2016 (8) TMI 1343 - HC - VAT and Sales Tax

Validity of Demand Notice dated October 10, 2011 - Declaration that the oxygen gas used by Tata Steel Ltd., which is being supplied by this petitioner for the purposes of manufacturing of steel through basic oxygen steel method (a method of steel making) is a raw material, required directly for use in manufacturing or processing of steel - whether oxygen sold by this petitioner to respondent No. 11 Tata Steel Ltd. is used as a material in manufacturing process of steel or is used as a raw material in manufacturing process of steel? Held that - the word raw material is to be understood in a common parlance of those who deal with the matter. If we ask any common man who has nothing to do with any manufacturing process of steel then he may give any other answer, but, this is not a test at all. Common parlance is to be used of the persons, who are dealing with manufacturing of steel and if those persons are narrating oxygen as a raw material, it will be one of the factors for arriving at the conclusion. What is to be seen by this court, is inevitable use of the material in chemical reaction, non-replacability of the said material in chemical reaction, whether this material is participating in a chemical reaction or not, whether oxygen is converted into any other material or not in a chemical reaction (here oxygen is converted into carbon dioxide and carbon monoxide) in L. D. Vessel Operation-second reaction in the manufacturing process of steel. What is to be seen is huge quantity of material added for chemical reaction. These are the guiding factors. If all these tests are applied to the usage of oxygen in second chemical reaction in manufacturing process of steel through BOS method, i.e., in L. D. Vessel Operation, certainly, oxygen is a basic raw material without which steel cannot be manufactured through BOS method. The orders passed by the Deputy Commissioner of Commercial Taxes, Jamshedpur Circle, Jamshedpur, dated October 1, 2011 (annexure 16 to the memo of this petition) relating to financial year 2003-04 is set aside. The oxygen gas sold by this petitioner and purchased by respondent No. 11 is used as a basic raw material in manufacturing process of steel through Basic Oxygen Steel Method. Petition allowed.

Summary

Issues Involved:
1. Determination of whether oxygen gas used in the manufacturing of steel through the Basic Oxygen Steel (BOS) method is a raw material.
2. Assessment of the applicable sales tax rate on oxygen gas sold for steel manufacturing.
3. Validity of the orders passed by the assessing officer, appellate authority, and revisional authority.
4. Consideration of previous litigation and Supreme Court directions on the matter.
5. Interpretation of notifications under the Bihar Finance Act, 1981.

Detailed Analysis:

1. Determination of Whether Oxygen Gas is a Raw Material:
The petitioner challenged the classification of oxygen gas used in the BOS method of steel manufacturing. The core issue was whether oxygen gas should be considered a raw material, which would attract a lower sales tax rate of 2%, or merely a material used in the process, attracting a 3% sales tax rate.

The court analyzed the manufacturing process of steel through the BOS method, noting that oxygen is used in a significant quantity and is essential for converting pig iron into steel. The court emphasized that oxygen cannot be replaced by any other element and is crucial for reducing carbon content in pig iron, thus making it a raw material.

2. Assessment of the Applicable Sales Tax Rate:
The petitioner argued that oxygen gas should be taxed at a rate of 2% as per the notification dated February 3, 1986, which applies to raw materials used in manufacturing. The court agreed, stating that oxygen gas is a basic raw material in the BOS method, and thus, the petitioner is liable to pay sales tax at the rate of 2% instead of 3%.

3. Validity of the Orders Passed by the Authorities:
The orders passed by the assessing officer, appellate authority, and revisional authority were challenged. These authorities had classified oxygen gas as a refining agent rather than a raw material. The court found that these authorities had not properly appreciated the role of oxygen in the manufacturing process and had erroneously classified it based on terminology rather than its actual usage and necessity in the process.

The court quashed the orders passed by the Deputy Commissioner of Commercial Taxes, the Joint Commissioner of Commercial Taxes (Appeals), and the Commercial Taxes Tribunal, as well as the consequential demand notice.

4. Consideration of Previous Litigation and Supreme Court Directions:
The court revisited the previous litigation, where the Supreme Court had remanded the matter to the assessing officer to determine whether oxygen is a raw material based on evidence and a site visit. A committee was constituted, which reported that oxygen is used as a refining agent. However, the court noted that this report did not fully appreciate the chemical reactions and the indispensable role of oxygen in the BOS method.

5. Interpretation of Notifications Under the Bihar Finance Act, 1981:
The court examined various notifications under the Bihar Finance Act, 1981, which differentiated between raw materials and other goods used in manufacturing. The court concluded that the notifications should be interpreted in light of the actual usage and necessity of the material in the manufacturing process. The court held that oxygen gas qualifies as a raw material under the notification dated February 3, 1986.

Conclusion:
The court held that oxygen gas used in the BOS method of steel manufacturing is a basic raw material and should be taxed at the rate of 2% as per the relevant notification. The orders passed by the assessing officer, appellate authority, and revisional authority were quashed, and the demand notice was set aside. The court directed that any differential amount already paid by the petitioner should be adjusted towards future tax liabilities.