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

Court rules oxygen gas in Basic Oxygen Steel method qualifies as raw material, subject to 2% tax rate.

The court determined that oxygen gas used in the Basic Oxygen Steel (BOS) method of steel manufacturing qualifies as a raw material, attracting a lower ... Raw material - goods required directly for use in manufacturing - inevitable and non-replaceable use in the manufacturing process - participation in chemical reaction as indicium of raw material - assessment under the Bihar Finance Act, 1981Raw material - participation in chemical reaction as indicium of raw material - inevitable and non-replaceable use in the manufacturing process - Whether oxygen gas supplied to Tata Steel Ltd. is a basic raw material used in the manufacture of steel by the Basic Oxygen Steel (BOS) method. - HELD THAT: - The court held that classification of oxygen as a 'raw material' is essentially a question of fact to be determined by reference to its role in the particular manufacturing process adopted by the manufacturer. Applying the tests articulated by the Supreme Court in Collector of Central Excise v. Ballarpur Industries Ltd., the court examined (i) whether oxygen participates in the chemical reaction (it is converted into CO and CO2), (ii) the quantity used (very large), (iii) inevitability and non-replaceability of oxygen in the BOS second-stage (L.D. vessel) operation, and (iv) the indispensability of oxygen to obtain the end-product (steel) by the BOS method. The court rejected the characterization of oxygen as merely a 'refining agent' where used in massive quantities, performing multipurpose functions (carbon removal, generation of heat, removal of other impurities) and being chemically consumed in producing the end-product. The court also held that declarations by the purchaser and illustrative lists under other statutes or circulars are not decisive; the inquiry must focus on the material evidence of usage in the adopted manufacturing process. Applying these criteria to the materials on record, including the assessing-authority visit report and technical description of the BOS process, the court concluded that oxygen is a basic raw material for manufacture of steel by the BOS method.Oxygen gas supplied to Tata Steel Ltd. for use in the BOS method is a basic raw material for the manufacture of steel.Assessment under the Bihar Finance Act, 1981 - goods required directly for use in manufacturing - Consequences of classification for sales tax liability and validity of impugned assessment, appellate and revisional orders and consequential demand notices for the specified years. - HELD THAT: - Because oxygen was held to be a basic raw material used in manufacture of steel by the BOS method, the court applied the relevant exemption/notification schema under the Bihar Finance Act, 1981 and held that sales of oxygen to Tata Steel attract the concessional rate applicable to raw materials rather than the higher rate applicable to goods used in manufacture. On this basis the court quashed and set aside the assessing officer's order, the appellate order and the revisional order impugned in these proceedings, as well as the consequential demand notice for the primary year in issue, and ordered that amounts already deposited or realized be adjusted against future tax or other liabilities of the petitioner. The court extended the same relief to the other writ petitions covering assessment/financial years where the facts and law were unchanged.Impugned assessment, appellate and revisional orders and consequential demand notices are quashed; oxygen sales are taxable at the concessional rate for raw materials and amounts deposited shall be adjusted against future liabilities.Final Conclusion: The writ petitions are allowed: oxygen supplied to Tata Steel Ltd. for use in the Basic Oxygen Steel method is held to be a basic raw material, the impugned orders and demand notices for the specified assessment/financial years are quashed and set aside, and amounts already realized shall be adjusted towards the petitioner's future tax or other liabilities. 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.