The Supreme Court while deciding an appeal filed by the State of Jharkhand and other authorities against Linde India Limited (erstwhile known as India Oxygen Limited) and Tata Iron and Steel Company held that the oxygen gas cannot be said to be a "raw material" used in the manufacture of the end product – steel.

The two-Judge Bench of Justice M.R. Shah and Justice M.M. Sundresh was dealing with the matter in which the Jharkhand High Court, Ranchi allowed the writ petitions filed by the respondents and had quashed and set aside the order passed by the Commercial Taxes Tribunal, Ranchi holding that the respondents were entitled to benefit of concessional rate of duty at 2%. The Bench while disagreeing with the High Court stated –

"Applying the law laid down by this Court in the case of Thomas Stephen & Co. Ltd. (supra) to the facts of the case on hand and the findings by the committee consisting of six expert members recorded in the detailed inspection report and when it has been found that the oxygen gas is used as a 'refining agent' and its main function is to reduce the carbon content as per the requirement, the oxygen gas cannot be said to be a "raw material" used in the manufacture of the end product – steel. Under the circumstances, the respondents are not entitled to the concessional rate of tax @ 2% treating the same as "raw material" in the manufacture of the end product and are liable to pay tax @ 3% on the sale thereof. The High Court has seriously erred in holding contrary and by interfering with the concurrent findings recorded by all the three authorities below. The impugned judgment and order passed by the High Court is unsustainable."

Senior Advocate Arunabh Chowdhury appeared on behalf of the appellants while Senior Advocate S. Ganesh appeared for the respondents.

Facts of the Case –

A certificate under Section 6 of the Bihar Finance Act, 1957 was issued in the name of respondent no. 1 i.e., Linde India Limited and the State Government vide notification in the year 1982 notified a special rate of tax at 1% for "raw material inputs". While the rate of tax for other than raw material inputs was still at 3%. A certificate was issued in the name of respondent no. 2 i.e., Tata Iron and Steel Company and as per the same, "oxygen gas" was to be taxed at 3% which was continued to be paid by Tata Steel. Thereafter, the State issued a fresh notification directing that the tax rate on raw materials for use in the manufacture or processing of goods for sale in the State or in course of Inter-State trade or commerce excluding such raw materials which have already undergone any manufacturing or production process and which are required for further assembly, shall be at the rate of 2%. However, the State afterward deleted the term "or in course of interstate trade or commerce". On raising a dispute by respondent no. 1, the Assessing Authority disputed the sale of oxygen in favour of the company.

The High Court dismissed a writ petition preferred by respondent no. 1 holding that it has no locus to file the same. The matter came before the Apex Court and it remanded the matter to hold an enquiry to consider the question, as to whether oxygen gas is a "raw material" for the manufacture of steel. After the inspection and enquiry by a six-member expert committee, it was found that the oxygen gas is not a direct "raw material" of a steel product and the work of the oxygen gas is only of a "refining agent". On the basis of such an inspection report, the assessing officer held that the respondents are not entitled to a tax rate of 2% and a 3% tax is to be levied on oxygen. The Joint Commissioner also dismissed the appeal filed by the respondent. The High Court, however, set aside the orders passed by all the authorities. Hence, the matter was before the Supreme Court.

The Supreme Court noted, "only in a case where oxygen gas is used as "raw material", the same would be taxed at the rate of 2% of the sales tax, which otherwise is chargeable @ 3% on the sale thereof." The Court further noted, "The High Court ought to have appreciated that there was a detailed inspection report by a six members committee who after detailed enquiry and inspection and considering the process of manufacture of steel specifically came to the conclusion that the work of oxygen is only of a 'refining agent' and its main function is to reduce the carbon content as per the requirement."

The Court observed that the findings accepted by the authorities were not required to be interfered with by the High Court in the exercise of the powers under Article 226 of the Constitution and that it lacks the expertise on deciding the disputed questions and more particularly the technical aspect.

The Court thereafter opined, "As such, the decision of this Court in the case of Thomas Stephen & Co. Ltd. (supra) has not been overruled by this Court in the case of Ballarpur Industries Ltd. (supra) and therefore the decision of this Court in the case of Thomas Stephen & Co. Ltd. (supra) still is a good law. In the case of Thomas Stephen & Co. Ltd. (supra), it was a case of fuel like in the present case which was used for the kiln to impart the heat treatment to ceramics and what actually went into the manufacture of such ceramics."

In the case of Ernakulam v. Thomas Stephen & Co. Ltd. (1988) 2 SCC 264, the cashew shells were used as fuel in the kiln and it was found that the same did not transform into the end product. It was held that the same cannot be said to be used as a "raw material".

The Apex Court in the above regard noted that prior to the bifurcation of the State of Bihar, the tax was being paid at 3% and no dispute was raised at that time. Hence, the Court concluded, "… the present appeals succeed. The impugned judgment and order passed by the High Court is hereby quashed and set aside and the assessment order passed by the assessing officer, confirmed up to the revisional authority – Joint Commissioner is hereby restored."

Accordingly, the Court allowed the appeals.

Cause Title – State of Jharkhand and others v. Linde India Limited and Another

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Justice MR ShahJustice MM SundreshTaxTribunalsJharkhand Government

Swasti Chaturvedi