Kerala High Court
M/S.Travancore Titanium vs The Commissioner Of Commercial Taxes on 7 October, 2008
Author: H.L. Dattu
Bench: H.L.Dattu, A.K.Basheer
IN THE HIGH COURT OF KERALA AT ERNAKULAM
ST.Appl..No. 4 of 2006()
1. M/S.TRAVANCORE TITANIUM
... Petitioner
Vs
1. THE COMMISSIONER OF COMMERCIAL TAXES,
... Respondent
For Petitioner :DR.K.B.MUHAMED KUTTY (SR.)
For Respondent :GOVERNMENT PLEADER
The Hon'ble the Chief Justice MR.H.L.DATTU
The Hon'ble MR. Justice A.K.BASHEER
Dated :07/10/2008
O R D E R
H.L. DATTU, C.J. & A.K. BASHEER, J.
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S.T. Appeal No.4 of 2006
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Dated this, the 7th day of October, 2008
JUDGMENT
H.L. DATTU, C.J.
This Sales Tax Appeal is directed against the order passed by the Commissioner of Commercial Taxes, Thiruvananthapuram in No.C3.12224/04/CT dated 26.10.2005.
2. The appellant is a company. It is engaged in the manufacture and sale of titanium dioxide through "sulphate process". The main raw materials are Ilmenite (mixed oxide of titanium) ferrous iron and ferric iron for the production of Titanium Dioxide pigment. Titanium dioxide (TiO2) is used in the manufacture of paints, plastics, paper, printing and rubber products etc.
3. The manufacturing process of Titanium dioxide pigments is as under:-
Titanium dioxide pigments are generally produced commercially according to the prior art processes by the so-called "sulfate process" in which a titaniferous material, such as a titaniferous iron ore, ore concentrate or a titanium slag is heated at elevated temperatures, with concentrated sulphuric acid to form a porous cake, sometimes referred to in the art as "digestion S.T.A.No.4/06 - 2 - cake". The digestion cake is allowed to cure so as to effect maximum recoveries of titanium values upon dissolving. After curing, the cake is dissolved in water or weak acid, with agitation to form a solution of titanium sulfate and iron sulfates. The ferric sulfate values in the solution are converted to ferrous sulfate by the addition, to the solution, of a reducing agent, such as scrap iron with or without antimony oxide. The solution is then clarified by settling and filtration to remove all of the solid material contained in the solution with minimum loss of TiO.sub.2. Following clarification, the solution is then usually subjected to a crystallization step to remove most of the ferrous sulfate values as copperas, i.e., FeSO.sub.4.sup. 7H.sub.2.O. After crystallization, the titanium sulfate solution is subjected to concentration to remove water from the solution. This is accomplished by evaporation in concentrators which operate under vacuum and at elevated temperatures. Concentration is continued until the specific gravity of the solution is at least 1.5 with a TiO.sub.2 content of at least 200 grams per liter and preferably from 250-300 grams per liter. The concentrated titanium sulfate solution is then converted by hydrolysis, from the soluble state into insoluble TiO.sub.2 hydrate and in general this change is effected through dilution of the concentrated titanium sulfate-ferrous sulfate solution with H.sub.2 O at S.T.A.No.4/06 - 3 - elevated temperatures. Thus a predetermined amount of titanium sulfate-ferrous sulfate solution having a TiO.sub.2 content of at least 200 grams per liter is preheated at a temperature of at least 90 degree C. and added at a predetermined rate, with agitation, to clear water at substantially the same temperature and in the ratio of 3-19 parts solution to one part water. During subsequent boiling, the precipitated TiO.sub.2 forms initially as colloidal particles, which subsequently floc to produce a filterable TiO.sub.2 hydrate containing from 30 percent to 36 percent solids. High quality titanium dioxide pigments may be produced from this particular type of prior art hydrate when the hydrate is produced from a concentrated and crystallized titanium sulfate solution.
4. Calcination is the final process in the production of Titanium dioxide of either antase grade or rutile grade pigment. Superior Grade Kerosene Oil (SKO) is used in the calciners as fuel.
5. The appellant is a registered dealer, registered under the provisions of Kerala General Sales Tax Act, 1963, hereinafter for the sake of brevity referred to as KGST Act. The appellant had applied before the Commissioner of Commercial Taxes, Thiruvananthapuram under Section 59A of KGST Act read with Rule 31D of the Rules, inter alia requesting to clarify S.T.A.No.4/06 - 4 - whether they can issue Form 18 declarations for the purchase of Kerosene Oil used in the manufacture of Titanium dioxide. In the application filed it was stated, that, the applicant is engaged in the business of manufacture and sale of Titanium dioxide. Apart from producing the product literature on the production of Titanium dioxide, they had briefly stated the process of manufacture/production of the product. According to them, the Ground Ilmenite is digested with hot concentrated Sulphuric acid. The hot cake obtained is extracted in water, clarified and supernatant liquid concentrated and the same is precipitated to get Titanium Dioxide cakes, which is washed free of iron salts. This cake is incinerated in calciner (kiln) using Super Kerosene Oil. Therefore, the sale of industrial raw material, namely kerosene by a registered dealer to the appellant for use in the production of the finished product namely, Titanium dioxide inside the State for sale is taxable at the concessional rate of tax at 3% on production of declaration to that effect from the appellant who uses the same for the declared purpose as provided under Section 5(3) of the KGST Act.
6. The Commissioner of Commercial Taxes by his order No.C3.1224/04/CT dated 26.10.2005 has clarified, that, Form 18 cannot be issued for purchase of Kerosene oil used as fuel in the manufacture of S.T.A.No.4/06 - 5 - Titanium Dioxide. According to the Commissioner of Commercial Taxes, "In the instant case, the role of kerosene is for the process of calcination. Even according to the petitioner, the contributing factor of kerosene is heat energy. In other words, the function is that of the fuel. Thus, Kerosene in this case, cannot be treated as a raw material used in the manufacture of goods, but as aid in the manufacture of goods".
7. The appellant being aggrieved by the aforesaid clarification is before us in this appeal, inter alia requesting to set aside the order passed by the Commissioner of Commercial Taxes dated 26.10.2005 and to declare that the appellant is entitled to issue Form 18 declaration for the purchase of Kerosene Oil used in the manufacture of Titanium Dioxide.
8. Dr.Mohammed Kutty, learned counsel for the appellant argues that the Kerosene Oil is a major and essential item of industrial raw material which is used in the Kiln without which the production of end product is impossible and therefore, applying the functional test the kerosene oil is a raw material used in the manufacture of finished product, viz. titanium dioxide. The learned counsel further contends, that, the Commissioner of Commercial Taxes without considering the manufacturing process explained by the appellant ought not to have concluded that the kerosene oil cannot be S.T.A.No.4/06 - 6 - treated as a raw material in the manufacture of finished product. The learned senior counsel would further contend, that, the Commissioner of Commercial Taxes has placed reliance on irrelevant material, namely, the notification issued by the State Government, SRO No.1091/99, which has no bearing on the issue involved. The learned counsel in support of this contention, heavily relies on the observations made by the Apex Court in the case of Collector of Central Excise vs. Ballapur Industries Ltd., 186 ITR 244, the decision of this Court in the case of P.Narendra Menon vs. State of Kerala 2007(2) KLT SN 68, the decision of the Calcutta High Court in the case of Phelps and Co. (Pvt) Ltd. vs. Board of Revenue, West Bengal, 20 STC 511, the decision of the Apex Court in Gujarat Narmada Valley Fertilizers Co. etc. vs. Collector of Central Excise, Vadodara, 2001(2) SCC 511, Bajaj Tempo Ltd. vs. Commissioner of Income Tax, 196 ITR 188, Periyar and Parekanni Rubbers Ltd. vs. State of Kerala, (2008) 13 VST 538.
9. The learned counsel for the Revenue ably justifies the impugned order passed by the Commissioner of Commercial Taxes. The learned counsel would contend, that, since Kerosene Oil is used only as fuel for the purpose of Calcination, it cannot be said that Kerosene oil is used in the manufacture of finished product. The learned counsel has produced lot of S.T.A.No.4/06 - 7 - product literature in support of his contention and further relies on the observation made by the Apex Court in the case of Coastal Chemicals Ltd. vs. Commercial Tax Officer, A.P. and others. (2000) 117 STC 12.
10. In our opinion, having heard the learned counsels for the parties, the one and the only issue that requires to be considered is, whether the appellant is entitled to issue Form 18 declaration forms for the purpose of purchase of kerosene oil which is used as a fuel for the process of calcination in the kiln used in the production of finished product, namely, Titanium Dioxide.
11. We need to start our discussion on this legal issue by referring to charging provision under the Act and the provision which provides for concessional rate of tax.
12. Section5 (1) of the Act is the charging provision under the Act. It provides that every dealer, other than a casual trader or agent of a non-resident dealer, whose total turnover for a year is not less than two lakh rupees and every casual trader or agent of a non-resident, whatever be his total turnover for the year, shall pay tax on his taxable turnover for that year.
13. Section 5(3) of the Act provides for concessional rate of tax under certain circumstances. The said provision reads as under. S.T.A.No.4/06 - 8 -
"5(3) (i). Notwithstanding anything contained in sub-section (1), the tax payable by a dealer in respect of any sale of industrial raw materials, component parts, containers or packing materials which are liable to tax at a rate higher than three per cent when sold to any industrial unit for use in the production of finished products inside the State for sale or for packing of such finished products inside the State for sale, as the case may be, shall be at the rate of three per cent on the taxable turnover relating to such industrial raw materials, component parts, containers or packing materials, as the case may be.
Provided that the provisions of this clause shall not apply to any sale unless the dealer selling the goods furnishes to the assessing authority in the prescribed manner a declaration duly filled in and signed in by the dealer to whom the goods are sold containing the prescribed particulars in the prescribed form.
(ii). Where any dealer, after purchasing any goods by furnishing a declaration as mentioned in the proviso to clause (i), fails to make use of the same for the purpose for which the declaration was furnished, he shall be liable to pay the tax that would have been payable by him, had the declaration not been furnished, less the tax, if any, paid by him and the same shall be levied and collected as if it is a tax due from him.".
S.T.A.No.4/06 - 9 -
14. Section 5(3) commence with a non obstante clause. The section speaks of tax payable by a dealer notwithstanding sub-section (1) of Section 5. The main ingredients of the sub-section are, the sale must be in respect of industrial raw material, component parts, containers or packing materials; they should be liable to pay higher rate of tax than 3%; the sale must be to an industrial unit; the said unit must use the purchased commodity/commodities in the production of finished product; the sale of the finished product must be inside the State. If these conditions are cumulatively complied, the tax payable by the dealer shall be at 3% on the taxable turnover relating to such industrial raw materials, component parts, containers or packing materials. The proviso appended to the sub-section imposes yet another condition, namely, that the sub-section shall not apply unless the selling dealer furnishes Form 18 declaration obtained from the purchasing dealer to the assessing authority. The purpose and object of this sub-section appears to be to encourage industries to procure the raw materials, component parts, containers or packing materials at a concessional rate of tax, so that the cost of production of the finished product would be less and the industrial unit would be in a better position to compete in the market by reducing the sale price of the finished product.
S.T.A.No.4/06 - 10 -
15. In the instant case, we are concerned with only "industrial raw material". The said expression is not defined in the Act. Therefore, reference can be made to the dictionary meaning and also how the courts have understood this expression. The expression "industrial raw material" is used to denote raw materials used for industrial purpose. According to the dictionary meaning, it means something which is used for manufacturing or producing the goods. The ordinary common sense understanding of it is that, it is something from which another new or distinct commodity is produced.
16. The Supreme Court has explained the meaning of this expression. In the case of Collector of Central Excise vs. Ballapur Industries Ltd., (1990) 186 STC 244, it is stated, an input or ingredient, getting burnt up or consumed in the chemical process of manufacture is raw material for the end product. The ingredient should go into the making of the end product in the sense that without the ingredient, the presence of the end product is rendered impossible. In Kothari Industrial Corporation vs. C.C.E., 1998 (36) ELT 721, it is observed that the term refers to all ingredients used in the manufacturing stream and which lose their identity in the manufacturing process. [Emphasis is supplied by us].
17. Having seen the meaning of the expression 'Raw material' S.T.A.No.4/06 - 11 - the other important ingredient that requires to be satisfied for the purpose of claiming concessional rate of tax is that, the industrial raw material sold must be "used in the production of finished products inside the State for sale". Therefore, the use of the raw material must be in the production of finished product. That only means raw materials must be used in the production of finished products. The word 'production' is explained by the Apex Court in the case of Chrestien Mica Industries Ltd. vs. State of Bihar and another, 125 STC 212, means, amongst other things, that which is produced; a thing that results from any action, a process or effort, a product of human activity or effort.
18. The Supreme Court in C.I.T. vs. N.C. Budhaiaja and Co. AIR 1993 SC 2529, has observed that the word "production" has a wider connotation than the word "manufacture". While every manufacture can be characterised as production, every production need not amount to manufacture. Therefore, the term raw materials would include materials which physically enter into the composition of the finished product.
19. The expression 'use' is not defined in the Act. In its ordinary meaning, the word 'use' is the act of employing a thing putting into action or service; employing for or applying to a given purpose. S.T.A.No.4/06 - 12 -
20. The main raw material for the production of Titanium Dioxide pigment are Ilmenite (a mixed oxide of titanium) ferrous iron and ferric iron. The product literature produced by the appellant before the Commissioner of Commercial Taxes illustrates the stages in the production of titanium dioxide. The first stage is, Ilmenite is reacted with Sulphuric acid in reinforced concrete tanks called Digesters; Exothermic reaction is initiated by the heat of dilution of the acid with water and porous cake is formed. The mass in the solid form is dissolved in dilute sulphuric acid to get titanium in solution as titanium oxy-sulphate along with other metallic ingredients in Ilmenite as their sulphate. After this digestion process, the next is known as "Reduction". At this stage, the liquor is reduced using scrap iron, when the ferric iron gets completely reduced to ferrous state. The third stage is known as 'clarification'. In this stage, the black liquor is clarified, concentrated and boiled by injecting steam to precipitate the titanium content as hydrated titania. Then, the other stages are crystallisation, hydrolysis and filtration. During these stages, the hydrated titania is filtered over drum type rotary vacuum filters. Any ferric iron still present is reduced to ferrous iron by leaching the pulp with dilute sulphuric acid. It is washed free of iron and other impurities. The last stage is "calcination". During this stage, the S.T.A.No.4/06 - 13 - huydrated titania is calcined in a rotary kiln and superior kerosene oil is used in the calciners as fuel and thereafter is cooled in rotating coolers and de-agglomerated in pendulum mills to very fine particles. The fine white powder is packed and sold in HDPE bags as Titanium Dioxide, which is mainly used in the manufacture of paints. Therefore, the use for which superior kerosene is put in the manufacture of Titanium dioxide is as fuel in the calciners.
21. In the instant case, super kerosene oil that is purchased by the appellant would only assist the manufacturing process, but does not physically enter into the composition of finished product, namely Titanium dioxide. Therefore, kerosene oil does not come within the definition of raw material under Section 5(3) of the KGST Act. The Kerosene oil used by the appellant as fuel for the purpose of calcination cannot be said to have been used as a raw material in the production of finished product for sale, viz. Titanium dioxide, but only as an aid in the production of finished product. It is relevant at this stage to notice the observations made by Apex Court in the case of Coastal Chemicals Ltd. vs. Commercial Tax Officer, A.P. and others, 117 STC 12. That was a case where the appellant had purchased natural gas from the Oil and Natural Gas Commission. The appellant used the S.T.A.No.4/06 - 14 - natural gas as fuel for the manufacture of paper and paper products. The applicant claimed that it was entitled to the concessional rate of tax that was provided for under Section 5B(1) of Andhra Pradesh General Sales Tax Act. The said provision is more or less akin to the provision under consideration in the instant case.
The argument that was advanced before the court was that the natural gas is "consumable" within the meaning of the aforesaid provision and therefore, entitled to concessional rate of tax. The Apex Court while repelling the aforesaid contention and after referring to the decision of the Apex Court in Ballapur Industries Ltd.'s case, 186 ITR 244, has stated as under:
"6. The word "consumable" in the said provision takes colour from and must be read in the light of the words that are its neighbours, namely, "raw material", "component part", "sub-assembly part" and "intermediate part": So read, it is clear that the word "consumables" therein refers only to material which is utilised as an input in the manufacturing process but is not identifiable in the final product by reason of the fact that it has got consumed therein. It is for this reason that "consumables" have been expressly referred to in the said provision, though they would fall within the broader scope of the words "raw materials".
S.T.A.No.4/06 - 15 -
7. In the case of Thomas Stephen & Co. [1988] 69 STC 320 (SC) relied upon in the impugned judgment, it was held that cashew shells used as fuel did not get consumed in the manufacture of other goods and that 'consumption must be in the manufacture as raw material'.
8. To use the words of Thomas Stephen & Co.
[1988] 69 STC 320 (SC) the natural gas used by the appellant does "not tend to the making of the end product". It is not a 'consumable'.".
22. In the instant case also, Superior Kerosene Oil is not used as an input in the use of production of finished product and it is not identifiable in the final product and it is just used as a fuel in the calciners as an aid in the production of finished product and therefore, would not answer the description of the expression 'raw material'.
23. We have perused carefully the other case laws on which reliance was placed by the learned Senior Counsel Dr.Mohammed Kutty. In our opinion, none of the case laws has any bearing on the issue which has come up for consideration in this appeal.
24. In view of the above discussion, in our view, the Commissioner of Commercial Taxes is right while clarifying that the appellant cannot use Form 18 declarations for purchase of Kerosene Oil used S.T.A.No.4/06 - 16 - as a fuel in the manufacture of Titanium Dioxide. Therefore, the appeal requires to be rejected and accordingly, it is rejected. No order as to costs.
Sd/-
H.L.DATTU, CHIEF JUSTICE.
Sd/-
A.K. BASHEER, JUDGE.
DK.