HIGH COURT OF ORISSA: CUTTACK W.P.(C) No.13202 of 2006 In the matter of an application under Articles 226 and 227 of the Constitution of India. ---------- Essel Mining and Industries Ltd., Barbil, Keonjhar … Petitioner -Versus- Commissioner of Sales Tax & another … Opp. Parties For Petitioner : Mr. Sanjit Mohanty M/s. P.K.Harichandan, S.Kanungo & Ch. M.R.Mishra. For Opp. Parties : Mr. R.P.Kar ---------- P R E S E N T: THE HONOURABLE THE CHIEF JUSTICE SHRI V.GOPALA GOWDA AND THE HONOURABLE SHRI JUSTICE B.N.MAHAPATRA Heard and disposed of on 03.11.2010 B.N.MAHAPATRA, J This Writ Petition has been filed for quashing Annexures-1 and 2 on the ground that those are illegal, arbitrary and contrary to the provisions of Orissa Value Added Tax Act, 2004 (for short, ‘OVAT Act’) and Central Sales Tax Act, 1956 (for short, ‘CST Act’) and settled principles of law decided by the apex Court. Annexure-1 is the order dated 18.08.2006 passed by O.P. No.1-Commissioner of Sales Tax, Orissa, Cuttack (for short, ‘the Commissioner’) passed in Revision Case Jajpur-39/06-07 under OVAT Act and CST Act confirming the order passed in Annexure-2. Annexure-2 is the order dated 24.06.2006 passed by O.P. No.2-Assistant Commissioner of Sales Tax by which “High Speed Diesel (HSD) and Cement” has been deleted from the registration certificate of the petitioner under OVAT Act and CST Act. The petitioner also challenges the initiation of penalty proceeding under Section 10A of the CST Act issued by O.P. No.2 vide notice dated 10.08.2006 for the period April 2005 to March, 2006 (Annexure-3). 2. Shorn of unnecessary details, the facts and circumstances giving rise to the present writ petition are that the petitioner is a public limited Company registered under the Companies Act, 1956. It is engaged in the business of extraction of mineral ore from the leasehold mines, processing of such ore in the crusher owned by it and selling of the processed materials inside and outside the State of Orissa. The petitioner was a registered dealer under the OST Act and CST Act bearing Registration Nos.KJB-28 and KJCB- 116 with effect from 28.03.1953 and 01.07.1957 respectively. On the introduction of OVAT Act, 2004, the petitioner has been registered under the said Act. Under the above registration certificates, the petitioner was entitled to purchase HSD for its use as fuel/consumable directly in mining machineries and cement to utilize directly in the construction of mining and processing project and installation of machineries for manufacturing process. O.P. No.2-Assistant Commissioner of Commercial Taxes (for short, ‘Asst. Commissioner’) issued notice dated 21.01.2006 under Section 32(3) of the OVAT Act and Section 7(4) of the CST Act to show cause as to why two items, 2 namely, ‘Cement and HSD’ should not be deleted from the registration certificate granted under the OVAT Act and CST Act as neither of the goods is either a ‘raw material’ or ‘input’ used directly for mining or manufacturing of finished product and the petitioner is continuously misusing goods by resorting to widespread bulk purchase of items from outside the State against declaration in form-‘C’ on payment of concessional rate of 4% tax causing loss to the State Exchequer. In reply, the petitioner has explained that the HSD purchased by it is being used for operating heavy earth moving machineries which is absolutely required for mining and crushing activities. Cement is being procured at a concessional rate of sales tax for utilization of the same in an on-going capacity expansion project. The petitioner is purchasing HSD and Cement on payment of full tax for use in their own light vehicle and other construction purposes. O.P. No.2 being not satisfied with the explanation of the petitioner passed the impugned order dated 24.06.2006 under Annexure-2 by deleting Cement and HSD from the registration certificate and issued the amended registration certificate under the OVAT Act and CST Act. Being aggrieved by the order of opp. party no.2, the petitioner moved a revision application before opp. party no.1 challenging the order dated 24.06.2006. The Revisional authority after hearing the petitioner has confirmed the order passed by opp. party no.2. Hence, the writ petition. 3. Mr. Sanjit Mohanty, learned Senior Advocate appearing on behalf of the petitioner submits that the impugned orders passed under Annexures-1 3 and 2 have been passed arbitrarily by the opp. parties contrary to the provisions contained in OVAT Act and CST Act and the settled principles of law. Under Section 2(25) ‘input’ includes consumables directly used in the processing or manufacturing. He placed reliance on Section 2(28), which defines ‘manufacture’; Section 2(27), which defines ‘input tax credit’; and also Rule 67(4), which provides for maintenance of true and up-to-date accounts. It is argued that the petitioner is a processing unit as defined under Section 2(28) of the OVAT Act and it is consuming HSD as fuel/consumable to run the mining machinery. Without using Cement, the machineries used for the mining process cannot be installed and operated. Under Rule 67(4), if a registered dealer engaged in manufacturing or processing of goods intends to claim input tax credit, he shall maintain the books of accounts prescribed under the said Rule. In the instant case, HSD and Cement are expedient for extraction and processing of minerals which are directly used in the machineries related to mining activities. In support of his contention, he relied upon a decision of the apex Court in J.K.Cotton Spinning & Weaving Mills Co. Ltd. Vs. The Sales Tax Officer, Kanpur & Anr., (1965) 16 STC page-563. Similarly, placing reliance on Section 8(1) (3) of the CST Act and Rule 13 of the CST (R & T) Rules and letter No.F-9(88)-ST/57 dated 12.11.1958 issued by the Government of India, Ministry of Finance, Mr. Mohanty submitted that HSD and Cement are coming under the heads ‘fuel’ and ‘construction materials’ respectively and therefore the said items should not be deleted on the ground that those are not directly used in the process of manufacturing of finished product. Placing 4 reliance on the decision of the apex Court in Chowgule & Co. Pvt. Ltd. & Anr. Vs. Union of India & Ors., (1981) 47 STC 124, it is argued that where a dealer is engaged in mining operation and also in processing of mineral ore, the item required for the said purpose could not be excluded from consideration. In support of his contention, he also relied on a decision of the apex Court in Indian Copper Corporation Ltd. Vs. Commissioner of Commercial Taxes, AIR 1965 (SC) 891. With regard to penalty proceeding initiated under Section 10A of the CST Act vide notice dated 10.08.2006 (Annexure-3) for the period April, 2005 to March, 2006, it is submitted that the said action is a colourable exercise of power to impose an illegal penalty on the alleged ground that Cement and HSD are not goods used in the manufacturing and processing of goods for sale. The said notice is vague and without any basis and therefore, is liable to be quashed. 4. Per contra, Mr. R.P.Kar, learned Standing Counsel for Revenue on the other hand supported the impugned orders passed under Annexures-1 and 2 by O.Ps. 1 and 2. According to Mr. Kar, considering the factual realities, the O.P.-authorities deleted the items ‘Cement and HSD’ from the registration certificate of the petitioner in accordance with the statutory provisions and in consonance with the settled legal position. Learned Commissioner has properly construed the decision of the Andhra Pradesh High Court in Delta Paper Mills Ltd. Vs. Oil and Natural Gas Commission & Ors., (1991) 81 STC 339 (A.P.) and has correctly applied the same in the case of the petitioner. According to Mr. Kar, the decisions relied upon by the learned Senior Counsel 5 for the petitioner have no application to the case of the petitioner. Registering Authority under the OVAT Act has recorded the finding that Cement is inadmissible so far as mining and manufacturing activities are concerned. Similarly, HSD has no utility as raw material for mining. HSD and Cement could not be accepted as capital goods/raw materials under Section 2(8) of the OVAT Act. HSD was not used as raw material directly in the process of manufacturing of the finished product. Hence, the petitioner cannot avail the benefit of concessional rate of tax at the time of purchase of goods. HSD and Cement cannot avail input tax credit under the OVAT Act. In the instant case, Cement and HSD are neither considered as raw materials nor can be considered as capital goods used for manufacturing of goods for sale. Placing reliance on Section 8(3)(b) of the CST Act and Rule 13 of the CST Rules, it is submitted that the opp. parties after careful consideration of all the relevant provisions of the OVAT Act and CST Act have come to the conclusion that HSD and Cement cannot be used as raw materials for manufacturing/processing of finished product of the petitioner. Therefore, the opp. parties have rightly deleted the said items from the registration certificates to save loss to State Exchequer. The present case is squarely covered by the judgment of this Court in Orient Paper Mills Vs. State of Orissa & Ors., (2007) 10 VST 547 (Orissa) wherein this Court directed the petitioner to pay differential tax under Section 10A of the CST Act. It is alternatively argued that in the mining process, Cement is required at the initial stage of processing for installation of the machineries. Thereafter, same is not at all required. Since initial stage of 6 mining operation had been completed long back the deletion of Cement from the registration certificate of the petitioner has been properly done. 5. Now the question that falls for consideration by this Court is whether use/consumption of HSD and Cement is integrally connected in the process of mining activities undertaken by the petitioner. 6. The said question is answered by assigning the following reasons. The undisputed facts are that the petitioner-Company is a registered dealer under the OVAT Act and CST Act. It is a leaseholder of iron ore and manganese and engaged in mining activities of the said minerals. It processes ores in the crusher owned by it. The Items “HSD and Cement” were included in the registration certificates under the OVAT Act as well as CST Act. The case of the Revenue is that the petitioner has purchased Cement and HSD by furnishing declaration in Form-‘C’ although the same are not goods to be used in manufacturing or processing of goods for sale and therefore, it is not entitled to purchase those items at concessional rate of tax. Accordingly, these two items are deleted from the registration certificates of the dealer issued under the CST Act and OVAT Act. Petitioner’s case is that it is eligible to purchase these two items at the concessional rate of tax on the strength of ‘C’ Form as those goods are inextricably connected with the process of mining activities of the minerals and processing of ores in the crusher owned by it. 7. Though various points have been raised, they are really side- stepping the real issue. The issue involved in the present case is about 7 application of Section 8(3)(b) of the CST Act and Rule 13 of the CST (R & T) Rules to the petitioner. 8. For proper appreciation and consideration of the issue involved in this case, the provisions of Section 8(3)(b) of CST Act And Rule 13 of the CST (R & T) Rules are reproduced below:- Section 8(3)(b) of CST Act : “8. Rates of tax on sales in the course of Inter-State trade or commerce- [1] Every dealer, who in the course of Inter-State trade or commerce- (a) Sells to the Government any goods; or (b) Sells to a registered dealer other than the Government shall be liable to pay tax under this Act, which shall be four percent of his turnover of at the rate applicable to the sale or purchase of such goods inside the appropriate State under the Sales Tax law of that State, whichever is lower. xx xx xx xx [3 The goods referred to in clause (b) of sub section (1)- (a) xx xx (b) …… are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central government in this behalf, for use by him in the manufacture or processing of goods for sale or [in the telecommunications network or] in mining or in the generation or distribution of electricity or any other form of power.” Rule 13 of the CST (R & T) Rules : “The goods referred to in clauses (b) of sub-section (3) of Section 8 which a registered dealer may purchase, shall be goods intended for use by him as raw materials, processing materials, machinery, plant, equipment, tools, stores, spare 8 parts, accessories, fuel or lubricants, in the manufacture or processing of goods for sale, or in mining, or in the generation or distribution of electricity or any other form of power.” 9. Perusal of the provisions contained in Section 8 (3) (b) and Rule 13 quoted above, makes it clear that in order to qualify for specification under Section 8(3)(b) the goods must be intended for use of the nature mentioned in Rule 13 in manufacturing or processing of goods for sale or in mining or in generation or distribution of electricity or any other form of power. Rule 13 of the CST (R & T) Rules says that the goods referred to in clause (b) of sub-Section (3) of Section 8, which a registered dealer may purchase, shall be the goods intended for use by him as raw materials, processing materials and machinery, plant, equipment, tools, stores, spare parts, accessories, fuel or lubricants, in the manufacture or processing of goods for sale, or in the mining etc. 10. For prescription of the goods under Section 8(3)(b) of the CST Act, the Government of India, Ministry of Finance vide letter No.F.9 (88)-ST/57 dated 12.11.1958 issued the detailed list showing the important industry-wise goods intended for being used by a dealer as fuel and raw-material etc. In the said clarification, Form No.54 has been enclosed specifying the goods intended for being used in mining. The said list is given below: “1. Fuels- (i) Electricity (including lighting and heating) (ii) Lubricating materials (iii) Timber (iv) Iron and steel goods (v) Electrical goods (vi) Safety lamps 9 (vii) Explosives- (1) gun power, (2) Salt peter, (3) Sulphur, (4) Catridge paper, (5) Safety fuses, (6) Gelignite, (7) Detonators, (8) Oil and catridge paper, (9) other explosives (viii) Construction materials- (1) Cement, (2) Asbestos, zinc sheets etc., (3) Tiles, (4) Paints and varnishes, (5) others (ix) Chemicals (x) Other articles” 11. Thus, from the above, it follows that goods which are intended for use are integrally connected with production of goods without which commercial production would be inexpedient and therefore, the same must be treated as goods intended for use in the manufacturing of goods. 12. At this juncture, it will be profitable to refer to some of the judicial pronouncements. In Indian Copper Corporation Ltd. (supra) the apex Court held as follows:- “….in a case where a dealer is engaged both in mining operations and in the manufacturing process—the two processes being inter-dependent—it would be impossible to exclude vehicles which are used for removing from the place where the mining operations are concluded to the factory where the manufacturing process starts. It appears that the process of mining ore and manufacture with the aid of ore copper goods is an integrated process and there would be no ground for exclusion from the vehicles those which are used for removing goods to the factory after the mining operations are concluded. Nor is there any ground 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 10 the vehicles and also the spare parts, tyres and tubes would not be justifiable. We are, therefore, of the opinion that the Corporation was entitled to specification as set out in the petition and explained in annexure B-2 to the petition in respect of items (i), (ii) and (vi).” The Hon’ble Supreme Court in M/s. J.K.Cotton Spinning & Weaving Mills Co. Ltd. Vs. The Sales Tax Officer, Kanpur & Anr., AIR 1965 SC 1310 considering the scope of section 8(3) (b) has held that the expression ‘in the manufacture of goods’ should normally encompass the entire process carried on by the dealer of converting the raw material into finished goods. Where any particular process is so integrally connected with the ultimate production of goods that in the absence of that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would fall within the expression ‘in the manufacture of goods’. For instance, in the case of a cotton textile manufacturing concern, raw cotton undergoes various processes before cloth is finally turned out. Cotton is cleaned, carded, spun into yarn, then cloth is woven, put on rolls, dyed, calendered and pressed. All these process would be regarded as integrated process and included ‘in the manufacture’ of cloth. It would be difficult to regard goods used only in the process of weaving cloth and also goods not used in the anterior process as goods used in the manufacture of cloth. Reading the expression ‘in the manufacture’ of cloth in that restricted sense would give rise to many anomalies. Raw cotton and machinery for weaving cotton and even vehicles for transporting raw and finished goods would qualify under Rule 13 but not spinning machinery, without which the business cannot be carried on. 11 Rule 13 does not justify importation of the restrictions, which are not clearly expressed nor imperatively intended. Goods used as equipment, such as tools, stores, spare parts, or accessories in the manufacture or processing of goods, in mining, and in the generation and distribution of power need not, to qualify for special treatment under Section 8(1), be ingredients or commodities used in the process, nor they be directly and actually needed for “turning out or the creation of goods.” The Hon’ble Supreme Court in Member, Board of Revenue, West Bengal V. Phelps & Co. (P) Ltd. [1972] 29 STC 101; [1972] 4 SCC 121, once again placed reliance on its earlier judgment in the case of J.K.Cotton Spinning & Weaving Mills (supra) and held that gloves used by workmen who were engaged in hot jobs or in handling corrosive substance in the course of manufacture cannot be denied those gloves which had to be used in the course of manufacture. In the later judgment of the Hon’ble Supreme Court in Star Paper Mills Ltd. V. Collector of Central Excise, Meerut [1990] 76 STC 312, while dealing with the term “manufacture”, their Lordships have held that term “manufacture” includes any process incidental or ancillary to the completion of a manufactured product. The apex Court in Chowgule & Co. Pvt. Ltd. & Anr. (supra) held that where a dealer is engaged in mining operation and also in processing of mineral ore the item required for the said purpose could not be excluded from consideration. 12 Similarly, once again the Hon’ble Supreme Court in Collector of Central Excise, New Delhi V. Ballarpur Industries Limited [1990] 77 STC 282, has held that for an item to qualify as raw material, it need not necessarily and in all cases go into, and be found, in the end-product. Merely because this ingredient was consumed and burnt up in the course of chemical reactions it did not ipso facto cease to be a raw material. 13. Keeping in view the above statutory provisions and settled legal position, it is to be ascertained as to whether the ‘Cement’ and ‘HSD’ purchased by the petitioner are integrally related to the activities of mining and process of mining ore. It is also necessary to apply the ‘functional test’ to find out whether Cement and HSD are necessary to carry on the above activities. 14. It is not in dispute that HSD is directly consumed in running the mining machineries for extracting and processing of minerals. Cement is also used for construction of the foundation for installation of mining machineries and construction of benches and plates. These two items are integrally related to the mining activities. The extraction and process of minerals is not possible without use of the said items. Considering the matter from any angle, we are of the view that HSD which is necessary to run the heavy machineries is integrally connected in the mining operation and processing of mining ore so long the said activities and the process is continuing. We are also of the view that ‘Cement’ is necessary for installation of the mining machineries and construction of benches/plates to carry 13 on the mining operation and processing of mining ore. But the question that arises now is whether like HSD, Cement is necessary so long mining operation and processing of mining ore goes on. Cement as stated above, is necessary for installation of machineries, i.e., primary stage of the mining activities and construction of benches and plates. After installation of the machineries and construction of benches/plates, utilization of Cement is almost insignificant. Therefore, we feel it proper to remit the matter to O.P. No.2-Asst. Commissioner so far as the use of Cement is concerned to decide the extent of period for which the petitioner should be allowed to purchase Cement at a concessional rate of tax for the purpose of utilizing the same in mining operation and processing of the mining ore. 15. In view of our findings in the preceding paragraphs, the decision in Delta Paper Mills Ltd. (supra) is of no help to the petitioner. 16. So far the initiation of the penalty proceeding under Section 10A of the CST Act is concerned, it is open for the petitioner to file his reply before O.P. No.2-Asst. Commissioner who has initiated the penal proceeding. O.P. No.2 is directed to decide the matter keeping in view the decision taken in this judgment. 17. In view of the above, we set aside the impugned orders under Annexures 1 and 2 passed by the O.Ps. 1 and 2 respectively and the writ petition is allowed to the extent indicated above. No order as to cost. 14 ……………………... B.N.Mahapatra, J. V.Gopala Gowda, C. J. I agree. …....……………….. Chief Justice 15 Orissa High Court, Cuttack Dated 3rd November, 2010/sss/skj