held that the nature and type of goods at the point of entry are the relevant factors in determining the rate of tax, not their subsequent use. Diesel, being a scheduled commodity under entry 67 of the First Schedule and specified in the Government notification, is liable to entry tax at five percent. The Tribunal affirmed the levy of entry tax on diesel, concluding that it cannot be treated as raw material or input for the finished products.

2. Legality of Levying Entry Tax at Two Percent on Hexane:

The second issue was whether the levy of entry tax at two percent on hexane, an input used in the extraction of solvent oil, was justified against the applicable rate of one percent under entry 80 of the First Schedule to the Karnataka Tax on Entry of Goods Act, 1979, read with Sl. No. 3 of Government Notification No. FD CET 98 (2) dated March 31, 1998. The assessee contended that hexane, used as a chemical in the solvent extraction process, should be treated as a chemical and not as a petroleum product, thus liable to a one percent tax rate. The Tribunal, however, considered hexane as a petroleum product derived from crude petroleum through fractional distillation, falling under entry 67 of the First Schedule and liable to a two percent tax. The Supreme Court's judgment in Collector of Central Excise v. Ballarpur Industries Ltd. was cited, treating hexane as a chemical used in the extraction process. The Tribunal failed to consider the notification specifying a one percent tax rate for raw materials used in manufacturing intermediate and finished products. Consequently, the order was modified to levy entry tax on hexane at one percent.

Conclusion:

The revision petition was partly allowed. The Karnataka Appellate Tribunal's order was modified to levy entry tax on hexane at one percent instead of two percent. The Tribunal's decision to affirm the levy of entry tax on diesel was upheld, as diesel used for generating electricity cannot be treated as raw material or input for finished products.