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TMI Blog1981 (9) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... in different parts of the country and to remove the impurities from such oil and sell them. For the purposes of carrying out these activities, the Commission, which has got different projects in different parts of the country, has to purchase various kinds of materials. The Ahmedabad project of the Commission, with which we are concerned in this reference, accordingly purchases such materials which include heavy machineries, vehicles, electrical goods, etc. These articles are purchased from inside the State as well as from outside the State. Some of the purchases which are effected from outside the State are effected against the declarations in form C, stating, inter alia, that these are required "for use in the manufacture of goods for sale". Certain local purchases were made from the registered dealers on payment of tax either directly or by inclusion in the sale price. The machineries and other goods as well as the spare parts of the vehicles so purchased were treated as for use in the manufacture of the goods for sale and in respect of these purchases a set-off was claimed before the Sales Tax Officer. It should be noted that since the purchases in the assessment period with w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the multifarious activities which the Commission has to undertake in its business of mining and processing, the claim of set-off should be allowed on some percentage basis. The Assistant Commissioner, on consideration of these contentions in the light of the nature of the business and the activities of the Commission, held that certain purchases in respect of which claim of set-off has been made under the Bombay Rules should be considered for use in the production of oil and the rest of the purchases should be held as not for this purpose in respect of which the claim of set-off was rejected. He also took similar view in respect of the purchases made against the declarations in form C. In respect of the goods which were purchased against the declarations in form C but which were found to be not used in the manufacture of the goods for sale, the Assistant Commissioner, though confirmed the order of penalty imposed by the Sales Tax Officer under section 10(d) read with section 10A of the Central Act granted partial reduction therein. He thus allowed partially the appeals by directing that the part of the goods purchased against the declarations in form C should be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a process of producing unrefined crude oil and, therefore, the opponent is a manufacturer as defined under the Bombay Sales Tax Act, 1959, and that this process of manufacturing starts from the stage of drilling or boring of the earth and not after the raw product is brought to the oil gathering plant? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing set-off under rule 41 of the Bombay Sales Tax Rules, 1959, in respect of the tax paid on the purchases of parts of drilling rigs when drilling rigs taken by itself are held not to be machinery used in the manufacture of goods for sale?" At the time of hearing of this reference, Mr. J.R. Nanavati, the learned Government Pleader appearing for the State Government, urged that the Tribunal has committed an error of law in not appreciating the true effect of the term "manufacture" as defined in section 2(17) of the Bombay Act inasmuch as it failed to appreciate that the entire activity of the Commission can be divided broadly into two categories: (i) of mining minerals by extracting the oil and natural gas and (ii) of refining them. In the submission of the learned Government Pleader ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll. The Tribunal has made the following findings of fact: The geological and geophysical surveys of the areas having possibility of oil and gas deposits are carried out. After obtaining the expert's report on the point, the Commission drills sample bores for confirming the presence of oil or gas deposits. On such confirmation the particular bores will be known as gas or oil wells. From the gas Wells either gas in its natural form or petroleum known as condensate is obtained. From the oil wells crude oil in its unpurified form along with traces of gas is obtained. The crude oil so obtained is subjected to the process of separation and de-emulsification. This process of separation and de-emulsification is applied after the oil extracted from the well is taken to the gathering plant. The gas is thereafter separated from the oil with the help of a separator. The water and the mud contents are taken out from the impure oil, which process is known as process of de-emulsification. This impure oil is known as crude oil. It is in other words in unrefined form. This unrefined crude oil is sold to the refinery where various petroleum products are manufactured out of this unrefined crude oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of extracting and purifying crude oil which cannot be artificially bifurcated or divided so as to put them in two watertight compartments. A similar question arose before the Supreme Court in Chowgule Co. Pvt. Ltd. v. Union of India [1981] 47 STC 124 (SC) where the assessee-company was carrying on the business of mining iron-ore and selling it in the export market after dressing, washing, screening and blending it. The entire activity of the assesseecompany comprised of seven different operations, one following upon the other, namely, (1) extraction of ore from the mine; (2) conveying the ore to the dressing plant; (3) washing, screening and dressing the ore; (4) conveying of the ore from the mine site to the riverside; (5) transport of the ore from the diverside to the harbour by means of barges; (6) stacking of the ore at the harbour in different stock piles according to its physical and chemical composition; and (7) blending of the ore from different stock piles with a view to producing ore of the required specifications and loading it into the ship by means of the mechanised ore handling plant. The assessee-company applied for inclusion of 36 items of goods in its ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion to which the court addressed itself was whether the blending of ore in the course of loading it in the ship by means of the mechanical ore handling plant constituted manufacture or processing of ore for sale within the meaning of section 8(3)(b) and rule 13 and secondly whether the process of mining, conveying the mined ore from the mining site to the riverside, carrying it by barges to the harbour and then blending and loading it in the ship through the mechanical ore handling plant constituted one integrated process of mining and manufacture or processing of ore for sale, so that the items of goods purchased for use in mining and integrated operations could be said to be goods purchased for use in mining and manufacturing or processing of ore for sale falling within the scope and ambit of section 8(3)(b) and rule 13 of the said Act and the Rules. What is the meaning of "processing " was answered by the Supreme Court after referring with approval to its earlier decision in Deputy Commissioner of Sales Tax v. Pio Food Packers [1980] 46 STC 63 (SC), which had earlier ruled that the relevant test which is required to be applied in this behalf is whether the processing of origin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased for use 'in mining'. The requirement of section 8(3)(b) and rule 13 is that the goods must be purchased for use 'in mining' and not use 'in the business of mining'. It is only the items of goods purchased by the assessee for use in the actual mining operation which are eligible for inclusion in the certificate of registration under this head and these would not include goods purchased by the assessee for use in the operations subsequent to the stacking of the ore at the mining site." After referring with approval to its earlier decision in Indian Copper Corporation Ltd. v. Commissioner of Commercial Taxes [1965] 16 STC 259 (SC), in the context of the contention of the assessee that mining of ore and processing it for the purpose of sale by carrying out blending through the mechanical ore handling plant constitute one integrated process and carrying the ore from the mining site to the riverside and from the riverside to the Marmagoa harbour where the process being done is part of this integral process and therefore the goods required in all phases of different operations should be included in the certificate of registration, Bhagwati, J., speaking for the court, found gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for excluding locomotives and motor vehicles used in carrying finished products from the factory. The expression 'goods intended for use in the manufacturing or processing of goods for sale' may ordinarily include such vehicles as are intended to be used for removal of processed goods from the factory to the place of storage. If this be the correct view, the restrictions imposed by the High Court in respect of the vehicles and also the spare parts, tyres and tubes would not be justifiable." It is clear from the aforesaid two decisions of the Supreme Court that where a dealer carries on the activity of mining as well as manufacturing as integrated parts of his business activity, it would be difficult to make any artificial division of the operations. The contention of the learned Government Pleader that since the business of the present assessee, namely, ONGC, in the present case, of refining oil involves two activities, namely, extracting the crude oil and after purifying it selling it to the company for further refinement it cannot be said that these are two unconnected activities undertaken by the Commission and, therefore, not entitled to claim set-off of the tax paid on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r set-off are complied with. The only question is whether the parts of drilling rigs on which the tax has been paid by the Commission can be allowed to be set-off when the drilling rigs taken by themselves are held not to be machinery used in the manufacture of goods for sale. The argument which has been advanced on behalf of the State Government runs like this: that if the drilling rigs which are used for operation of drilling bores are held not to be machinery used in the manufacture of goods for sale, how can the spare parts required for keeping the drilling rigs in perfect condition and operation. be held to be machinery required or used in the manufacture of goods for sale. What the Tribunal has held in fact is that drilling rigs are merely equipments and not machinery and, therefore, they would not fall within entry 15 of Schedule C to the Bombay Act but would be liable to be taxed under entry 22 of Schedule E to the said Act which is a residuary entry subjecting the goods which are not specified in other schedules to tax. The contention which has, therefore, been urged is not well-founded and we must hold that the Tribunal was right in allowing the set-off because of the goo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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