Karnataka High Court
M/S Habib Proteins And Fats Extracts vs The Commissioner Of Commercial Taxes on 4 September, 2012
Bench: K.Sreedhar Rao, B.Manohar
1
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 4TH DAY OF SEPTEMBER 2012
PRESENT
THE HON'BLE MR. JUSTICE K.SREEDHAR RAO
AND
THE HON'BLE MR. JUSTICE B.MANOHAR
CRP NO.310/2008
BETWEEN :
M/S HABIB PROTEINS AND FATS EXTRACTS
P.B.NO.3, N.H.HIRIYUR,
CHITRADURGA DISTRICT,
(BY ITS MANAGING PARTNER
MEHMOOD KHAN, 60 YEARS). ...PETITIONER
(BY SRI.T.N.KESHAVAMURTHY, ADV)
AND :
THE COMMISSIONER OF COMMERCIAL TAXES
VANIJYA THERIGE KARYALAYA
GANDHINAGAR,
BANGALORE - 560 009. ...RESPONDENT
(BY SMT. S.SUJATHA, AGA)
CRP FILED U/S 15-A OF THE KARNATAKA TAX ON ENTRY
OF GOODS ACT 1979 AGAINST THE ORDER DATED 17.04.2008
PASSED IN STA NO.554/2002 AND 555/2002 ON THE FILE OF THE
KARNATAKA APPELLATE TRIBUNAL, BANGALORE, PARTLY
ALLOWING THE APPEALS.
THIS CRP HAVING BEEN HEARD AND RESERVED AND
COMING ON FOR PRONOUNCEMENT OF ORDER THIS DAY,
B.MANOHAR.J., MADE THE FOLLOWING: -
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ORDER
The assessee has filed this revision petition challenging the order dated 17-4-2008 made in STA Nos.554-555/2003 and S.T. Cross Appeals No.299-300/2007 passed by the Karnataka Appellate Tribunal allowing the Cross Appeals filed by the State Government and partly allowing the appeals filed by the assessee, setting aside the order passed by the First Appellate Authority in KTEG.AP-36-37/2001-02 restoring the assessment order in part.
2. The revision petitioner is a partnership firm engaged in the business of manufacture and sale of solvent oil from the Oil Cake at its plant in Hiriyur Taluk, Chitradurga District. It is a registered dealer under KST, CST and the Karnataka Tax on Entry of Goods Act, 1979 (the 'KTEG Act' for short). During the assessment years 1998-1999 & 1999- 2000 in the course of its manufacturing activities, the assessee effected purchase of diesel for use as raw material in the generation of electricity energy in its Captive Generation Set for the purpose of electrical energy. The assessee also effected purchase of Hexane for use as an input/catalyst in the process of extraction of solvent oil, since the diesel as well as Hexane are the raw materials/input which are used in the manufacture and intermediate or finished product specified in the Second Schedule. The assessee has not filed any returns for the assessment years 1998-1999 & 3 1999-2000. The Assistant Commissioners of Commercial Taxes visited the business premises of the assessee for inspection on 18-12-1999. During the course of Inspection, it was noticed by them that the assessee has purchased high speed diesel and Hexane and caused entry of the same into the local area. No taxes have been paid, accordingly, notice was issued under Section 5(4) of the KTEG Act. Though the assessee was served with notice, no reply has been filed to the said notice inspite of granting sufficient time. Accordingly, assessment under the KTEG Act was concluded and levied entry tax on Diesel and Hexane. The demand notice was issued to the assessee to pay the entry tax at the rate of 5% in respect of high speed diesel and 2% tax is levied in respect of purchase of Hexane and also imposed penalty of Rs.20,000/- for each assessment year under section 5(5) of the Act.
3. The assessee being aggrieved by the assessment of entry tax for the assessment years 1998-1999 and 1999-2000 preferred appeals in STA No.554-555/2002 before the Joint Commissioner of Commercial Taxes (hereinafter referred to as 'the First Appellate Authority'). The First Appellate Authority by its order dated 2-2-2002 allowed the appeals in part and deleted the entry tax on High Speed Diesel holding that the diesel constitutes a raw material/input, which has been used to generate electrical energy in the manufacture of intermediate or finished products and also reduced the penalty imposed on the assessee. However, no order has been 4 passed insofar as Hexane is concerned. Being aggrieved by the levy of entry tax on the value of Hexane and levy of penalty for both the assessment years in question, the assessee preferred second appeals before the Karnataka Appellate Tribunal. The State Government being aggrieved by the order of the First Appellate Authority setting aside the assessment order in respect of Diesel for the assessment years 1998-1999 & 1999- 2000 preferred S.T.Cross Appeals No.299-300/2007 before the Karnataka Appellate Tribunal.
4. The Karnataka Appellate Tribunal after considering the matter in detail passed the following order:
a) The two cross appeals filed by the State in this case are allowed.
b) The two appeals filed by M/s.Habib Proteins & Fats Extracts are partly allowed as follows:
i) The common appeal order passed by the FAA insofar as it relates to the levy of entry tax at 2% on hexane in respect of both the years and to the levy of tax on machinery at 2% on the purchase turnover of Rs.12,100- 00 in respect of the financial year 1998-99 is confirmed;
ii) The deletion of the taxed levied (in the assessment orders) on diesel as per the impugned common appeal order is hereby held to be opposed to 5 law laid down by the Hon'ble High Court of Karnataka in the case of Nestle India Ltd., mentioned supra and for that reason the impugned common appeal order is modified and it is declared that the levy of entry tax on the turnovers relating to diesel as levied in the impugned assessment orders in respect of both the years are hereby affirmed;
iii) The impugned penalties levied under Section 5(5) in respect of both the years are hereby deleted.
iv) The assessing authority shall issue revised demand notices in respect of both the years in terms of this order.
The original order shall be kept in STA No.554/2002 and copies thereof in STA No.555/2002 and in ST cross appeals No.299/2007 and 300/2007."
The assessee being aggrieved by the order dated 17-4-2008 passed by the Karnataka Appellate Tribunal preferred this revision petition.
5. While admitting this revision petition, this court has framed the following questions of law:
i) Whether Appellate Tribunal was legally justified in restoring levy of entry tax on diesel brought into local area for use as raw material/input in the generation of electrical energy which is exempted 6 from tax levy under Entry Sl.No.15 of the Second Schedule to the Karnataka Entry Tax Act?
ii) Whether levy of entry tax at 2 per cent in respect of Hexane which is an input used in the extraction of solvent oil is legally justified as against the rate of tax at 1 per cent applicable under entry 80 of the First Schedule to the Karnataka Tax on Entry of Goods Act, 1979 read with Sl.No.3 of Government Notification No.FD CET 98 (2) dated 31.3.1998?
6. Sri.T.N.Keshavamurthy, learned counsel appearing for the revision petitioner contended that the order passed by the Karnataka Appellate Tribunal setting aside the order passed by the First Appellate Authority insofar as assessment of entry tax is contrary to law. He further contended that no tax can be levied on the entry of raw materials/inputs brought into the local area which in turn is used for production or manufacturing of any goods which was listed in the Second Schedule under the KTEG Act. Since the diesel is being used for generating the electricity, it falls under the second Schedule. The diesel cannot be subjected to entry tax, which is used as raw material/input by the assessee.
7. Further Hexane is not listed in the First Schedule and in the relevant Government Notification dated 31-3-1998, wherein petroleum products are mentioned by various descriptions and the Hexane is not described specifically in the scheduled entry. Hence, Hexane cannot be subjected to the entry tax at the rate of 2%. Hexane is normally used as a 7 chemical in the solvent extraction process and it has to be treated as only chemical and not as petroleum product. Even if it is treated as not chemical, the tax can be imposed at the rate of 1% as raw material consumable and not at 2%. He further relied upon the judgment reported in (1990) 77 STC 282 (COLLECTOR OF CE v/s BALLARPURA INDUSTRIES LTD.) and 2010 Vol 32 VST 97 (AMI PIGMENTS PVT. LTD AND OTHERS v/s STATE OF GUJARATH AND OTHERS) and contended that the fuel used to generate electricity in the manufacturing of the end products can be considered to be the raw material or processing material or the consumable stores for the purpose of Section 15-B of Gujarath Sales Tax, 1969. Sri.T.N.Keshavamurthy further contended that the issue raised is fully covered by the judgment reported in 110 STC 226 (KAR)(DB) in the case of SAMYUKTHA KARNATAKA v/s STATE OF KARNATAKA. However, in another Division Bench of this Court in CRP No.1250/2004 and other connected matters (M/s. NESTLE INDIA LTD. v/s STATE OF KARNATAKA) this court has taken a different view. The co-ordinate bench cannot take a different view. Hence, the order made in NESTLE INDIA LTD., cannot be considered and sought for allowing the appeal.
8. On the other hand, Smt.S.Sujatha, learned Additional Government Advocate argued in support of the order passed by the Karnataka Appellate Tribunal and contended that the judgment of the Division Bench of this Court in M/s. NESTLE INDIA LTD. v/s STATE OF KARNATAKA 8 covers the field. It is the latest judgment. The Division Bench has clearly held that the nature of goods and type of the goods at the point of entry are the relevant factors in determining the rate of tax and not how the goods are used thereafter, since diesel as well as the Hexane are the taxable goods under the KTEG Act. Though the assessee has purchased the diesel, it cannot be treated as raw material for the finished products. However, it was used for manufacturing of the electricity energy. Hence, the diesel cannot be treated as raw material or input. Admittedly for the assessment years 1998-1999 and 1999-2000, the assessee has not filed annual returns. On inspection by the Assistant Commissioners of Commercial Taxes, it was noticed that High Speed Diesel as well as the Hexane are brought into the local area. Hence, the assessee has to pay 5% tax on diesel as well as 2% tax on Hexane. There is no infirmity or irregularity in the order passed by the Karnataka Appellate Tribunal and sought for dismissal of the revision petition.
9. We have carefully considered the arguments addressed by the parties and perused the orders impugned.
10. It is not in dispute that the revision petitioner caused entry of diesel as well as Hexane for use as raw material/input in generation of electrical energy for their Generation Sets and for extraction of solvent oil from the Oil Cake. The revision petitioner has not filed its returns for the assessment years 1998-1999 and 1999-2000. During the course of 9 inspection by the Assistant Commissioners of Commercial Taxes (Intelligence) they noticed that the petitioner has purchased HSD as well as Hexane without paying any entry tax. Section 3(1) of the KTEG Act provides for levy of collection of tax on entry of any goods specified in the First Schedule into local area for consumption, use or sale therein, at such rate not exceeding 5% of the value of the goods as may be specified retrospectively or prospectively by the State Government by its notification. The State of Karnataka in exercise of its power under Section 3(1) of KTEG Act issued notification No. FD 34 CET 98/1 dated 31-3- 1998 specifying the levy of entry tax on diesel. Subsequently it was modified in FD 79 CET 98(2) Bangalore dated 14.05.1998 which reads as under:
" In exercise of the power conferred by sub section (1) of section 3 of the KTEG Act 1979 (Karnataka Act No.278/1979), the Government of Karnataka hereby specify that with immediate effect the tax shall be levied and collected under the said Act on the entry of diesel into a local area for consumption, use or sale therein at the rate of five percent."
The assessee has caused entry of diesel into local area, which is a scheduled goods under entry 67 of the First Schedule under the KTEG Act. The assessee is manufacturing and selling solvent oil from the Oil Cake from its plant. The assessee has caused entry of diesel for generating the electric energy for running its machine. As per entry 80 of the First 10 Schedule to the Act, raw materials, component parts and inputs which are used in the manufacture of intermediate or finished products other than those specified in the Second Schedule are liable to be taxed as per the rate specified in the notification issued under Section 3(1) of the Act. The electrical energy is not intermediate or finished product relating to the solvent oil. The assessee has never sold electrical energy. Hence, diesel cannot be treated as raw material or component part or an input used in the manufacture of some other goods. Hence, the we find that there is no infirmity or irregularity in the order passed by the Karnataka Appellate Tribunal confirming the order passed by the Assessing Authority.
11. With regard to the second question, the Hexane is not listed in the First Schedule or in the relevant Government Notification dated 31-3- 1998, wherein petroleum products are mentioned by various descriptions. Hence the petitioner claims that Hexane cannot be subjected to entry tax at the rate of 2%. He claims that Hexane is normally used as chemical in the solvent extraction process and it has to be treated as chemical and not as petroleum product. The Assessing Authority after considering the contention raised by the petitioner held that Hexane is petroleum product, it was derived from crude petroleum through a process of fractional distillation. Hence, it squarely falls under entry 67 of First Schedule under the Act and liable to be taxed at the rate of 2%. No scientific study appears to be made with regard to Hexane, which is being used as input in 11 the extraction of solvent oil. In view of Judgment of the Hon'ble Supreme Court reported in (1990) 77 STC 282 cited supra, at paragraph 5 it has held that Hexane has to be treated as chemical used as a raw material in extraction of the oil. The Assessing Authority has not noticed the notification dated 31-3-1998 wherein it was specifically mentioned that the raw materials, component parts and input which are used in the manufacturing of intermediate and finished products other than those specified in the Second Schedule is at the rate of 1%. The Assessing Authority as well as the Karnataka Appellate Tribunal has not considered the said notification. Hence, the order passed by the Assessing Authority is required to be modified and the tax has to be levied on Hexane at the rate of 1%.
12. The Division Bench of this court in CRP No.1250/2004 and other connected matters (M/S NESTLE INDIA LIMITED v/s STATE OF KARNATAKA) has clearly held that the nature of the goods and type of goods at the point of entry is the relevant factor to be taken while determining the rate of tax and not how the goods are used thereafter since the taxable event under the KTEG Act is the entry of goods into the local area for the purpose mentioned in charging Section. The diesel by virtue of being listed in the taxable commodities in the entry tax schedule read with the relevant Government Notification issued under Section 3(1) of the Act, it has to be treated as a scheduled commodity and liable to be 12 taxed at the rate indicated in respect of the diesel and it cannot be treated as raw material or input at all. Further the diesel is being used not for production of end goods and it is only for generating electricity supply for its factory. Hence, the diesel cannot be treated as raw material. Hence, the first question of law is held against the petitioner and the second question of law is held in favour of the assessee. Accordingly, we pass the following order:
ORDER The revision petition is partly allowed. The order passed by the Karnataka Appellate Tribunal is modified to the effect that the levy of entry tax on Hexane is at the rate of 1% as against 2%. In all other respects, the order passed by the Karnataka Appellate Tribunal is upheld.
Sd/-
JUDGE Sd/-
JUDGE mpk/-*