HIGH COURT OF ORISSA: CUTTACK

W.P.(C) Nos. 1597 and 1686 of 2012

In the matter of applications under Articles 226 & 227 of the

Constitution of India.

--------M/s. National Aluminum Company Limited,having its principal place of businessat Plot No.P/1, NALCO Bhawan, Nayapalli,Bhubaneswar, Dist: Khurda, represented by its Chairman-cum-Managing DirectorMr. Bajranglal Bagra, aged about 58 years,S/o. Hanuman Prasad Bagra … Petitioner

-Versus-

Deputy Commissioner of Commercial Taxes,Bhubaneswar-III, Circle, Bhubaneswar, Dist: Khurda … Opp. Party

For Petitioner : Dr. Devi Pal, Senior AdvocateM/s. S. Kanungo, CH. S. Mishra,R.N. Pattnaik, N.R. Mohanty &N.K. Nanda

For Opp. Party : Mr. R.P. Kar,Standing Counsel (Revenue)

---------- P R E S E N T:

THE HONOURABLE THE CHIEF JUSTICE SHRI V.GOPALA GOWDA AND

THE HONOURABLE SHRI JUSTICE B.N.MAHAPATRADate of Judgment: 09.10.2012

B.N.Mahapatra,J. The above two writ petitions have been filed with a prayer to

quash the assessment order dated 31.10.2011 (Annexure-1) passed by

the sole opposite party-Deputy Commissioner of Commercial Taxes,

Bhubaneswar-III Circle, Bhubaneswar, Dist: Khurda and to issue a

direction to the said opposite party to treat coal, alum, caustic soda, and

other consumables as input for manufacturing of aluminum, aluminum

ingots and sheets etc. and to allow the petitioner to take input tax credit

on such inputs.

2. Annexure-1 attached to W.P.(C) No.1597 of 2012 is an order

of assessment passed by the opposite party-Deputy Commissioner of

Commercial Taxes, Bhubaneswar Circle-III, Bhubaneswar, Khurda

under Section 43 of the Orissa Value Added Tax Act, 2004 (for short,

“OVAT Act”) for the period 01.04.2011 to 30.06.2011 raising a demand

of Rs.11,32,49,874/- which includes penalty of Rs.7,54,99,916/- levided

under Section 43(2) of the OVAT Act.

Similarly, Annexure-1 attached to W.P.(C) No.1686 of 2012

is the assessment order passed by the opposite party-Deputy

Commissioner of Commercial Taxes, Bhubaneswar Circle-III,

Bhubaneswar, Khurda under Section 43 of the OVAT Act for the period

01.07.2011 to 30.09.2011 raising a demand of Rs.14,68,62,843/- which

includes penalty of Rs.9,79,08,562/- levied under Section 43(2) of the

OVAT Act.

3. Since the issues involved in both the writ petitions are

identical, they are dealt with together.

4. Petitioners’ case is that the petitioner-company is a Central

Government Public Sector Undertaking under the Administrative Control

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of the Ministry of Mines, Government of India, having its Corporate Office

at NALCO, Plot No.P/1, NALCO Bhawan, Nayapalli, Bhubaneswar, Dist:

Khurda. It is an integrated establishment consisting of the following

three units, namely,

(a) Aluminium Refinery Plant at Damanjodi in the district

of Koraput, having (8.00 lakh Tons per annum).

Presently, enhanced to 21.0 lakhs MT per annum.

(b) Aluminium Smelter Plant at Angul in the district of

Angul having (2.15 lakhs MT per annum). Presently

enhanced to 4.60 MT per annum.

(c) Captive Thermal Power Plant of 720 Mega Watt meant

for Smelter Plant at Angul. Presently, enhanced to

1200 Megawatt.

5. For the aforesaid activities, the petitioner is registered under

the Central Sales Tax Act, 1956 vide Registration Certificate No. BHC-

1113 dated 16.09.1981 whereas separate and individual Registration

Number had been allowed under Orissa Sales Tax Act, subsequently

replaced with the OVAT Act in respect of the aforesaid three

manufacturing units of the petitioner. Thereafter the petitioner has been

granted the centralized registration certificate under the OVAT Act w.e.f.

01.04.2011 by declaring its Corporate Office at Bhubaneswar as the

principal place of business. It has filed its statutory monthly returns for

the impugned tax period, by claiming Input Tax Credit in respect of

inputs, namely coal, alum, caustic soda, consumables (lubricants, gas)

used for generation of electricity in its Captive Power Plant which in turn

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used in the continuous process of manufacturing of aluminum. After

scrutiny of the returns, the sole opposite party issued a notice in Form

VAT-307 on 16.08.2011 by initiating assessment proceeding under

Section 43 of the OVAT Act and completed the assessment raising

aforesaid demands. Hence the writ petition.

6. Dr. Devi Pal, learned Senior Advocate appearing for the

petitioners submitted that the opposite party without communicating the

reasons as asked for by the petitioner has reopened the assessment

proceeding and passed the order of assessment disallowing the input tax

credit in respect of purchase of coal, alum, caustic soda, consumables

(lubricants, gas) used for its Captive Power Plant for generation of

electricity which in turn is used in continuous process of manufacturing

of aluminum by treating the electricity so generated by the petitioner in

its Captive Power Plant as its finished product which is exempted from

tax under Schedule-A of the OVAT Act. It was submitted that the

impugned orders of assessment were passed under Section 43 of the

OVAT Act without informing/communicating the information to the

petitioner which was in the possession of Assessing Officer. The said

information was also not indicated on the body of the order while

completing the assessment proceeding under Section 43 of the OVAT Act.

7. Dr. Pal, learned Senior Advocate emphatically submitted that

the input tax credit on the purchase of coal etc. is to be set off and/or

adjusted against the output tax under the OVAT Act on the final

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products, i.e., aluminum, aluminum ingot etc., which are sold in the

market. Referring to Section 2(25) of the OVAT Act, it was submitted that

‘input’ means any goods purchased by a dealer in the course of his

business for resale or for use in the execution of the works contracts or

in the processing or manufacturing where such goods directly goes into

composition of finished product or packing of goods for sale and includes

consumables directly used in such processing or manufacturing. Further

referring to Sections 20(1) and 20(8)(k) of the OVAT Act, Dr. Pal,

submitted that no input tax credit shall be claimed by or be allowed to a

registered dealer in respect of input or capital goods other than those

covered under Schedules A, C and D in manufacturing of goods where

the finished products are exempted from tax either in whole or in part

under the OVAT Act or under the CST Act, 1956.

8. Dr. Pal, further submitted that the contentions of opposite

party that since the materials like coal, alum, caustic soda, etc. which

are purchased from market on payment of tax and used as input in the

manufacture of electrical energy in the Captive Power Plant of the

petitioner and the said electrical energy being the finished product

exempted from tax under Item No.13 of Schedule A, input tax credit on

such materials cannot be allowed as a set off is totally misconceived and

not sustainable in law. It is further submitted that coal along with other

materials are used for generation of electrical energy which is

subsequently used in continuous process of manufacturing of finished

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products viz. aluminum, aluminum ingots and sheets etc. After coal is

being purchased from Mahanadi Coalfields Limited on payment of tax,

the said goods are being fed into a boiler where it is burnt with the help

of thermal heat and water is being converted into Super Saturated Steam

and after attending at a particular temperature and pressure, steam

enters into a turbine which in turn rotates the shaft of turbo-generator

from where electricity is being generated. Aluminum metal is produced in

smelter plant by adopting the hall-heroult process in a large carbon lined

steel container called a reduction pot. Such pots lined up in long rows,

are called pot lines. The key to the chemical reaction necessary to

convert the alumina to metallic aluminum is by running high magnitude

of electricity current through the cryollite/alumina mixture in the pot.

This process requires huge quantity of electricity. This electrolysis

process takes place in electrolytic cells (or pots), where carbon cathodes

from the bottom of the pot act as the negative electrode. The smelting of

aluminum in a pot is a continuous process and therefore, the potline is

kept in operation for 24 hours a day without any interruption of power

supply. A smelter plant cannot be easily stopped and restarted. If the

production is interrupted by a power failure of more than 4 hours, the

aluminum metal in the pots will be solidified which requires an

expensive rebuilding process.

9. Dr. Pal, submitted that without electric energy the pot lines

cannot function. Huge quantity of electrical energy is required during

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electrolysis process and then only the aluminum which is a commercial

product saleable in the market is produced. Therefore, the electrical

energy generated in the captive power plant is not the final product

which is sold in the market. Aluminum, aluminum ingots and other

aluminum products are sold @ 4% as provided under Sl.No.9 of Part-II of

Schedule B under the OVAT Act and input tax credit can be allowed only

against the sale of aluminum, aluminum ingots etc. which are taxable

under the OVAT Act. Generation of electrical energy in its own captive

power plant is neither meant for sale in the market and necessarily are

not sold in the market but are used ranging from 95 to 99% only in the

process of manufacture of aluminum, aluminum ingots etc. by using

such energy in the smelter plant through electrolysis process.

10. Placing reliance on the judgment of this Court in the case of

Reliance Industries Limited vs. Assistant Commissioner of Sales Tax,

(2008) 15 VST 228, Dr. Pal submitted that disallowance of input tax

credit as made by the Assessing Officer is not correct.

Placing reliance on the judgment of the Hon’ble Supreme

Court in the case of J.K. Cotton Spinning & Weaving Mills Co. Ltd. Vs.

Sales Tax Officer, (1965) 16 STC 563 (SC), it is submitted 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.

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In support of the contention, Dr. Pal, has also relied upon

the judgment of the Hon’ble Supreme Court in the case of Collector of

Central Excise vrs. M/s. Ballarpur Industries Ltd., Vol. 77 STC 282 and

submitted that the opposite party while granting registration certificate

under the OVAT Act has treated coal under the heading of fuel.

Further, placing reliance upon the judgment of the Hon’ble

Supreme Court in the case of Commercial Taxation Officer vs. Rajasthan

Taxchem Ltd., 5 VST 529 (SC), Dr. Pal, submitted that diesel in that case

was termed as raw material and not otherwise and the benefit of

deduction had been allowed.

11. It is further submitted that if the test of essentiality or the

test of dependency will be applied in the present case, it would be

appreciated that without the use of coal and other goods, the electricity

cannot be generated in the Captive Power Plant of the petitioner.

Therefore, it will come under the definition of ‘input’ as provided under

Section 2(25) of the OVAT Act.

Dr. Pal submitted that where a question involved is pure

interpretation of law, that question should be decided and settled by the

High Court.

12. It was further submitted by Dr. Pal that penalty can be

levied only if the escapement is without any reasonable cause. In support

of the contention, Dr. Pal, further relied upon the decisions of the

Hon’ble Supreme Court in the cases of Hindustan Steels Ltd. vs. State of

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Orissa, 25 STC 211 (SC), Cement Marketing Co of India Ltd. vs. Assistant

Commissioner of Sales Tax, Indore and other, 45 STC 197 (SC) and the

decision of this Court in the case of National Aluminium Co. Ltd. vs. State

of Orissa and others, 93 STC 529 (Orissa).

13. Dr. Pal also submitted that the decision of the Hon’ble

Supreme Court in the case of Collector of Central Excise and others vs.

Solarish Chemtech Ltd. and others, (2007) 7 SCC 347 relied upon by the

opposite party supports the case of the petitioner as the petitioner adopts

electrolysis process for manufacture of aluminum which requires huge

quantity of electricity and therefore, the potline is kept in operation for

24 hours a day without any interruption of power supply. It is further

submitted that the decision of the Hon’ble Supreme Court in the case of

Deputy Commissioner of Sales Tax (Laws), Board of Revenue (Taxes)

Ernakulam vs. Thomas Stephen & Co. Ltd., 69 STC 320 has no

application in the present case as the definition of ‘input’ appearing in

Section 2(25) of the OVAT Act includes consumables directly used in

such processing or manufacturing.

14. Mr. R.P. Kar, learned Standing Counsel appearing for the

Revenue submitted that there is no infirmity or illegality in the order

passed by the sole opposite party-Deputy Commissioner of Commercial

Taxes, Bhubaneswar Circle-III, Bhubaneswar in disallowing input tax

credit under the OVAT Act in respect of purchase of coal, alum, caustic

9

soda, and other consumables etc. used for manufacture of electrical

energy in Captive Power Plant.

Placing reliance upon the judgment of the Hon’ble Supreme

Court in the case of Solaris Chemtech Ltd., (Supra), Mr. Kar submitted

that any operation in course of manufacture, only if integrally connected

with the operation which results in the emergence of manufactured

goods, would come within the term “manufacture”. But in the case at

hand, electricity generated is a finished product itself and it is not

integrally connected with manufacturing of aluminum and aluminum

ingots. Mr. Kar, further placing reliance on the decisions of the Hon’ble

Supreme Court in the case of Deputy Commissioner of Sales Tax (Law)

vs. Thomas Stephen & Co. Ltd., (1988) 69 STC 320 (SC), submitted that

“consumption” as contemplated by Section 2(25) of the OVAT Act must

be in the manufacture as raw material or of other components which go

into the making of the end-product. Goods used for ancillary purposes,

like fuel, in the process of manufacture, do not fall within section 2(25) of

the OVAT Act. Further placing reliance upon the judgment of the Hon’ble

Supreme Court in the case of Union of India and others vs. Dharamendra

Textile Processors and others, (2008) 18 VST 180 (SC), Mr. Kar,

submitted that wilful concealment is not an essential ingredient for

attracting civil liability or penalty.

15. On the rival contentions advanced by the parties, the

following questions fall for consideration by this Court:

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(i) Whether coal, alum, caustic soda, and other

consumables used for generation of electricity is to be

treated as an input as defined under Section 2(25) of

the OVAT Act and the tax which has been paid on

purchase of coal, alum, caustic soda and other

consumables etc. can be claimed as input tax credit

under Section 2(27) of the OVAT Act against the tax

payable on sale of finished product i.e. aluminum,

aluminum ingots and sheets etc.

(ii) Whether imposition of penalty under Section 43(2) of

the OVAT Act can only be levied if the escapement is

without any reasonable cause?

16. So far as question No.(i) is concerned, the case of the

opposite party-Revenue is that the finished product of Captive Power

Plant is electrical power or electrical energy which finds place at Sl.No.13

of Schedule A of the OVAT Act. As per Section 17 of the OVAT Act, the

goods specified in Schedule-A are exempted from levy of tax and as such

the electrical energy is exempted from tax under the OVAT Act. Coal is

used for manufacturing of electrical energy, which is a finished product.

Therefore, no input tax credit could be allowed in terms of Section 20(8)

(k) of the OVAT Act.

17. On the other hand, petitioner’s case is that it has set up an

integrated establishment consisting of three units, namely, (a) Aluminum

Refinery Plant, (b) Aluminum Smelter Plant, and (c) Captive Thermal

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Power Plant. These three plants have been set up to manufacture the

finished product i.e. aluminum, aluminum ingots and sheets etc.

18. The opposite party-Deputy Commissioner of Commercial

Taxes in the assessment order has observed as follows:

“In the instant case the assessee company is carrying business in manufacturing and selling of alumina and aluminum ingots & sheets etc. This assessee company has three nos. of units in the State of Odisha, they are involved in mining and refining of the mineral from which alumina is produced at Damanjodi units and transferred to second unit i.e. smelting plant at Angul. The third unit is captive power plant, power generating unit at Angul, which supplies electricity power to smelting plant for manufacturing aluminum ingots, wires and sheets for sale”

19. It is nobody’s case that the petitioner is engaged in

producing and selling of electricity. The admitted case is that the

petitioner is carrying on business in manufacturing and selling of

aluminum, aluminum ingot and sheet etc and to manufacture the

finished products the power plant has been set up to manufacture/

generate electrical energy.

20. The relevant portion of Section 20(8)(k) of the OVAT Act,

reads thus:

“20.(8) No input tax credit shall be claimed by or be allowed to a registered dealer—

xx xx xx

(k) in respect of input or capital goods other than those covered under Schedules A, C and D used in manufacture of goods where the finished products

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are exempted from tax either in whole or in part under this Act or under the Central Sales Tax Act, 1956 (74 of 1956)”

21. Section 17 of the OVAT Act envisages that the sale of all

goods specified in Schedule A shall be exempted from tax subject to

conditions and exceptions set out therein. Therefore, sale of electrical

energy which appears under Item No.13 of Schedule ‘A’ is exempted from

levy of value added tax under OVAT Act. Consequently, no input tax

credit shall be claimed by or allowed to a registered dealer in respect of

tax paid on input of purchases by a dealer in course of his business for

use in producing or manufacturing of electrical energy in terms of

Section 20(8)(k) of the OAVT Act. It is the admitted fact that the

petitioner-company is carrying on business of manufacturing and selling

of aluminum, aluminum ingot and sheet etc. It is not the case of opposite

party-Revenue that the petitioner is carrying on business of

generating/producing electrical energy for sale.

22. The next question arises whether the tax paid on the inputs

for generating power can be set off against the tax payable on sale of

aluminum, aluminum ingot and sheet etc. Undisputedly, electrical

energy is necessary to produce/manufacture and sale of aluminum,

aluminum ingot and sheet etc.

23. ‘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

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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.

24. 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

execution of works contract or for manufacture and processing against

the output tax, that is the tax payable on sale of any taxable goods.

25. In the present case, the petitioner is engaged in

manufacturing of aluminum, aluminum ingot and sheet etc. and in order

to manufacture the above goods the electrical energy is required. The

process of manufacturing of aluminum reveals that energy is required in

such process of manufacturing. To generate energy/power, coal, alum,

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caustic soda and other consumables etc. are necessary which the

petitioner purchases on payment of tax.

26. It is not disputed that huge quantity of electrical energy is

required during electrolysis process to produce aluminum which is a

commercial product. Thus, the electrical energy generated in the Captive

Power Plant of the petitioner is not the final product which is sold in the

market. Electrical energy which is generated with the use of coal and

other materials is only an intermediate product which is used in the

process of manufacturing of final product viz. aluminum, aluminum

ingots and sheets etc.

27. The Hon’ble Supreme Court in the case of J.K. Cotton

Spinning and Weaving Mills Co. Ltd. (supra), 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 fall within the expression “in the manufacture of

goods”. Undisputedly, in the present case, the generation of electrical

energy in the Captive Power Plant is integrally connected with the

ultimate production of finished goods. Therefore, the goods required in

the process of generation of electrical energy would fall within the

expression “in the process of manufacturing”.

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28. Power/energy is one of the primary and essential

commodities which has a direct relation in the manufacturing process.

Direct relation means without which manufacture of any product is not

possible at all. In that view of the matter, we are of the considered view

that coal, alum, caustic soda and other consumables etc. used by the

petitioner in the process of manufacture of power/energy without which

production of the finished products viz., aluminum, aluminum ingots

and sheets etc. is not feasible which is nothing but an input in terms of

Section 2(25) of the OVAT Act.

29. It is not at all necessary that coal, alum, caustic soda and

other consumables etc. purchased on payment of tax and used in

manufacturing of electrical energy in order to qualify as input should

directly go into composition of the finished products, what is required is

that those goods should be directly used in manufacturing and

processing for production of finished goods. The expression “directly go

into composition of finished product” and “directly used for

manufacturing or processing of finished products” are not one and the

same thing. There is a clear distinction between the two. In the former,

while the goods directly go into the composition of finished products, in

the latter the goods are directly used in manufacturing/processing of the

finished products. Therefore, coal, alum, caustic soda and other

consumables etc. which are used for manufacturing/generating of

electrical energy, are inextricably connected with the manufacturing

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process of aluminum and aluminum ingots; they are nothing but input

and tax paid on purchase of such input shall qualify for set off against

output tax paid/payable on sale of finished products. There is no dispute

that coal, alum, caustic soda and other consumables etc. are used to

generate electricity through Captive Power Plant which is admittedly

used for the purpose of manufacturing the end/finished products viz.

aluminum, aluminum ingots and sheets etc. Therefore, coal, alum,

caustic soda and other consumables etc. can only be termed as input in

terms of Section 2(25) of the OVAT Act.

30. In the case of Reliance Industries Ltd. (supra), this Court

held as under:

“18. 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 Vol. 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.

xx xx xx

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36. In view of the proposition of law laid down by the Hon’ble 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.

37. 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 goes 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

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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 consumable 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 that consumables must go directly into composition of finished products is totally misconceived and runs contrary to the very definition of input under Section 2 (25) of the VAT Act.”

31. In the case of Commercial Taxation Officer (supra), the

question was whether diesel can be called raw material in the

manufacture of polyster yarn. In that case the assessee is engaged in he

business of manufacture of polyster yarn and for the said purpose it

purchased diesel and used it for manufacturing of electricity by G.D.

Sets. The assessee in that case claimed the benefit of sales tax on the

ground that diesel purchased is a raw material for the manufacture of

the ultimate final product viz. polyster yarn although diesel was used for

generation of electrical energy by D.G. Sets. The Hon’ble Supreme Court

observed that there is no dispute in the instant case that diesel and

lubricant is used to generate electricity through DG sets which is

admittedly used for the purpose of manufacturing yarn. In view of the

above facts diesel is being used for the purpose of running the generator

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set for the production of the ultimate product which is also required for

the purpose of manufacturing the end product. The diesel therefore can

only be termed as raw material and not otherwise and the benefits of

deduction have been allowed.

32. In the case of Maruti Suzuki Ltd. vs. Commissioner of

Central Excise, Delhi III, (2009) 9 SCC 193, the Hon’ble Supreme Court

held that electricity generation is more of a process having its own

economics. When the electricity generation is a captive arrangement and

the requirement is for carrying out the manufacturing activity, the

electricity generation also forms part of the manufacturing activity and

the input used in that electricity generation is an input used in the

manufacture of final product.

33. Further in the case of State of Gujarat and Another vs.

AMI Pigments Pvt. Ltd. and others, (2009) 22 VST 615 (SC), the issue

before the Hon’ble Supreme Court was, whether the fuel such as natural

gas, furnance oil, diesel oil and naphtha to generate electricity which was

then used in the manufacturing process of the finished products like

caustic soda, industrial chemicals, etc would come under meaning of the

expressions ‘raw materials’, ‘processing materials’ or ‘consumables

stores’ for the purpose of section 15 B of the Gujarat Sales Tax Act, 1969

and while remanding back the said batch of cases to the Hon’ble High

Court of Gujarat, the Hon’ble Supreme Court further observed that

whether for determining this question the test to be applied would be the

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‘test of essentiality’ or the ‘test of dependency’ laid down by the Hon’ble

Supreme Court in the case of Collector of Central Excise vs.

Ballarpur Industries Ltd (1990) 77 STC 282 and in J.K. Cotton

Spinning & Weaving Mills Co. Ltd. (supra), or the test laid down by

the Hon’ble Supreme Court in Coastal Chemicals Ltd. vs. Commercial

Tax Officer, A.P. and others, (2000) 117 STC 12.

34. The High Court of Gujarat in the case of AMI Pigments Pvt.

Ltd. and others vs. State of Gujarat and another, [2010] 32 VST 97

(Guj) by applying the “test of essentiality” and the “test of dependency” as

laid down by the Hon’ble Supreme court in the case of Ballarpur

Industries (supra) and J.K. Cotton (supra) has come to the conclusion

that goods like natural gas, furnace oil, diesel oil and naphtha when

used as fuel for generation of electricity which was then used in the

manufacturing process of the finished products like caustic soda,

industrial chemicals, etc will come under the meaning of the expression

‘raw materials’, processing materials’ or ‘consumables stores’.

35. In view of the above, we are of the considered view that coal,

alum, caustic soda and other consumables purchased from market on

payment of tax and used for generation of electrical energy in the Captive

Thermal Plant of the petitioner which is used in the process of

manufacture of finished product viz. aluminum, aluminum ingots and

sheets etc. taxable under the OVAT Act. are input as defined under

Section 2(25) of the OVAT Act and the tax which has been paid on such

21

purchases can be claimed as input tax credit under Section 2(27) of the

OVAT Act against the tax payable on sale of finished products i.e.

aluminum, aluminum ingots and sheets etc. Hence, the demand raised

in the assessment orders dated 31.10.2011 passed under Annexure-1 in

both the writ petitions disallowing the input tax credit in respect of tax

paid on coal, alum, soda, and other consumables used for generation of

electrical energy is quashed.

36. Question No.(ii) is as to whether imposition of penalty under

Section 43(2) of the OVAT Act can only be levied if the escapement is

without any reasonable cause.

VAT is indirect tax on consumption of goods. It is the form of

collecting sales tax under which tax is collected in each stage on the

value added to the goods. The basic object of VAT Scheme is to provide

voluntary and self compliance. It goes without saying that to plug the

leakage of revenue, the Legislature enacted law authorizing imposition of

penalty for infraction of any statutory provision. We are conscious that

generally penalty proceedings are quasi judicial in nature. Quantification

of penalty under Section 43 of the OVAT Act is dependent upon the tax

assessed under that Section. For the purpose of assessing tax,

opportunity of hearing was afforded to the assessee, the explanation of

the assessee and its books of account were examined and considered.

Penalty is only quantified on the basis of the tax assessed. No discretion

is left with the Assessing Officer for levying any lesser amount of

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penalty. Penalty is not independent of the tax assessed. If the tax is

assessed, imposition of penalty under 42(5) is warranted.

37 The matter may be looked at from different angle. Section 43

of the OVAT Act deals with escaped assessment. As stated above,

imposition of penalty is dependent upon the quantum of tax assessed

under Section 42 of OVAT Act. If such a penal provision is not

provided then fraudulent dealers would seriously venture to evade tax

and whenever they will be caught hold of they will simply pay the tax

and escape. Therefore, the provision for imposing penalty twice the

amount of tax assessed, under Section 43 of the OVAT Act has been

made so that a dealer-assessee would refrain himself from taking any

step to avoid payment of legitimate tax. If, however, any dealer

indulges himself in any fraudulent activities to evade tax, then in

addition to tax assessed he would pay penalty which is twice the

amount of tax assessed.

38. Against the assessment of tax and penalty, there is a

provision for appeal. In appeal, if the amount of tax assessed under

Section 43 of the OVAT Act is reduced, the quantum of penalty will

also be reduced automatically.

39. In view of the above, once the Assessing Officer comes to

the conclusion that the dealer is indulged in fraudulent activities and

assesses him under Section 43 of the OVAT Act, there is no need for

the Assessing Officer to make further investigation to find out whether

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the escapement is without reasonable cause for the purpose of

imposition of penalty under Section 43(2) of the OVAT Act.

The Hon’ble Supreme Court in the case of Dharamendra

Textile Processors (supra), held that wilful concealment is not an

essential ingredient for attracting civil liability or penalty.

40. In the result, the writ petitions are allowed to the extent

indicated above.

………………………... B.N.Mahapatra, J.

V. Gopala Gowda, C.J. I agree.

………………………….. Chief Justice agree I agree.

Orissa High Court, CuttackThe 9TH October, 2012/ssd

Chief Justice

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