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The Bihar Value Added Tax Act, 2005
Section 2 in The Bihar Value Added Tax Act, 2005
the Central Sales Tax Act, 1956
Section 30 in The Bihar Value Added Tax Act, 2005
Section 2 in the Central Sales Tax Act, 1956
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Orissa High Court
Reliance Industries Ltd. vs Asst. Commissioner Of Sales Tax ... on 15 May, 2008
Equivalent citations: 106 (2008) CLT 245, (2008) 15 VST 228 Orissa
Author: B Mahapatra
Bench: A Ganguly, B Mahapatra

JUDGMENT

B.N. Mahapatra, J.

1. The petitioner, in this writ petition calls in question, the legality of the order dated June 28, 2006 passed by the Assistant Commissioner, Sales Tax, (LTU) Cuttack-II Range, Cuttack (hereinafter called the "the ACST") under Section 30 of the Orissa Value Added Tax Act, 2004 (hereinafter called "the OVAT Act") whereby claim of the petitioner that furnace oil qualifies to be an "input" for the purpose of availing input tax credit was rejected. Consequently, a tax demand to the tune of Rs. 32,26,909 was raised by that order.

The facts which give rise to the present writ petition are set out below.

2. The petitioner in the present case is a company incorporated under the Companies Act, 1956 having its registered office at 3rd Floor, Maker Chambers-IV, 222, Nariman point, Mumbai-400 021 and factory at Laxmi-nagar, Baulpur, Dhenkanal. It is a dealer registered under the OVAT Act. It manufactures polyester staple fibres (hereinafter referred to as, "the PSF") through Orissa Poly-fibres Limited on job-work basis, out of mono ethylene glycol (hereinafter referred to as "the MEG") and pure teraph-thallic acid (hereinafter referred to as "the PTA") and polymer chips at Dhenkanal. The said materials are brought from outside the State of Orissa either by way of stock transfer or by way of inter-State trade or commerce. It has filed its return regularly under the OVAT Act for the financial year 2005-06. The petitioner claimed input tax credit to the tune of Rs. 83,81,744 for the financial year 2005-06 out of which the petitioner availed input tax credit to the tune of Rs. 69,36,982 against the output tax under the OVAT Act. On January 9, 2006, the Sales Tax Officer, Angul, issued a letter to the petitioner directing it to pay Rs. 47,26,908 on the ground that the claim made by the petitioner for input tax credit on furnace oil was not admissible. Subsequent thereto by an order dated February 6, 2006, the ACST issued an order of suspension of registration certificate to the petitioner under the OVAT Act on the ground that the petitioner had knowingly furnished incorrect particulars claiming input tax credit on furnace oil which was allegedly not a consumable directly used in manufacturing process, but was used as a fuel for burning. Simultaneously, a notice in form VAT-110 was issued to the petitioner to produce papers, documents and evidences to rebut the charges made in the suspension order.

3. Being aggrieved by both the notices dated January 9, 2006 and February 6, 2006, the petitioner instituted a writ petition being W.P. (C) No. 2359 of 2006 under Article 226 of the Constitution of India together with an application for interim order being Misc. Case No. 1935 of 2006. In the said application, the petitioner challenged the constitutional validity of Section 30 of the OVAT Act. Vide order dated February 21, 2006 this Court directed the petitioner to deposit Rs. 15 lakhs and simultaneously directed the opposite parties to revive the registration certificate upon receipt of such amount. It was further ordered that the parties would appear before the ACST on March 6, 2006 on which date the ACST shall fix a date for hearing and proceed with the same. Notice was also issued upon opposite parties on the constitutional validity of Section 30 of the OVAT Act. Pursuant to the said order dated February 21, 2006 the petitioner deposited Rs. 15 lakhs with the ACST and the latter withdrew the order of suspension on February 24, 2006. As per the direction of this Court, the petitioner appeared on March 6, 2006 and the case was adjourned to March 28, 2006 for hearing. Subsequently, the case was adjourned to April 7, 2006 and again to May 26, 2006 and June 17, 2006 and finally to June 28, 2006, on which date the advocate for the petitioner filed written note of submission. On June, 28 2006, the ACST passed the impugned order under Section 30 of the OVAT Act, inter alia, holding that the furnace oil was not a consumable and/or input which directly goes into the composition of finished product. It was only a fuel in preparation of "PSF". He further held that the registration certificate of the petitioner under the OVAT Act was revived in view of the order passed by this Court pursuant to which Rs. 15 lakhs were deposited by the petitioner.

4. Assailing the impugned order dated June 28, 2006 Dr. Pal, learned Senior Counsel for the petitioner, submitted that the registration certificate of the petitioner under the OVAT Act was suspended on the ground that the petitioner had knowingly furnished incorrect particulars claiming input tax credit on furnace oil, the same being not directly used in manufacturing process but was used as a fuel for burning. By restoring the registration certificate vide his order dated February 24, 2006, the ACST exonerated the petitioner from the said charges. Thereafter, the ACST lacks jurisdiction to pass the impugned order. The further case of the petitioner is that Section 30 of the OVAT Act makes provision for suspension of registration of a dealer. In a proceeding initiated under Section 30 of the OVAT Act the ACST cannot arrogate himself the jurisdiction of making assessment. He further submitted that furnace oil is used as a consumable directly in processing or manufacture of finished product. "Input" is defined as any goods purchased by dealer in course of his business for resale or for use in execution of works contract, in process or manufacturing where such goods directly goes into the composition of finished product or packing of goods for sale and includes consumable directly used in such process or manufacture. Furnace oil is used as a consumable for heating liquid dowtherm and for converting the same into dowtherm vapour. The said dowtherm vapour is transmitted through pipelines to heat transfer stations and to heat the other raw materials in the process tank for manufacturing PSF and in the said process the dowtherm vapour loses heat and/or thermal energy and is converted back to liquid dowtherm which is again circulated back for conversion into dowtherm vapour by using furnace oil for heating. Thus, furnace oil is used as consumable directly in the processing or manufacturing of finished product, namely, PSF. He further submitted that input as provided in Section 2(25) of the OVAT Act should not be construed as only consumables which should directly go into the composition of finished product. In concluding his arguments, the learned Counsel submitted that furnace oil should be treated as consumable and qualifies to be an input for the purpose of availing input tax credit. Learned counsel relied on the following judicial pronouncements in support of his contention that furnace oil is a consumable which qualifies to be an input for the purpose of availing input tax credit.

(i) Collector of Central Excise v. Ballarpur Industries Ltd. .

(ii) Collector of Central Excise v. Eastend Paper Industries Ltd. [1990] 77 STC 203 (SC).

(iii) J.K. Cotton Spinning & Weaving Mills. Co. Ltd. v. Sales Tax Officer, Kanpur .

(iv) Consolidated Fibres Chemicals Ltd. v. A.C.S.T., Corporate Division [2008] 15 VST 222 (WBTT) : [2007] 50 STA 140.

(v) Pratap Steel Rolling Mills Ltd. v. State of Punjab [2007] 9 VST 629 (P&H).

(vi) Haryana Sheet Glass Ltd. v. Commissioner of Cus. & C. Ex., Surat-II .

(vii) Saurashtra Calcine Bauxite and Allied Industries v. State of Gujarat [1993] 91 STC 435 (Guj).

5. Per contra, Mr. Mohanty, learned Senior Standing Counsel appearing on behalf of Revenue, submitted that whether furnace oil is consumable or not is a question of fact, which cannot be decided by writ court. Moreover, the impugned order can be challenged in revision before the Commissioner under Section 79 of the OVAT Act and the writ petition being filed without exhausting the statutory remedy is liable to be dismissed. Further, relying on the provisions contained in Section 2(25) of the OVAT Act he argued that furnace oil cannot be treated as "input" and tax paid on purchase of furnace oil cannot be included in input tax for adjustment against VAT payable on sale of finished product. According to him, provisions contained in Section 2(25) of the OVAT Act envisaged that goods which directly go into composition of finished product and consumables which are directly used in such manufacturing or processing would qualify for being treated as input. The use of the words "such processing or manufacturing" if read ejusdem generis would mean that the consumable must be consumed directly in the process of manufacturing or processing like goods which directly go into the composition of finished products. He further argued that the consumable must partake character of goods which go into composition of finished product but the same being consumed in the process of manufacture does not have its trace remnant in the ultimate finished product. The word "directly" used twice in the said definition as adjective to goods and consumables has its own significance and those articles alone which are put into process of manufacturing with the raw materials will only be taken as an input. The other articles which get consumed indirectly in the process of manufacturing meaning thereby the things like fuel and other consumables which are used for providing energy/electricity or heat to facilitate a process of manufacturing would not qualify to be treated as an input. He further argued that the furnace oil gets burnt and its flame converts the "dow" into the heated vapour which is applied to the raw materials in the processing tank and in that process, the raw materials like mono ethylene glycol and pure teraphthallic acid and polymer chips get converted into polyester staples fibre. Thus, the furnace oil does not by itself get directly consumed like the raw materials. The furnace oil is merely used as fuel and so the same cannot be called as a consumable, directly used in the process of manufacturing. It is further argued that the scheme allowing deduction of input tax from the VAT payable under the OVAT Act is in the nature of a provision of exemption and such provision has to be interpreted strictly and while doing so the interpretation which favours taxation has to be applied. Sections 20, 21 and 22 of the OVAT Act have to be strictly interpreted. Input tax credit is permissible on strict interpretation of Section 2(25) of the OVAT Act. Furnace oil, which is used for providing energy, is to be treated as a fuel rather than a consumable, which is directly used in the process or manufacture. The use of the word "input" has its own significance and consumable to be used as an input must be goods of nature used as raw material. He further argued that the impugned order has been passed in due process of law and there was no defect in decision-making process. The ACST was fully justified in holding that the petitioner was not entitled to claim input tax credit in respect of purchase of furnace oil. He further submitted that in the registration certificate granted in form VAT-103, the furnace oil has been included in the list of goods under the heading "fuel" along with electric energy, lubricant petrol, diesel, coal gas, engine oils, fuel oil, furnace oil, gasoline/motor spirit heavy kerosene, etc. Hence, the petitioner is not correct in claiming the furnace oil as an article to be treated as "input" for the purpose of "input tax credit". Referring to the engineering flow-chart diagram filed by the petitioner, the learned Counsel for the Revenue further submitted that the "dow" which gets vapourised on application of heat from the flame on burning of furnace oil, goes into the processing tank and again is sent back to the "dow" condenser tank for reprocessing. But the furnace oil by itself does not go into the actual process of manufacturing. In support of his contention that the furnace oil cannot be treated as a category of consumable, the learned Counsel relied on the following decisions of the honourable Supreme Court and different High Courts:

(i) Deputy Commissioner of Sales Tax v. Thomas Stephen & Co. Ltd. .

(ii) Delta Paper Mills Ltd. v. Oil and Natural Gas Commission .

(iii) Coastal Chemicals Ltd. v. Commercial Tax Officer .

(iv) Union of India v. Ahamedabad Electricity Co. Ltd. .

In view of such rival contentions, the questions which fall for consideration by this Court are as follows:

(i) Whether exhaustion of statutory remedy can be a bar in this case for this Court to exercise its jurisdiction under Article 226 of the Constitution ?

(ii) Whether exercising power under Section 30 of the OVAT Act, the ACST assumes jurisdiction to make assessment?

(iii) Whether the furnace oil which is used in the process of manufacture of PSF is to be treated as an input as defined in Section 2(25) of the OVAT Act and the input tax which has been paid on the purchase of furnace oil can be claimed as input tax credit under Section 2(27) of the OVAT Act against the tax payable on finished product, i.e., PSF?

6. In the present case, no question of fact is involved. The issue involved is only the interpretation, of Sections 2(25), 2(26) and 2(27) of the OVAT Act. The question involved is whether furnace oil used in the process of manufacture of PSF is., to be treated as "input" as defined under Section 2(25) of the OVAT Act "and the "input tax" as defined under Section 2(26), paid on purchase of furnace oil can be claimed as "input tax credit" under Section 2(27) against the tax payable on finished product ? Even though the impugned order is revisable under Section 79 of the OVAT Act, the provision for revision is not a bar to invoke jurisdiction under Article 226 of the Constitution. Reference may be made to the decision of the honourable Supreme Court in the case of Collector of Customs and Excise, Cochin v. A.S. Bava . In the said decision, the honourable Supreme Court held that it is settled that the existence of a remedy by way of a revision does not bar jurisdiction of the High Court to entertain a petition under Article 226 of the Constitution.

7. The honourable Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District-1, Calcutta , observed that existence of an alternative remedy is not always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority from acting without jurisdiction or from continuing such action.

8. The honourable Supreme Court in Paradip Port Trust v. Sales Tax Officer , was dealing with an issue relating to interpretation of Sub-clause (d) of Clause (29A) of Article 366 of the Constitution of India. The honourable Orissa High Court instead of deciding the matter directed the parties to avail of the alternative remedy against the order of assessment passed by the Sales Tax Officer. The honourable Supreme Court held that since the question involved in the writ petition related to interpretation of Sub-clause (d) of Clause (29A) of Article 366 and taxability of transaction in respect of which the sales tax has been assessed by the Sales Tax Officer, the High Court should have dealt with the matter instead of sending the assessee to avail of the remedy of appeal under the Sales Tax Act. As such the honourable Supreme Court set aside the judgment of the High Court and remanded the matter to the High Court for decision on merits.

9. Similarly, in Union of India v. State of Haryana , a question came up for consideration whether alternative remedy is an adequate remedy in the context of the sales tax assessee/assessment. In that case the question was whether the sales tax authorities can assess sales tax on rental which was charged by the Union of India for supply of telephones. The Union of India filed writ petitions before the respective High Courts challenging the levy. Those writ petitions were dismissed in view of alternative remedy in form of statutory appeal. In that context the honourable Supreme Court held that the High Courts should not have dismissed the petitions as the questions raised were purely questions of law which required determination whether the provision of telephone connections and instruments amounted to sale and even so as to why the Union of India was not exempted from sales tax under the respective statutes. The Supreme Court held that such questions should not be "put through the mill of statutory appeals in the hierarchy". Saying so, the honourable Supreme Court set aside the orders passed by the respective High Courts and remanded the writ petitions to the High Courts for decision on merit. For these reasons, the present writ petition is maintainable even without exhaustion of the statutory remedy.

10. The second question which falls for consideration is whether, while exercising power under Section 30 of the OVAT Act, the ACST assumes jurisdiction to make assessment. In the impugned order passed under Section 30 of the OVAT Act, the ACST asked the dealer to pay an amount of Rs. 47,26,908.94 on the ground that the dealer is not entitled to avail input tax credit on furnace oil. Section 30 authorised the registering authority for the reasons to be recorded in writing to suspend certificate of registration of a registered dealer by notification in prescribed manner. It does not empower the ACST to pass any order requiring any dealer to pay any amount payable under the OVAT Act. By the impugned order, the ACST raised demand against the petitioner as stated above which he is supposed to do while passing the order of assessment. The OVAT Act contains separate provision for the purpose of assessment. Under Section 39 of the OVAT Act, which provides for self-assessment, a dealer makes such assessment at the time of furnishing return and deposits admitted tax as per the return. Section 40 provides for provisional assessment. Section 41 read with Section 42 provides for audit assessment where the Commissioner selected the class (s) of dealer for audit visit and audit assessment. Section 43 deals with turnover escaping assessment. Section 44 deals with assessment of dealer, who being liable to pay tax, fails to register. Section 45 deals with assessment of a casual dealer. In view of these provisions of law, the ACST did not assume jurisdiction under Section 30 of the OVAT Act to assess the tax liability and disallow the claim of the petitioner for input tax credit on purchase of furnace oil.

11. In order to deal with the third question it is necessary to know what is, "input", "input tax" and "input tax credit" which have been defined in Sections 2(25), 2(26) and 2(27) of the OVAT Act, respectively. The said sections are reproduced below:

Section 2(25) 'input' means any goods purchased by a dealer in the course of his business for resale or for use in the execution of works contract, in processing or manufacturing, where, such goods directly goes into composition of finished products or packing of goods for sale, and includes consumables directly used in such processing or manufacturing.

Section 2(26) 'input tax' in relation to any registered dealer means the tax collected and payable under this Act in respect of sale to him of any taxable goods for use in the course of his business, but does not include tax collected on the sale of goods made to a commission agent purchasing such goods on behalf of such dealer.

Section 2(27) 'input tax credit' in relation to any tax period means the setting off of the amount of input tax or part thereof under Section 20 against the output tax, by a registered dealer other than a registered dealer paying turnover tax under Section 16;

12. "Input" has been defined in Section 2(25) to mean that any goods purchased by a dealer in the course of his business for resale or for use in the execution of works contract, in processing or manufacturing, where such goods directly goes into composition of finished products or packing of goods for sale, and includes consumables directly used in such processing or manufacturing. Section 2(26) defines "input tax" to mean tax collected and payable under this Act in respect of sale to a registered dealer of any taxable goods for use in the course of his business, but does not include tax collected on the sale of goods made to a commission agent purchasing such goods on behalf of such dealer. "Input tax credit" as defined under Section 2(27) of the OVAT Act means the setting off of the amount of input tax or part thereof under Section 20 against the output tax, by a registered dealer other than a registered dealer paying turnover tax under Section 16.

On a conjoint reading of Section 2(25), Section 2(26) and Section 2(27) of the OVAT Act, it is amply clear that a registered dealer under the OVAT Act shall be entitled to set off the tax paid on the purchase of goods effected by such dealer either for resale or for use in the execution of works contract or for manufacture and processing against the output tax, that is the tax payable on sale of any taxable goods.

13. In the present case, the petitioner is a registered dealer under the OVAT Act and is engaged in manufacture of PSF. It is not disputed that in order to manufacture PSF, furnace oil is required. Now it is necessary to have an idea about the use of furnace oil in the processing and manufacturing of PSF.

14. In the manufacturing process of PSF, the engineering flow-chart produced by the petitioner before opposite party No. 1 which has been annexed by the opposite party to its counter-affidavit as annexure B shows that furnace oil is used as fuel for heating the liquid dowtherm and for converting the same into dowtherm vapour. The said dowtherm vapour is transmitted through pipelines to heat transfer stations to heat the other raw materials in the process tank for manufacturing PSF and in the said process the dowtherm vapour loses heat and/or thermal energy and is converted back to liquid dowtherm which is again circulated back for conversion into dowtherm vapour by using furnace oil for heating. The above manufacturing process clearly shows that furnace oil is essentially required for the manufacture of PSF and without the use of furnace oil, the manufacture of PSF becomes commercially inexpedient.

15. Now the question that arises for consideration is whether the furnace oil is a "consumable" within the meaning of Section 2(25) of the OVAT Act. The expression "consumable" has not been defined in the OVAT Act. In the absence of any such statutory definition the expression has to be understood in the meaning assigned to it by various dictionaries and how it is understood in trade and commerce. "Consumable", according to Webster Dictionary means that which can be consumed, a consumable commodity. "Consume" means to eat, use up, and destroy. According to Shorter Oxford Dictionary "consumable" means capable of being consumed by fire. The term "fuel" according to Webster Dictionary means any material as coal, oil, gas, wood, etc. Which is burnt to supply heat or power. According to Shorter Oxford Dictionary "fuel" means material for burning combustible matter for fires. According Micropaedia Britannica Volume 5, oil is also called fuel oil and it is used primarily for steam boilers in power plants, on board ship, and in industrial plants.

16. The process of manufacturing as indicated above in the engineering flow-chart reveals that the process is a continuous one and furnace oil is directly used in such process of manufacture. The lis between the parties in the case at hand is that while the petitioner claims that furnace oil which is a consumable directly used in the processing/manufacturing of PSF, the Revenue's stand is that furnace oil is not a consumable which is directly used in the manufacturing process, but is a fuel for burning. As stated above, the ACST in his order dated June 28, 2006, inter alia, held that furnace oil is not an input which directly goes into composition of the finished products. It is a fuel in preparation of PSF.

17. It shall be useful for the present purpose to refer to some of the decisions of the honourable Supreme Court and different High Courts and Taxation Tribunals relied on by counsel appearing for the petitioner as well as the opposite parties. In the case of Collector of Central Excise v. Ballarpur Industries Ltd. [1990] 77 STC 282 the question before the honourable Supreme Court was whether the input of sodium sulphate in the manufacture of paper would cease to be a "raw material" by reason of the fact that in the course of the chemical reactions this ingredient is consumed and burnt up. In the said case, the honourable Supreme Court 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 raw material. Although sodium sulphate was utilised in the preparation of an anterior, intermediate product at the stage of digestion of the pulp, this process was so integrally connected with the ultimate production of goods that, without that manufacture or processing of paper would be commercially inexpedient.

18. In the case of Collector of Central Excise v. Eastend Paper Industries Ltd. [1990] 77 STC 203, the honourable Supreme Court held that the real test is where any particular process is so integrally connected with the ultimate production of goods, but for that process, manufacture or processing of goods would be commercially inexpedient, articles required in that process, would fall within the expression "in the manufacture of goods". In view of the law laid down by the honourable Supreme Court in the aforesaid decision, even raw materials which are burnt up or consumed in chemical reactions is also the material used in processing or manufacturing.

19. In the case of J.K. Cotton Spinning & Weaving Mills Co. Ltd. [1965] 16 STC 563, the honourable Supreme Court held that the expression "in the manufacture of goods" should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process is so integrally connected with the ultimate production of goods but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would, in our judgment, fall within the expression "in the manufacture of goods". The honourable Supreme Court further held that 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, cleaned and pressed. All these processes would be regarded as integrated processes and included "in the manufacture" of cloth. It would be difficult to regard goods used only in the process of weaving cloth and not goods used in the anterior processes as goods used in the manufacture of cloth.

20. The West Bengal Taxation Tribunal in the case of Consolidated Fibres Chemicals Ltd. [2008] 15 VST 222 (WBTT) : [2007] 50 STA 140, relying upon the decision of the Supreme Court in J.K. Cotton's case [1965] 16 STC 563 has taken the same view regarding furnace oil which is used in the processing or manufacturing of acrylic fibre. The petitioner in that case claimed input tax credit under the West Bengal VAT Act on purchase of furnace oil as consumable in the manufacture of acrylic fibre. The learned Tribunal held that furnace oil has a direct relation in the manufacturing process and "direct relation" means without which the manufacturing of end-product is not feasible at all. According to the learned Tribunal the furnace oil, which is purchased by the petitioner therein for use in the boiler for incessant running of other plants in the manufacture of goods and thereby to convert the raw materials into finished goods, and as in the absence of furnace oil manufacture of the end-product, i.e., acrylic fibre would become commercially inexpedient, furnace oil necessarily comes in the campus of consumable goods. The facts of this case are identical to the facts of the case at hand.

21. In the case of Pratap Steel Rolling Mills Ltd. [2007] 9 VST 629, the Division Bench of the Punjab and Haryana High Court had the occasion to consider an identical issue as to whether the purchase value of furnace oil could be deducted from the turnover of iron and steel products as it is used and consumed in the manufacture of iron and steel products. Answering the question in favour of the assessee, the court held that furnace oil purchased by the assessee is one of the primary and essential commodities used by the assessee in the process of manufacture and without use thereof, the production itself is not possible.

Similar issue came up for consideration before the learned Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in the case of Haryana Sheet Glass Ltd. [2007] 214 ELT 202 (Tri.-Ahmd.), which held that furnace oil is consumable in the manufacture of sheet glass. The use of the furnace oil is to generate steam in the factory, which is thereafter used in relation to the process of distillation of the final product. Without the use of this steam, process of distillation cannot be carried out, and end-products cannot be manufactured.

In Saurashtra Calcine Bauxite [1993] 91 STC 435, a Division Bench of. the Gujarat High Court held that furnace oil which is used to produce heat in the process of calcinations of raw bauxite into calcined bauxite is not merely a fuel but a processing material.

22. The main contention of the Revenue is that furnace oil used by the dealer is to produce flame and therefore it is fuel and not consumable which directly goes into the composition of finished product.

23. Learned counsel for the Revenue relied upon the case of Thomas Stephen & Co. Ltd. [1988] 69 STC 320 (SC). In that case, the dealer used cashew shells as fuel for manufacturing its products. It also purchased lime shells and consumed stores which it used in the maintenance of its kiln and factory. The question before the court was whether cashew shells and lime shells and consumed stores are liable to be taxed under Section 5A(l)(a) of the Kerala General Sales Tax Act, 1963. The Tribunal held that as the cashew shells had been used only as fuel in the manufacture of tiles and other goods, Section 5A(l)(a) of the Kerala General Sales Tax Act was not satisfied as there was no consumption of the cashew shells in the manufacture of other goods. The High Court upheld the decision of the Tribunal in revision. The department preferred petitions t6'the Honourable Supreme Court for special leave to appeal. The honourable Supreme Court rejected the said application holding that since the cashew shell had been used only as fuel and did not get transformed into the end-product and were not used as raw materials in the manufacture of other goods, they did not fall within Section 5A(l)(a) of the Kerala General Sales Tax Act and did not attract the tax payable. In that case interpretation of'Section 5A(l)(a) was under consideration. Section 5A(1), inter alia, lays down that every dealer who in the course of his business purchases from a registered dealer or from any other person any goods, the sale or purchase of which is liable to tax under this Act, in circumstances in which no tax is payable under Section 5 and either (a) consumes such goods in the manufacture of other goods for sale or otherwise or (b)... or (c)... shall whatever be the quantum of the turnover relating to such purchase for a year, pay tax on the taxable turnover relating to such purchase for the year at the rates mentioned in Section 5. Thus, the language of the section which came up for consideration clearly lays down that the goods must be consumed in the manufacture of other goods for sale or otherwise. Interpreting the said provision, apex court upheld the decision of the Kerala High Court. Thus, the facts of that case are totally different from the facts of the case at hand.

24. The next case relied upon by the department is Delta Paper Mills Ltd. [1991] 81 STC 339 (AP). In this case, the meaning of the word "consumable" in Section 5B of the Andhra Pradesh General Sales Tax Act, 1957 fell for consideration by the Court. The High Court pointed out that the "consumption" of the goods in manufacture must be as raw material or other components which go into the making of the end-product. Goods used for ancillary purposes such as fuel cannot be said to be consumed in the process of manufacture. Therefore, diesel oil and gas and other goods used by the dealer for running the machinery which produces the end-product do not fall within the meaning of the word "consumables" occurring in Section 5B(1) of the A.P. General Sales Tax Act, 1957. In that case, the said section provides that notwithstanding anything in the said Act every dealer shall pay in respect of any sale of goods to another dealer for use by that dealer as raw material, component part, sub-assembly part, intermediate part, consumables and packing materials of any other goods which he intends to manufacture inside the State, a tax at the rate of four paise in the rupee or the rates specified in Sections 5, 5A and 6B in respect of the goods other than declared goods or Section 6, 6A and 6B in respect of the declared goods whichever is lower on the turnover relating to such sale.

25. The honourable Supreme Court in the case of Coastal Chemicals Ltd. [2000] 117 STC 12 (SC) interpreting the said Section 5B of the Andhra Pradesh General Sales Tax Act held that the word "consumables" used in the said provision, i.e., Andhra Pradesh General Sales Tax Act, 1957 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, the word "consumables" therein refers only to raw material which is used 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 material".

Thus, the context in which the word "consumables" has been interpreted in that case is not the same as in the case at hand.

26. The other case relied on by the Revenue is Union of India v. Ahamedabad Electricity Co. Ltd. . In that case, the assessee used coal as fuel for producing steam to run the machines used in their factories to manufacture the end-product. Coal was burnt in the boilers of furnaces for producing steam. The un-burnt or half-burnt portions left out in the boilers, called "cinder" were sold by the assessee. The question was whether the assessees were liable to pay excise duty on the sale value of the cinder. The honourable Supreme Court held that coal used by the assessees which led to the production of cinder was not used as a raw material for the end-product. It was used only for the ancillary purpose as fuel. Irrespective of the fact whether any manufacture was involved in the production of cinder, the cinder was not liable to excise duty for the reason that it was not a raw material for the end-product. In producing cinder, there was no manufacturing process involved ; coal was simply burnt as fuel to produce steam. Coal was not tampered with, manipulated or transformed into the end-product. For the purpose of manufacture, the raw material had ultimately to get a new identity by virtue of the manufacturing process either on its own or in conjunction with other raw materials. Since coal was not a raw material for the end-product the question of getting a new identity as an end-product due to manufacturing process did not arise. It could not be said that as a result of burning coal, cinder or ash a new product had emerged. While so held, honourable apex court observed that in Section 3 of the Central Excise Act, 1944, the words "excisable goods" have been qualified by the words "which are produced or manufactured in India". Therefore, simply because the goods find mentioned in one of the entries of Schedule I to that Act or in the Schedule to the Central Excise Tariff Act, 1985, it does not mean that they become liable to payment of excise duty. The goods have to satisfy the test of being produced or manufactured in India. It is settled law that excise duty is a duty levied on manufacture of goods. Unless the goods are manufactured in India, they cannot be subjected to payment of excise duty. Honourable apex court further held that according to the definition of "manufacture" in Section 2(f) of the Act, manufacture includes any process incidental or ancillary to the completion of a manufactured product. The word "manufacture" used as a verb is generally understood to mean bringing into existence a new substance ; it does not mean merely to produce some change in a substance. Manufacture implies a change, but every change is not manufacture; something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use. Manufacture may involve various processes. The natural meaning of the word "process" is mode of treatment of some material in order to produce a good result. Every process which is incidental or ancillary to the completion of the manufactured product is included within the meaning of manufacture. "Process" is an activity performed on a given material in order to transform it into something new.

27. Thus, the decision of the honourable apex court in the above case is on totally different facts. It has no application to the facts of the present case.

28. In this connection, it shall be useful to refer to the decision of the Punjab and Haryana High Court in the case of Pratap Steel Rolling Mills Ltd. [2007] 9 VST 629 (paragraphs 22, 23 &24). The Punjab and Haryana High Court referred to all the decisions of the honourable Supreme Court, viz., Thomas Stephen & Co. Ltd. [1988] 69 STC 320, Deputy Commissioner of Sales Tax v. Pio Food Packers reported in [1980] 46 STC 63, Ganesh Prasad Dixit v. Commissioner of Sales Tax reported in [1969] 24 STC 343, Assistant Commissioner v. Nandanam Construction Co. reported in [1999] 115 STC 427 as well as Coastal Chemicals Ltd. [2000] 117 STC 12 (SC). After referring to all the aforesaid decisions, the High Court observed as follows:

22. As far as reliance on the judgment of the honourable Supreme Court in Thomas Stephen & Co. Ltd.'s case [1988] 69 STC 320 by the respondent is concerned, while delivering the judgment, their Lordships relied upon an earlier judgment in Deputy Commissioner of Sales Tax v. Pio Food Packers and distinguished Ganesh Prasad Dixit v. Commissioner of Sales Tax . The correctness of the judgment in Pio Food Packers' case , which was relied upon in Thomas Stephen & Co. Ltd.'s case was doubted by the honourable Supreme Court in Assistance Commissioner (Intelligence)-IV, Hyderabad v. Nandanam Construction Co. [1994] 95 STC 601 and the matter was directed to be heard by a Constitution Bench. The judgment of the honourable Constitution Bench is reported as Assistant Commissioner (Intelligence) v. Nandanam Construction Co. the view taken in Pio Food Packers' case was partly overruled and the earlier judgment in Ganesh Prasad's case was approved. The judgment of the honourable Constitution Bench was delivered on September 21, 1999. The view taken in Thomas Stephen & Co. Ltd.'s case was followed in Coastal Chemical Ltd. , vide judgment dated October 14, 1999. Judgment of the Constitution Bench was not referred to therein.

23. Even otherwise, the provisions for consideration before the honourable Supreme Court in Thomas Stephen & Co. Ltd.'s case [1988] 69 STC 320 were different from the provisions of Rule 29(xii) of the Rules, which are under consideration in the present case. Accordingly, the principles laid down in that case would not be of any help to the respondent.

24. As far as the judgment of the honourable Supreme Court in Coastal Chemicals Ltd.'s case [2000] 117 STC 12 (SC), is concerned, the same is also of no help to the respondent, as in the said judgment, the question of interpretation of an entry was there, which was interpreted by the honourable Supreme Court by applying the principles of statutory interpretation--noscitur a sociis, which is not relevant for the purpose of decision of the present case.

29. The Supreme Court in Nandanam Construction [1999] 115 STC 427 case has approved the decision in the case of Ganesh Prasad Dixit's case [1969] 24 STC 343 and partly overruled the earlier decision of the Supreme Court in Pio Food Packers' case [1980] 46 STC 63. Therefore, cases relied on by the counsel for the department are not of much assistance to the opposite parties.

30. In view of the proposition of law laid down by the honourable apex court, different High Courts and the views taken by Taxation Tribunals, the contention of the opposite parties that furnace oil used by the dealer is to produce flame and therefore it is fuel and not consumable which is directly used in processing or manufacturing of finished product is totally misconceived and not sustainable in law. On the other hand, it boils down to an irresistible conclusion that furnace oil is one of the primary and essential commodities which has a direct relation in the manufacturing process and "direct relation" means without which the manufacturing of end-product is not possible at all. In that view of the matter, we are of the considered view that furnace oil used by the petitioner in the process of manufacture without which production of PSF is not feasible is nothing but consumable.

31. Now it is to be examined whether Section 2(25) requires that furnace oil, in order to be treated as input, should directly go into the composition of finished product. In the definition of "input" under Section 2(25), the Legislature has included various types of articles. "Input" has been defined to mean any goods purchased by a dealer in the course of his business for resale or for use in the execution of works contract, in processing or manufacturing, where, such goods directly goes into composition of finished products and includes consumables directly used in such processing or manufacturing. It will appear therefore that the definition of "input" comprises four different types of articles, viz., articles or goods for resale, goods used in the execution of works contract, goods used in processing or manufacturing, where such goods directly go into composition of finished products and consumables directly used in such processing or manufacturing. Separately, by an inclusive definition, consumables which are directly used in such processing or manufacturing have been included. Therefore, the inclusive definition does not refer to any goods which must be used in processing or manufacturing, where such goods directly go into composition of finished products. As per inclusive definition, the only requirement is that the consumables are directly used in such processing or manufacturing. "Consumables" need not be required to directly go into composition of finished products. The very expression "consumables" postulates that such articles are destroyed or used upon the processing or manufacturing of goods. It is because of this reason that while consumables by an inclusive definition are included in the definition of "input" under Section 2(25) of the VAT Act, the Legislature did not insist upon the requirement which appears in the earlier clauses that such goods must go into composition of finished products. When the Legislature does not insist upon such requirement, the insistence by opposite party No. 1 thatconsumables must go directly into composition of finished product is totally misconceived and runs contrary to the very definition of "input" under Section 2(25) of the VAT Act.

32. The ACST, in the impugned order referring to the decision of the Kerala High Court in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes) v. Pio Food Packers [1978] 41 STC 364 and Notification No. 17800-CTA-19/2005F bearing S.R.O. No. 209/2005 dated April 4, 2005 of the Government of Orissa reached a conclusion that furnace oil is not an "input" which directly goes into composition of finished product of the dealer, i.e., PSF and, therefore, the dealer is not entitled to avail input tax credit in the said item, i.e., furnace oil. This conclusion of the ACST is not correct. The decision of the Kerala High Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes) v. Pio Food Packers [1978] 41 STC 364 has been discussed above. The Government notification has not been properly understood by the ACST. In the said notification, the Government has clarified that in relation to the entry appearing against SI. No. 45, Part II of the Schedule relating to "input" is that "input" shall be construed as those inputs which directly go into composition of finished product manufactured by the purchasing dealer for sale and shall include consumables directly used in manufacturing process for production of finished products. So, according to the said notification "input" comprises of two types of commodities, i.e., (i) those commodities which should directly go into composition of finished product, and (ii) the consumables directly used in such manufacturing process for production of finished product. Therefore, it is not at all necessary that consumables in order to qualify as "input" should directly go into composition of finished product. What is required is that consumables should be directly used in the manufacturing process for production of finished product. The expressions "directly go into composition of finished product" and "directly used in manufacturing or processing of finished product" are not one and the same thing. There is a clear distinction. In the former, while the goods directly go into composition' of finished product, in the latter, the consumable is directly used in the manufacturing process of finished products. It has already been held that furnace oil is consumable which is directly used in the manufacturing process for production of finished product. Certainly it does not directly go into composition of finished product. In spite of the same, since "input" as defined under Section 2(25) of the OVAT Act includes consumables which are directly used in manufacturing of finished products, furnace oil is nothing but an "input" and tax paid on purchase of such input shall qualify for set off against the output tax.

33. In that view of the matter, we are of the considered view that furnace oil which is used in the process of manufacture of PSF is to be treated as an "input" as defined in Section 2(25) of the OVAT Act and the input tax which has been paid on purchase of furnace oil can be claimed as input tax credit under Section 2(27) of the OVAT Act against the tax payable on finished product, i.e., PSF. Accordingly, the impugned order dated June 28, 2006 (annexure 6) is quashed.

34. In the result, the writ petition is allowed. There will be no order as to costs.

A.K. Ganguly, C.J.

35. I agree.