Supreme Court Clarifies “Raw Material” Definition in Steel Manufacturing: State of Jharkhand vs. Linde India Ltd. (2 December 2022)

Date of the Judgment: 2 December 2022

Citation: 2022 INSC 1739

Judges: M.R. Shah, J. and M.M. Sundresh, J.

Can a substance used in manufacturing be considered a “raw material” even if it doesn’t become part of the final product? The Supreme Court of India recently tackled this question in a case concerning the steel industry and the tax implications of using oxygen gas. This judgment clarifies the definition of “raw material” under the Bihar Finance Act, 1981, and its applicability to the State of Jharkhand. The bench consisted of Justice M.R. Shah and Justice M.M. Sundresh, with the opinion authored by Justice M.R. Shah.

Case Background

The dispute arose from a claim by Linde India Limited (formerly India Oxygen Limited), a manufacturer of pure oxygen, that the oxygen they sold to Tata Iron and Steel Company (Tata Steel) should be taxed at a concessional rate of 2% under the Bihar Finance Act, 1981, as it was used as a “raw material” in steel production. The State of Jharkhand, however, argued that the oxygen was a “refining agent” and not a “raw material,” thus subject to a 3% tax rate.

Initially, a certificate (Form VI-B) under Section 6 of the Bihar Finance Act, 1957, was issued to India Oxygen Limited, later renamed Linde India Limited. A subsequent notification on 12 April 1982, under Section 13(1)(b) of the Bihar Finance Act, 1981, set a special tax rate of 1% for “raw material inputs” and 3% for other goods. A certificate (Form VI-B) under Section 8 of the Bihar Finance Act, 1981, was issued to Tata Steel, which was taxed at 3% for “oxygen gas.” A fresh notification dated 9 September 1983, set the tax rate at 2% for raw materials used in manufacturing for sale within the state or in interstate trade, excluding raw materials that had undergone any manufacturing process and were required for further assembly. This was later amended on 3 February 1986, to remove the words “or in the course of interstate trade or commerce”.

Linde India Limited contended that the oxygen they supplied to Tata Steel was a “raw material” in the Basic Oxygen Steelmaking (BOS) method. The Assessing Authority disagreed, stating that the oxygen was not a “raw material” but a refining agent and thus subject to a 3% tax rate. This led to a series of legal proceedings.

Timeline:

Legal Framework

The core of this case revolves around the interpretation of “raw material” under Section 13(1)(b) of the Bihar Finance Act, 1981. This section allows for a concessional tax rate on raw materials used in manufacturing. The specific notification dated 9 September 1983, states that raw materials used in the manufacture or processing of goods for sale in the State or in course of Inter-State trade or commerce, shall be taxed at the rate of 2%. However, it excludes raw materials that have already undergone any manufacturing or production process and are required for further assembly. This was amended by a notification dated 3 February 1986, which deleted the term “or in the course of interstate trade or commerce”.

The dispute centers on whether oxygen gas, used in the Basic Oxygen Steelmaking (BOS) method, qualifies as a “raw material” under this provision. The State of Jharkhand argued that oxygen acts as a ‘refining agent’ and not a ‘raw material’, while Linde India Limited and Tata Steel argued that it is indispensable for steel production and therefore a ‘raw material’.

Arguments

Appellants (State of Jharkhand) Arguments:

• The High Court erred in overturning the concurrent findings of the lower authorities, which were based on a detailed expert committee report.
• The expert committee found that oxygen gas is not a direct “raw material” in steel production but a “refining agent” that reduces carbon content.
• Oxygen is a part of the manufacturing process but not a “raw material” for the final product.
• Reliance was placed on Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s Thomas Stephen & Co. Ltd., (1988) 2 SCC 264, which stated that goods used for ancillary purposes like fuel are not raw materials.
• The respondents had been paying 3% tax on oxygen until the formation of the State of Jharkhand, indicating acceptance of the tax rate.

Respondents (Linde India Limited & Tata Steel) Arguments:

• Oxygen gas is directly used in the manufacturing process of steel and is therefore a “raw material.”
• The High Court correctly noted the Basic Oxygen Steel Method (BOS) and the use of oxygen in both blast furnace and L D vessel operations.
• The High Court rightly concluded that a “refining agent” can also be a “raw material” if it is indispensable, non-replaceable, used in large quantities, and inevitable.
• Reliance was placed on Collector of Central Excise, New Delhi v. Ballarpur Industries Limited, (1989) 4 SCC 566, which clarified that a substance can be a raw material even if it is consumed or burnt up in the process.
• The State of Jharkhand admitted that oxygen is used in the manufacturing process of steel.
• Steel cannot be produced without oxygen, making it an essential “raw material”.
• The notification dated 3 February 1986, excludes raw materials that have already undergone any manufacturing or production process and which are required for further assembly. Since oxygen is not used for any assembly by Tata Steel, it does not fall under the exclusion clause.
• The State’s argument regarding declaration in Annexure B by Tata Steel was overruled in the previous round of litigation in BOC India Limited v. State of Jharkhand and Others, (2009) 15 SCC 590.
• Refining agents and raw materials are not mutually exclusive.
• The indispensability of a product in the manufacturing process determines if it is a raw material.
• The importance lies in the presence of the raw material at the delivery end of the process.
• The quantity of oxygen used (70kg per 1000kg of steel) is significant.
• Oxygen is irreplaceable in the steel-making process.
• Oxygen reduces the carbon percentage in pig iron, converting it into steel, and is itself converted into carbon dioxide and carbon monoxide.
• Oxygen is injected with high pressure into the semi-liquid pig iron.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the oxygen gas supplied by respondent No.1 to respondent No.2 is used as “raw material” in the manufacturing process of steel, so as to entitle respondent No.1 to pay concessional rate of tax on the same under Section 13(1)(b) of the Bihar Finance Act, 1981.
2. Whether in the facts and circumstances of the case and faced with a detailed inspection report pertaining to inspection and enquiry of respondent No.2 by a six members expert committee, upon which reliance was placed by the assessing officer holding that oxygen gas is a ‘refining agent’, confirmed up to the revisional authority, was it open for the High Court to upset the concurrent findings recorded by all the three authorities below, while exercising powers under Article 226 of the Constitution?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ BOC India Limited v. State of Jharkhand and Others, (2009) 15 SCC 590: The Court acknowledged that the issue of an incorrect declaration by Tata Steel was overruled in this case, but the main issue of whether oxygen is a raw material was to be determined.

✓ Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s Thomas Stephen & Co. Ltd., (1988) 2 SCC 264: The Court relied on this case to support the argument that goods used for ancillary purposes like fuel are not considered raw materials.

✓ Collector of Central Excise, New Delhi v. Ballarpur Industries Limited, (1989) 4 SCC 566: The Court distinguished this case, stating that it does not apply to the facts of the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the expert committee’s report, which concluded that oxygen gas acts as a ‘refining agent’ and not a direct ‘raw material’ in steel production. The Court emphasized that the main function of oxygen is to reduce carbon content, which does not qualify it as a direct component of the end product. The Court also relied on the principle established in Thomas Stephen & Co. Ltd., which stated that goods used for ancillary purposes are not considered raw materials.

The Court distinguished the case from Ballarpur Industries Limited, where the substance was consumed in the process but was still considered a raw material, stating that the facts of the present case were different. The Court also highlighted that the High Court should not have interfered with the concurrent findings of the lower authorities, which were based on a detailed expert committee report.

Fact:Law Ratio

Logical Reasoning

Issue 1: Whether oxygen gas is a “raw material” under Section 13(1)(b) of the Bihar Finance Act, 1981

Issue 2: Whether the High Court could upset the concurrent findings of the lower authorities under Article 226

Key Takeaways

• Definition of “Raw Material”: The Supreme Court clarified that a substance used in manufacturing is not necessarily a “raw material” simply because it is essential to the process. The substance must directly contribute to the final product and not be used for ancillary purposes.
• Role of Expert Committees: The Court emphasized the importance of expert committee reports in technical matters and that High Courts should be cautious in overturning such findings.
• Tax Implications: The judgment affirmed that oxygen gas used in steel manufacturing is not a “raw material” for the purpose of concessional tax rates under Section 13(1)(b) of the Bihar Finance Act, 1981, and is subject to a 3% tax rate.
• Impact on Similar Cases: This decision sets a precedent for similar cases involving the interpretation of “raw material” in manufacturing processes.
• Importance of Factual Findings: The Court stressed the importance of factual findings by expert committees and the limited scope of judicial review under Article 226 of the Constitution in such matters.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There is no discussion on specific amendments in this judgment.

Development of Law

The ratio decidendi of this case is that a substance used in manufacturing is not necessarily a “raw material” simply because it is essential to the process. The substance must directly contribute to the final product and not be used for ancillary purposes. This clarifies the interpretation of “raw material” under Section 13(1)(b) of the Bihar Finance Act, 1981, and its applicability to the State of Jharkhand. This decision also reinforces the importance of expert opinions in technical matters and the limited scope of judicial review under Article 226 of the Constitution.

Conclusion

In the case of State of Jharkhand and others vs. Linde India Limited and Another, the Supreme Court held that oxygen gas used in steel manufacturing is not a “raw material” for concessional tax purposes under the Bihar Finance Act, 1981. The Court emphasized that oxygen acts as a refining agent, not a direct component of the final product. The judgment underscores the importance of expert opinions in technical matters and limits the scope of judicial review under Article 226 of the Constitution. The decision has significant implications for tax assessments in the steel industry and for the interpretation of “raw material” in similar contexts. The Supreme Court set aside the judgment of the High Court and restored the assessment order passed by the assessing officer.