Dismissing an order passed by the Jharkhand High Court (HC), the Supreme Court (SC) held that oxygen gas could not be said to be a 'raw material' used in the manufacture of the end product—steel and, hence, is not liable for tax concessions.
In an order passed earlier this month, a bench of justice MR Shah and justice MM Sundresh says, "... 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 HC has seriously erred in holding contrary and by interfering with the concurrent findings recorded by all three authorities below. The impugned judgment and order passed by the HC is unsustainable."
Linde India Ltd, erstwhile India Oxygen Ltd, sold oxygen gas to Tata Iron and Steel Co (Tata Steel) and claimed that Tata Steel used oxygen gas as raw material for producing steel through the basic oxygen steelmaking (BOS) method. Using a notification issued by the Bihar state government on 3 February 1986, Linde claimed that oxygen supplied by it to Tata Steel as 'raw material' should be taxed at 2%.
However, the assessing authority (AO) disputed the claim saying that such sale is not of 'raw material' but of goods other than raw materials and, as such, the concessional rate of tax applicable to such sale under Section 13(1)(b) of the Bihar Finance Act would be 3%, rather than 2%.
Linde then approached the HC, which ruled that the company had no locus to file the writ as the tax was payable by Tata Steel, the buyer of the oxygen. The company then filed an appeal before the apex court. While allowing the appeal, SC asked tax authorities to hold an enquiry and consider if the oxygen sold can be said to be a 'raw material' in the manufacturing of steel.
A six-member expert committee was constituted to investigate whether the pure oxygen sold can be said to be 'raw material'. A detailed inspection report about the inspection and inquiry of Tata Steel by the committee, was submitted, and it was found that 'oxygen gas' is not a direct 'raw material' of steel production and the work of oxygen is only of a refining agent. The committee opined that the primary function of oxygen is to reduce the carbon content as per requirement; as such, oxygen gas is not a direct 'raw material' of steel.
The report also stated that using oxygen to reduce the quantity of carbon from the iron could not be ground to say that oxygen is a 'raw material' of steel.
Based on the inspection report dated 4 February 2010, the AO issued a notice to Linde seeking clarification as to why oxygen may not be considered a 'refining agent'. On 1 October 2011, the AO passed an order of assessment relating to financial years 2001-02, 2002-03, 2003-04, 2004-05 and 2005-06, holding that the oxygen is used as goods other than 'raw material' in steel making and that it is a 'refining agent', 'reducing agent' and that 3% tax is to be levied on oxygen.
Based on the assessment order, the deputy commissioner for commercial taxes at Jamshedpur Circle on 10 October 2011 issued a demand notice against Linde.
Meanwhile, Tata Steel assailed the assessment order by filing a writ petition before the high court. The HC asked Tata Steel to file an appeal under Section 45 of the Bihar Finance Act. Linde filed an appeal before the joint commissioner, commercial taxes (appeals). In an order on 7 June 2013, the joint commissioner dismissed the appeal. Even a revision application filed by Linde was dismissed.
The company again approached Jharkhand HC, challenging the order passed by the revisional authority. The high court allowed Linde's writ petition and set aside the orders given by all the authorities below. It held that the function of the oxygen is to convert pig iron into steel by reducing the percentage of carbon dioxide by converting it to carbon monoxide, which is necessary for the manufacture of the end product—steel and, therefore, the oxygen can be said to be a 'raw material' and therefore Linde is entitled to concessional rate of tax at 2%.
The Jharkhand government then challenged the HC order before the apex court.
Senior counsel Arunabh Chowdhury, representing the state government, submitted that the fact-finding committee consisting of experts presented a detailed inspection report, and it was specifically found that the oxygen gas is not a direct 'raw material' in steel production and the work of oxygen is only a refining agent and its primary function is to reduce carbon content as per requirement and as such, oxygen gas is not a direct 'raw material' of steel. Once that is the position, 'oxygen gas' cannot be said to be a 'raw material' in the manufacture of steel; therefore, the rate of tax at 3% would be leviable, Mr Chowdhury says.
He also contended that the companies paid a 3% tax on oxygen gas used in steel manufacturing and never raised any dispute till the bifurcation of Bihar. "However, a dispute was raised only when the state of Jharkhand came into existence and they demanded the rate of tax at 3%."
Senior counsel S Ganesh, representing Linde and Tata Steel, vehemently opposed the submission by the state government. He contended that oxygen supplied by Linde is directly used by Tata Steel in manufacturing steel and, therefore the same is 'raw material' and consequently entitled to the benefit of concessional rate of tax under Section 13(1)(b) of the Bihar Finance Act adopted in the state of Jharkhand.
"...the method by which the steel is made is the BOS method. Obviously enough, steel cannot be made without oxygen. If that is so, it is but obvious that oxygen is the 'raw material' used in this method for manufacturing steel. It is submitted that in other words, but for oxygen, the steel cannot be manufactured," Mr Ganesh submitted.
After hearing both sides, the SC bench observed that the fact findings recorded by the AO, which were based upon a detailed inspection report by a six members expert committee, were confirmed by the deputy commissioner and after that by the joint commissioner – revisional authority. The findings of fact recorded by the three authorities below have been upset by the HC in the exercise of powers under Article 226 of the Constitution of India.
The apex court also noted that, as per the settled position of law, the Jharkhand HC in the exercise of powers under Article 226 of the Constitution of India is not sitting as an appellate court against the findings recorded on appreciation of facts and the evidence on record.
It says, "The HC 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 HC lacks the expertise on deciding the disputed questions and, more particularly, the technical aspect which could have been left to the committee consisting of experts."
The Supreme Court then quashed and set aside the judgement and order passed by the Jharkhand HC and restored the order passed by the AO.
(Civil Appeal Nos8061-8064 of 2022 Date: 2 December 2022)
