Concessional Rate Of Sales Tax Not Applicable On Oxygen As It Is Not A Raw Material For Manufacture Of Steel: Supreme Court

The Supreme Court has held that the main function of oxygen in manufacturing steel is to reduce the carbon content; therefore, it can be considered a refining agent but not a raw material, so the concessional rate of sales tax is not available on oxygen.

The division bench of Justice M.R. Shah and Justice M.M. Sundresh has set aside the order passed by the Jharkhand High Court and restored the orders passed by assessing officers to revisional authority—the Joint Commissioner.

The issue raised was whether the oxygen supplied by the respondent company was the raw material for manufacturing steel and whether the concessional rate of sales tax would be applicable.

The respondent manufactures pure oxygen and has supplied oxygen to Tata Steel Limited for steel production. Tata Steel believed that oxygen should be considered a raw material in the production of steel.

The State Government of Bihar issued a notification on April 12, 1982, under Section 13(1)(b) of the Bihar Finance Act, 1981, levying a special rate of 1% tax on "raw material inputs" and a rate of 3% on all other inputs. TATA Steel was issued a certificate in Form VI-B under Section 8 of the Bihar Finance Act, with an annexure stating that "oxygen gas" would be taxed at 3%.

The State Government of Bihar issued a new notification under the Bihar Finance Act on September 9, 1983, directing that the rate of tax payable on "raw materials" used in the manufacture or processing of goods for sale would be 2%.

The respondent opined that the oxygen consumed by TATA Steel is considered a raw material in the production of steel, and thus a 2% tax should be levied.

The Assessing Authority determined that oxygen cannot be considered a raw material, and thus the respondent and TATA Steel could not apply the 2% rate of tax.

The respondent was aggrieved by the order of the assessing authority and filed a Writ Petition before the Jharkhand High Court. The Jharkhand High Court dismissed the petition by stating that the respondent could not file a writ petition where tax was payable by TATA Steel.

The High Court constituted a six-member committee to inquire whether the oxygen sold to TATA Steel can be considered "raw material" for manufacturing steel. As per the report of the committee, oxygen is used for reducing the quantity of carbon in iron and therefore cannot be considered a raw material; it is only a "refining agent."

The respondent filed a second Writ Petition before the High Court against the orders passed by the lower authorities.

The High Court held that oxygen is necessary for the purpose of manufacturing steel. Therefore, oxygen can be considered a raw material, and a tax of 2% would be leviable rather than 3% as contended by the lower authorities. The High Court allowed the Writ Petition and set aside the orders passed by lower authorities.

The Supreme Court ruled that when the findings of the committee of six expert members are recorded in the detailed inspection report, and when it is discovered that the oxygen gas is used as a "refining agent" and its main function is to reduce the carbon content as required, the oxygen gas cannot be considered a "raw material" used in the manufacture of the end product—steel.

"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 in interfering with the concurrent findings recorded by all three authorities below," the court said.

Case Title: State of Jharkhand and others Versus Linde India Limited and Another

Citation: Civil Appeal No. 8061-8064 Of 2022

Date: 02.12.2022

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