Research › Search › Judgment

Gujarat High Court · body

2016 DIGILAW 547 (GUJ)

State of Gujarat v. Balram Cement Ltd.

2016-03-08

G.R.UDHWANI, HARSHA DEVANI

body2016
JUDGMENT : Harsha Devani, J. 1. The appellant, the State of Gujarat, by these appeals under section 78 of the Gujarat Value Added Tax Act, 2003 (hereinafter referred to as "the Act"), has called in question the order dated 15.07.2015 passed by the Gujarat Value Added Tax Tribunal, at Ahmedabad (hereinafter referred to as "the Tribunal") in Second Appeals No. 917 and 916 of 2013 respectively, by proposing the following common questions stated to be substantial questions of law: "[1] Whether the Hon'ble Tribunal has erred in law and in facts in holding that petroleum coke was not used as fuel in the process of manufacturing cement as per section 11(3)(b)(iii) of the Act? [2] Whether the Hon'ble Tribunal has erred in law and in facts in deleting levy of interest and penalty?" 2. Since both the appeals arise out of a common order of the Tribunal and the parties as well as the facts are also common, they were taken up for hearing together and are decided by this common judgment. 3. For the purpose of properly appreciating the controversy in issue, it may be germane to refer to the relevant statutory provisions. 3.1 Section 2 (19) of the Gujarat Value Added Tax Act, 2005 (hereinafter referred to as "the GVAT Act") defines the expression "raw materials" to mean the goods used as ingredient in the manufacture of other goods and includes processing materials, consumable stores and material used in the packing of the goods so manufactured but does not include fuels for the purpose of generation of electricity. 3.2 Section 11 of the GVAT Act makes provision for "tax credit". Clause (a) of sub-section (11) provides that a registered dealer (hereinafter referred to as the "purchasing dealer") who has purchased the taxable goods shall be entitled to claim tax credit equal to the amount of - "(i) tax collected from the purchasing dealer by a registered dealer from whom he has purchased such goods or the tax payable by the purchasing dealer to a registered dealer who has sold such goods to him during the tax period; or (ii) tax paid by him during the tax period under sub-section (1), (2), (5) or (6) of section 9, or (iii) tax paid by the purchasing dealer under the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001. Clause (b) thereof provides that the tax credit to be so claimed under that sub-section shall be subject to the provision of sub-sections (2) to (12); and the tax credit shall be calculated in such manner as may be prescribed." 3.3 Clause (a) of sub-section (3) of section 11 of the GVAT Act provides that subject to the provisions of that section, tax credit to be claimed under sub-section (1) shall be allowed to a purchasing dealer on his purchase of taxable goods which are intended for the purpose of- "(i) sale or re-sale by him in the State; (ii) sale in the course of inter-State trade and commerce, other than the sales in the course of export out of the territory of India; (iii) branch transfer or consignment of taxable goods to other States (subject to the provision of sub-clause (b) below); (iv) sales in the course of export out of the territory of India; (v) sales to export oriented units or the units in Special Economic Zones for sale in the course of export out of the territory of India; (vi) use as raw material in the manufacture of taxable goods intended for (i) to (v) above or in the packing of the goods so manufactured; (vii) xxxxx" The present case relates to clause (vi) of clause (a) of section 11 of the GVAT Act. 3.4 Clause (b) of sub-section (3) of section 11 of the GVAT Act provides that notwithstanding anything contained in that section, the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the taxable turnover of purchases within the State - "(i) Xxx (ii) Xxxx (iii) of fuels used for the manufacture of goods." 4. Therefore, by virtue of sub-section (1) and clause (a) of sub-section (3) of section 11 of the GVAT Act, a dealer is entitled to the tax credit in respect of the raw materials used in the manufacture of taxable goods as specified therein. However, clause (b) of sub-section (3) of section 11, inter alia, provides that the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the taxable turnover of purchases within the State of the fuels used for the manufacture of goods. However, clause (b) of sub-section (3) of section 11, inter alia, provides that the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the taxable turnover of purchases within the State of the fuels used for the manufacture of goods. Therefore, in respect of the fuels used in the manufacture of goods, the tax credit is required to be reduced by four per cent of the taxable turnover of purchases of such inputs. 5. The respondent - dealer is carrying on the business of manufacturing and selling of cement within the State of Gujarat as well as outside the State and is holding registration as a dealer both under the GVAT Act as well as the Central Sales Tax Act (hereinafter referred to as "the CST Act"). While submitting the returns for the assessment period 2007-08 and 2008-09, the dealer claimed input tax credit on purchases of pet coke. It was the case of the dealer that considering the manufacturing process adopted by it wherein pet coke is used as a raw material, the amount of tax credit is not required to be reduced by four per cent as contemplated under section 11(3)(b)(iii) of the GVAT Act in respect of the pet coke used by it in the manufacture of cement. The Deputy Commissioner of Commercial Tax, Circle-8, Mehsana, however, had called for audit assessment for the year 2007-08 and after due verification of all the evidence and books of accounts produced by the dealer, he worked out the said input tax credit as eligible. He further observed that the dealer had purchased petroleum coke which can be used as a substitute of coal. Coal is a fuel and therefore, 4% of the purchase price is required to be reduced as per section 11(3) of the GVAT Act. The dealer had placed reliance upon the decision of the Tribunal in the case of M/s. Welspun Steel Limited; however, according to the Deputy Collector, in the said case coal was not considered as fuel for the reason that in that case it was noted that coal creates a chemical reaction with iron ore and without it sponge iron cannot be produced whereas no such process was taking place in the present case. He, accordingly, reduced the dealer's claim of input tax credit and also levied penalty under section 34(7) of the GVAT Act. Being aggrieved by the order passed by the Deputy Commissioner of Commercial Tax, the dealer carried the matter in first appeal before the Joint Commissioner of Commercial Tax. Before the Joint Commissioner, the dealer placed reliance upon the decision of the Tribunal in the case of M/s. Welspun Steel Limited, 2012 GSTB 304, M/s. SAL Steel Limited, 2012 GSTB 283 and M/s. Saurashtra Ferrous Private Limited, 2012 GSTB 290. The Joint Commissioner observed that the decision in the case of M/s. Welspun Steel Limited related to use of pet coke in the manufacture of sponge iron and cannot be made applicable to the facts of this case. He, however, placed reliance upon the determination order passed under section 80 of the GVAT Act in the case of M/s. Shri Digvijay Cement Company Limited, and confirmed the reduction of input tax credit by 4% under section 11(3)(b)(iii) of the GVAT Act in relation to pet coke used by the dealer in the manufacture of cement. The respondent-dealer carried the matter in further appeal before the Tribunal, which held that in the VSK technology adopted by the dealer coke/pet coke is not used as fuel but as part of the feed stock and its components form part of the product, that is, clinker and that without this raw material, the product clinker cannot be manufactured. The Tribunal was of the view that fuel is one that produces some kind of energy but does not form part of the product and it accordingly, allowed the appeals and set aside the orders passed by the authorities below in respect of reduction of tax credit in respect of pet coke under section 11(3)(b)(iii) of the GVAT Act and consequentially, also set aside the order charging interest and levying penalty. 6. Ms. Nisha Thakore and Ms. Maithili Mehta, learned Assistant Government Pleaders appearing on behalf of the appellant vehemently assailed the impugned order by submitting that though in the present case, while manufacturing cement, petroleum coke is mixed along with the raw material, considering the process which is undertaken by the respondent, it is clear that the pet coke is necessary for the purpose of the exothermic reaction which takes place inside the kiln when it is heated externally. It is on account of this exothermic reaction that the raw material is converted into clinker. The fact that there is an exothermic reaction is clearly indicative of the fact that the petroleum coke acts as a fuel which causes such exothermic reaction. It was submitted that the petroleum coke having been used as fuel, the dealer is not entitled to input credit in respect thereof. It was, accordingly, urged that the authorities below were wholly justified in holding that petroleum coke is fuel and not raw material as was contended on behalf of the respondent and denying the benefit of input credit in respect thereof. 6.1 The learned Assistant Government Pleaders referred to the written submissions tendered by them and submitted that the Tribunal has grossly erred in arriving at a finding that whether a material is fuel or raw material, is a question of fact to be decided on the basis of the role attributed to the material in the whole process. It was submitted that the question as to whether a material is fuel or raw material cannot be decided on the basis of mere mixing with other raw materials or its characteristic of externally generating energy without being mixed with raw material, but the same has to be decided from the characteristic of that material and role attributed to it in the whole manufacturing process. It was submitted that since the expression "fuel" has not been defined in the GVAT Act, its plain meaning is required to be looked into viz., material such as coal, gas or oil that is burnt to produce heat or power. It was submitted that petroleum coke mixed with other raw materials is transferred into a kiln, which is already preheated by the electricity which ultimately leads to an (exothermic reaction generating heat to facilitate the chemical reaction of the raw material. Referring to the definition of "raw material" as defined under section 2(19) of the GVAT Act, it was submitted that the same expressly excludes fuel from the ambit thereof. It was submitted that from the chemical composition of the end product viz. cement, it is found that petroleum coke is not an ingredient of the final product cement but rather mixed with raw material as fuel to generate energy. It was submitted that from the chemical composition of the end product viz. cement, it is found that petroleum coke is not an ingredient of the final product cement but rather mixed with raw material as fuel to generate energy. It was submitted that a similar issue as regards the use of coal for the purpose of manufacture of sponge iron came up before the Tribunal in the case of M/s. Welspun Steel Ltd. v. The State of Gujarat in First Appeal No. 27 of 2010 wherein the Tribunal had held that the coal is essential for the ultimate production of sponge iron and hence, it is an ingredient used in the manufacture of goods and therefore, raw material as defined in the VAT Act and that against the said decision the State has preferred an appeal before this court being Tax Appeal No. 252 of 2013, which has been admitted on a substantial question of law. Referring to the impugned order it was pointed out that the Tribunal has placed strong reliance upon the said decision, under the circumstances, this appeal also deserves to be admitted on a similar question of law. 6.2 It was further submitted that ample material was produced before the Tribunal as regards the process of manufacturing cement; however, the Tribunal, without adverting to such material, has relied upon the manufacturing process of VSK plant as supplied by the dealer. It was submitted that in the present case, there is determination order of the Commercial Tax Commissioner (Legal), State of Gujarat, under section 80 of the GVAT Act in the case of M/s. Digvijay Cement Co. Ltd., wherein it has been held that use of petroleum coke in the manufacture of cement is by way of fuel; however, the Tribunal has turned a blind eye to the same. It was submitted that therefore, the impugned order passed by the Tribunal is bad in law as it has been passed without appreciating the correct process of manufacturing of cement. It was, accordingly, urged that the appeals require consideration on the questions as proposed or as may be formulated by the court. 7. Vehemently opposing the appeals, Mr. It was submitted that therefore, the impugned order passed by the Tribunal is bad in law as it has been passed without appreciating the correct process of manufacturing of cement. It was, accordingly, urged that the appeals require consideration on the questions as proposed or as may be formulated by the court. 7. Vehemently opposing the appeals, Mr. Tushar Hemani, learned advocate for the respondent - dealer invited the attention of the court to the definition of "raw material" as defined under clause (19) of section 2 of the GVAT Act, which defines "raw material" to mean goods used as ingredient in the manufacture of other goods and includes processing materials, consumable stores and material used in the packing of the goods so manufactured but does not include fuels for the purpose of generation of electricity. It was submitted that in the facts of the present case, pet coke is mixed along with other ingredients, namely, lime stone, silica, red oxide and bauxite in a definite proportion as per the formula. The pet coke is not used as fuel for the purpose of generation of electricity as envisaged under clause (19) of section 2 of the GVAT Act and hence, the same clearly falls within the ambit of raw material as envisaged under the said provision. Reference was made to the provisions of section 11 of the GVAT Act and more particularly to sub-section (3)(b) thereof, which provides that the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four per cent on the taxable turnover of the purchases within the State and of fuels used for manufacture of goods. Referring to the impugned order wherein the Tribunal has referred to the process of manufacturing of cement, it was pointed out that the pet coke is in no manner used as a fuel nor is it the case of the appellant that there is generation of any electricity on account of use of pet coke as envisaged under section 2(1) of the GVAT Act and therefore, no credit in respect thereof is required to be reduced from the amount of tax collected. It was submitted that the respondent - dealer had consumed petroleum coke as raw material in manufacturing cement whereas input tax credit under section 11(3)(b)(iii) of the GVAT Act is required to be reduced only in respect of purchase of fuel. Since the dealer has used the petroleum coke as raw material in manufacturing of cement, input tax credit is not required to be reduced on consumption of such goods. Referring to the impugned order, it was pointed out that the Tribunal, upon appreciation of the evidence on record, has recorded findings of fact and based its conclusion thereon and that in the absence of any perversity being pointed out in the impugned order, the same does not give rise to any question of law so as to warrant interference. 8. In the present case, the sole controversy that arises for consideration is as to whether the pet coke used in the manufacture of cement is 'raw material' as contended by the dealer, or 'fuel' as contended by the appellant. 9. For the purpose of better appreciating the controversy in issue, it may be germane to refer to the impugned order which describes the process of manufacture as follows: "14......... The process undertaken by the appellant own as Vertical Shaft Kiln (VSK) for manufacturing clinker. For making clinker (semi finished good), the raw material like lime stone, silica, pet coke/coal, red oxide and bauxite is used. These materials are mixed in definite proportion as per the formula. They are stored as different hoppers. In different percentage mixed is fed to raw mill. The raw mill is a ball mill type. Mill to grind the mixture of raw material. This raw material will become a homogeneous powder. The raw material mixture powder is stored in a silo. From the silo the raw material powder which has all the ingredients including pet coke/coal etc. is conveyed through bucket elevator into the vertical shaft kiln (VSK). The VSK which is already heated through external electricity heater is filled with this raw mix powder. Exothermic reaction takes place inside the kiln. After the completion of the chemical reaction, it is converted into a compound consisting of all the chemical elements of the raw material into clinker. After certain period, the chemical process is completed and clinker are formed. These clinker yard clinkers are mixed with 6% gypsum and fed to cement mill. Exothermic reaction takes place inside the kiln. After the completion of the chemical reaction, it is converted into a compound consisting of all the chemical elements of the raw material into clinker. After certain period, the chemical process is completed and clinker are formed. These clinker yard clinkers are mixed with 6% gypsum and fed to cement mill. It is ground in cement mill to make cement. Then cement is stored in cement silo. It is packed through packing machine in 50 kgs. bags. These cement bags then are dispatched to the market." 10. From the process described hereinabove, it is evident that insofar as 'fuel' is concerned, the vertical shaft is heated through external electricity heater. Insofar as the use of pet coke in the manufacture of cement is concerned, the same is mixed with lime stone, silica, red oxide and bauxite in definite proportion as per the formula. The mixture is then crushed into a homogeneous powder which is then heated in a vertical shaft kiln, wherein an exothermic reaction takes place and the powder is converted into a compound called clinker which consists of all the chemical elements of the raw material. Therefore, the chemical elements contained in pet coke also form part of the compound called clinker. 11. At this juncture, it may be germane to refer to the decision of the Supreme Court in the case of Union of India v. Ahmedabad Electricity Co. Ltd., (2003) 11 SCC 129 , wherein, in a converse case where coal was simply burnt to fuel to produce steam and it was the case of the Central Excise authorities that clinker was a byproduct of coal which emerged in the course of manufacture of the end product and was subject to levy of excise duty, the court observed thus: "26. CST v. Thomas Stephen & Co. Ltd., (1988) 2 SCC 264 , is a case under the Kerala General Sales Tax Act, 1963. The assessee used to purchase cashew shells for use as fuel in the kiln in the factory. Under the Act levy of tax was on consumption of goods in the manufacture of other goods for sale or otherwise. The difference between use of goods in manufacture as raw material and use for other ancillary purposes was brought out. The assessee used to purchase cashew shells for use as fuel in the kiln in the factory. Under the Act levy of tax was on consumption of goods in the manufacture of other goods for sale or otherwise. The difference between use of goods in manufacture as raw material and use for other ancillary purposes was brought out. Goods used for ancillary purposes like fuel in the process of manufacture were held not to be exigible to tax. Since cashew shells were used only as fuel and they did not get transformed into the end product they were held to be not exigible to tax. Cashew shells were used in aid of manufacture of goods and as such they did not attract levy of tax. 27. In the case in hand also, coal which leads to production of cinder is not used as a raw material for the end product. It is being used only for ancillary purpose, that is, as a fuel. Therefore, irrespective of the fact whether any manufacture is involved in the production of cinder it should be held to be out of the tax net for the reason that it is not a raw material for the end product. 28. In producing "cinder", there is no manufacturing process involved. Coal is simply burnt as fuel to produce steam. Coal is not tampered with, manipulated or transformed into the end product. For purposes of manufacture the raw material should ultimately get a new identity by virtue of the manufacturing process either on its own or in conjunction or combination with other raw materials. Since coal is not a raw material for the end product in all the cases before us, the question of getting a new identity as an end product due to manufacturing process does not arise. 29. In CCE v. Ballarpur Industries Ltd., (1989) 4 SCC 566 , the raw material in the course of chemical reactions got burnt up and lost its apparent identity. To be more precise, the input of sodium sulphate in the manufacture of paper would not cease to be of raw material by reason alone of the fact that in the course of the chemical reactions, this ingredient is consumed and burnt up. All the same, it remained a raw material. To be more precise, the input of sodium sulphate in the manufacture of paper would not cease to be of raw material by reason alone of the fact that in the course of the chemical reactions, this ingredient is consumed and burnt up. All the same, it remained a raw material. It was held that the relevant test is not the absence of the raw material in the end product, but the dependence of the end product for its essential presence at the delivery end of process. What follows from this is that the raw material which we are concerned about is the raw material which is linked with emergence of the end product. It has to be present in the end product whether visibly or invisibly. Use of an item as fuel cannot be called part of the manufacturing activity in relation to production of the end product. Therefore, cinder cannot be said to be a by-product of the final product. At best it is a by-product of coal which is used as fuel." (Emphasis supplied) 12. Thus, for the purpose of manufacture, the raw material should ultimately get a new identity by virtue of the manufacturing process either on its own or in conjunction or combination with other raw materials. The input would not cease to be raw material by reason alone of the fact that in the course of the chemical reactions, the ingredient is consumed or burnt up. All the same, it would still remain a raw material. In the present case, pet coke is used as a raw material for the manufacture of clinker and forms an ingredient thereof. Despite the fact that Sodium Sulphate used in the manufacture of paper gets consumed and burnt up it has been held to be not a fuel but raw material; whereas, insofar as pet coke used in the manufacture of clinker, nothing has been brought on record to show that it is consumed or burnt up. Even if pet coke is consumed or burnt up in the manufacturing process, it would still not cease to be a raw material as the production of the end product viz. cement depends upon its presence in the manufacturing process. Even if pet coke is consumed or burnt up in the manufacturing process, it would still not cease to be a raw material as the production of the end product viz. cement depends upon its presence in the manufacturing process. In the present case, it appears that the pet coke used in the manufacture of cement, during the course of the manufacturing process gives rise to an exothermic reaction, as a result whereof it loses its apparent identity and forms part of the end product. Essentially, therefore, pet coke forms one of the ingredients of cement and merely because there is an exothermic reaction in the preparation of cement which may be facilitated by its presence, pet coke would not cease to be a raw material. 13. As regards the submission that the appeal against the decision of the Tribunal in the case of M/s. Welspun Steel Ltd. v. The State of Gujarat has been admitted on a substantial question of law and the Tribunal having placed reliance upon such decision, this appeal also deserves to be admitted on a similar question of law, it may be noted that the Deputy Commissioner in the assessment order has categorically recorded that the said decision would not be applicable to the facts of the present case. Similarly, the first appellate authority, viz. the Joint Commissioner of Commercial Tax has also held that the decision in the case of M/s. Welspun Steel Ltd. cannot be made applicable to the present case as the same relates to the use of pet coke in the manufacture of sponge iron. Therefore, it appears that it was the case of the Department that the decision of the Tribunal in the case of M/s. Welspun Steel Ltd. v. The State of Gujarat would not be applicable to the facts of the present case, under the circumstances, merely because the appeal preferred by the State against the said order of the Tribunal has been admitted on a question of law, does not mean that the present appeal is also required to be admitted on a similar question of law, despite the fact that the impugned order does not give rise to a substantial question of law. 14. 14. As can be seen from the impugned order, the Tribunal, after appreciating the material on record, has found as a matter of fact that coke/pet coke used in the VSK technology is not used as a fuel but as part of feed stock and its components form part of the product, that is, clinker and that without this raw material, the product clinker cannot be manufactured. It is not the case of the appellant that the findings of fact recorded by the Tribunal are, in any manner, perverse to the record of the case, inasmuch as, no question on the ground of perversity has been raised by the appellant. On the facts as found by the Tribunal, the above decision of the Supreme Court would be squarely applicable and therefore, the pet coke used in the manufacture of clinker clearly falls within the ambit of the expression 'raw material' as contemplated in section 2(19) of the GVAT Act. The Tribunal, therefore, did not commit any error in holding that pet coke is not used as fuel but is used as raw material in the manufacture of cement. The impugned order, therefore, does not suffer from any legal infirmity so as to give rise to a question of law, much less, a substantial question of law, warranting interference. 15. The appeals, therefore, fail and are, accordingly dismissed.