Karnataka High Court

M/S Gokak Textiles Limited ... vs State Of Karnataka R/B Princiapl ... on 23 December, 2021

Bench: N.S.Sanjay Gowda

            IN THE HIGH COURT OF KARNATAKA
                    DHARWAD BENCH

     DATED THIS THE 23RD DAY OF DECEMBER 2021

                          BEFORE

        THE HON'BLE MR.JUSTICE N.S.SANJAY GOWDA

           WRIT PETITION NO.61145/2009(T KST)

BETWEEN:

M/S. GOKAK TEXTILES LIMITED,
FORMERLY KNOWN AS
M/S.FORBES GOKAK LTD.,
GOKAK MILLS DIVISION, GOKAK-591 308,
R/B ITS CHIEF FINANCIAL OFFICER-
SRI S. RAGHUNATHANS/O SRI K. SUNDARAM,
AGED 61 YEARS.
                                                 ...PETITIONER
(BY SRI G.RABINATHAN, SRI M.THIRUMALESH AND
SRI H.R. KAMBIYAVAR, ADVOCATES)

AND :

1.      STATE OF KARNATAKA
        R/B PRINCIPAL SECRETARY TO GOVERNMENT,
        FINANCE DEPARTMENT,
        GOVERNMENT OF KARNATAKA,
        VIDHANA SOUDHA,BANGALORE-560 001.

2.      COMMISSIONER OF COMMERCIAL TAXES KARNATAKA,
        VANIJAY THERIGE KARYALAYA,
        GANDHINAGAR,BANGALORE-560 009.

3.      DEPUTY COMMISSIONER OF COMMERCIAL TAXES,
        (RECOVERY-2) COMMERCIAL TAX OFFICES,
        SADASHIVANAGAR, BELGAUM-560 001.
                                             ...RESPONDENTS
        (BY SRI SHIVAPRABHU S.HIREMATH, AGA)
                              :2:



     THIS WRIT PETITION IS FILED UNDER ARTICLES 226 & 227
OF THE CONSTITUTION OF INDIA PRAYING TO ISSUE A WRIT OF
CERTIORARI OR A DECLARATION IN THE NATURE OF WRIT OF
CERTIORARI QUASHING THE PROCEEDINGS ISSUED BY THE
COMMISSIONER OF COMMERCIAL TAXES IN NO.RFD/CR.15/2004-
05, DATED 15.05.2008-ANNEXURE-J AND ISSUE A WRIT OF
MANDAMUS OR A DIRECTION IN THE NATURE OF A WRIT OF
MANDAMUS, DIRECTING THE COMMISSIONER OF COMMERCIAL
TAXES SHALL GRANT/APPROVE GRANT OF REFUND TO THE
PETITIONER IN RESPECT OF ENTRY TAX PAID ON DIESEL
BROUGHT INTO THE LOCAL AREA AND SALES TAX PAID ON
DIESEL PURCHASED FROM DEALERS REGISTERED UNDER KST
ACT, 1957 DURING THE 4 YEARS FROM 1997-98 TO 2000-2001 IN
TERMS OF THE INCENTIVE OFFERED IN PARAGRAPH 10(B) IN THE
GO.NO.CI 30 SPC 96, DATED 15.03.1996 RELATING TO 1996-2001
INDUSTRIAL POLICY AND THE IMPLEMENTATION GO.NO.FD 32
CSL 96, DATED 15.11.2006.

     THIS PETITION WAS HEARD ON 08.12.2021 AND RESERVED
FOR ORDERS, THIS DAY, THE COURT PRONOUNCED THE
FOLLOWING:

                           ORDER

A request for refund of Sales Tax and Entry Tax paid on

diesel used in the diesel generating set of the petitioner has

been refused by the Government and hence the petitioner is

before this Court.

2. The Government of Karnataka framed a New Industrial

Policy, 1996 vide Government Order dated 15.03.1996. The

policy was evolved to achieve the objective of the State for a

healthy growth of Industries in the State and as a key

component of the policy, a package of incentives and

concessions was created to encourage the speedy growth of

the Industries.

3. One of the components of the incentive package was

the grant of special concessions for export oriented units. In

respect of 100% export oriented units, an investment subsidy

as applicable for thrust sector industries was granted and an

exemption from power cut and an exemption from payment

of entry tax which was payable on purchase of raw materials

components, packing materials, consumables, capital goods,

spares, material handling equipment, intermediates, semi-

finished goods and sub-assemblies, from a registered dealer

was granted. Entry tax exemption was also made available

for these items procured within the State.

4. In respect of units other than 100% export oriented

units with an export offer of a minimum 25% of the value of

the turnover, investment subsidy as applicable for normal

industries was made available.

5. Refund of entry tax and sales tax payable on

purchase of raw materials, components, packing materials,

consumables from a registered dealer was provided for.

6. Entry tax refund was made available for those items

procured from within the State or from outside the State. The

Sales tax refund on purchase of the items mentioned above

was made available provided procurement was from dealers

located within the State.

7. The controversy in the present case revolves around

the refund of entry tax and sales tax is in respect of the term

"consumables".

8. The package of incentives announced by the

Government and its industrial policy stood translated into a

Government order. The said Government Order, insofar, as it

relates to the present controversy reads as follows :

"Government Order No.FD 32 CSL 96, Bangalore, Dated 15.11.1996.

Sanction is hereby accorded for refund of sales tax under Karnataka Sales Tax, 1957 and Entry Tax paid under Karnataka Tax on Entry of Goods Act, 1979 to industrial units with an export effort of a minimum of 25% of the value of total turnover in a year, for a period of 5 years upto 31st March, 2001 or for a period of 5 years from the date of commencement of Commercial production, whichever is later, by the said units, as applicable, on purchases made from

registered dealers in the State and on entry caused from place outside Karnataka in respect of raw materials, components, packing materials, intermediates, semi-finished goods and sub- assemblies subject to the following conditions:

(i) The unit is registered with the Director of Industries and Commerce, Government of Karnataka or Government of India as an Export Oriented Unit, with an export effort of a minimum of 25% of the value of the total turnover.

(ii) To be eligible for refund of Sales Tax the unit shall purchase raw materials, components, packing materials consumables, capital goods, spares, material handling equipment, intermediates, semi-finished goods and sub-assemblies from registered dealers in the State.

(iii) Refund of Sales Tax (KST) and Entry Tax shall be limited to Sales Tax and Entry Tax paid on the said goods which are used in the manufacture or processing of goods in the unit in Karnataka and the goods so manufactured or processed (with the exception of consumables, capital goods, its spares and material handling goods, its

spares and material handling equipment) are exported out of the territory of India.

(iv) The unit exports a minimum of 25% of the value of its total turnover in a year, in each year.

(v) Refund under this Government Order shall not apply for any year/years to a unit which does not export a minimum of 25% of the value of the total turnover in a year.

(vi) Refund under this Government Order shall not be applicable to units which are in availment of refund of Sales Tax under G.O.No.FD 171 CSL 93, dated 28-8-1993 and G.O. No.FD 49 CSL 95, dated 31-3-

1995."

9. The case of the petitioner is that it had made use of

the diesel generating set for the purpose of manufacture of

the goods which were exported and the diesel used for

running the generating set would have to be considered as a

consumable and consequently the sales tax and entry tax

paid on the quantity of diesel consumed would also be

required to be refunded.

10. It is not in dispute that the petitioner has been

granted refund of Sales Tax and Entry Tax in respect of the

claim made by it in respect of the other items as provided

under the Government order dated 15.11.1996.

11. The claim for refund in the instant case i.e., on the

diesel consumed by the diesel generating set was rejected by

the Commissioner of Commercial Taxes by his order dated

30.10.2006. However, this order was set aside by this Court

in Writ Petition No.1955/2007 on 02.01.2008 and a direction

was issued to the Commissioner to reconsider the matter

taking into consideration the observations made therein

regarding the applicability of the ratio laid down in

Dhanvantari Botanicals Private Limited, Bangalore v. State

of Karnataka and Others, reported in 2006(60) Kar. L.J. 367

(HC).

12. The Commissioner, on remand, considered the

matter afresh and came to the conclusion that the ratio laid

down in the Dhanvantari's case was not applicable since

that was a case in which this Court had held that on a

combined reading of New Industrial Policy of 2001 and the

notification issued pursuant to the said policy, the notification

was repugnant to the industrial policy to the extent of

withholding of exemption of petroleum products like petrol,

diesel, furnace oil, naphtha and LS HS used as consumables.

13. The Commissioner also came to the conclusion that

there was no finding recorded in Dhanvantari's case as to

whether the diesel used in a captive power plant of a

manufacturing unit was an industrial input or a consumable

and therefore the said decision was inapplicable.

14. The Commissioner thereafter came to the conclusion

that the Government had made it very clear that it was only

in respect of new industrial units, a refund of Sales Tax on

diesel used in captive power generation was being provided

as was evident from Clause-3 of Annexure-1 to the Industrial

Policy. The Commissioner opined that if it was the intention of

the Government to refund the Sales Tax and Entry Tax paid

on diesel consumed in the captive power generation plant of

an exporting unit, then the same would have been explicitly

stated so in the policy itself. He stated that since there was

no mention about refund of sales tax on diesel consumed by

the captive power generation unit in export oriented units the

same could not be granted to the petitioner.

15. It is against this refusal to refund the sales tax and

entry tax on the diesel consumed by the captive power

generation plant i.e., the diesel generating set, the present

writ petition has been filed.

16. The learned counsel for the petitioner contended

that it was absolutely essential for the petitioner to have a

captive power generating unit, such as, a diesel generator, in

order to manufacture the goods and export them, given the

fact that the power supply was completely unreliable. He

submitted that diesel generator was an essential tool for

ensuring the manufacture of the goods and therefore, the

diesel used for running the diesel plant would have to be

considered as a consumable as defined in the Government

Order and policy.

17. In order to illustrate this point, he submitted that in

the New Industrial Policy of 2001, the State had granted

exemption from payment of entry tax and sales tax, as had

been done in the New Industrial Policy, 1996. However, while

implementing the policy decision, by issuance of a

notification, the State had excluded from the purview of

refund petroleum products like petrol, diesel, furnace oil,

naphtha and LS HS used as consumables for captive power

generation units. He submitted that the exclusion of the

petroleum products in the notification had been set aside in

Dhanvantari's case and therefore, it cannot be in dispute that

diesel used in the captive power generation units would have

to be considered as consumables.

18. Learned AGA, on the other hand, stated that Section

5A of the Karnataka Sales Tax Act, 1957 (for short, 'the Act,

1957') provided for taxation of industrial inputs. In order to

explain what were the industrial inputs and to remove any

ambiguity 5 explanations had been appended to Section 5(A)

of the Act, 1957.

19. The 4th explanation dealt with the explanation

consumables wherein it was made expressly clear that the

said term did not include petroleum products found under

Sl.No.11A of part F, Sl.No.12 of part N and Sl.No.5 part-P of

II schedule. He therefore submitted that since the notification

issued was in respect of the sales tax paid, the explanation to

Section 5A made it expressly clear that petroleum products

would not be consumables. He submitted that when an

express provision was made to exclude certain components

as consumable under the Act 1957 itself, the petitioner could

not claim a refund on the basis of a notification issued under

the very Act.

20. He also submitted that this Court in the

Dhanvantari's case had not considered the meaning of

consumables and this Court had merely considered the

difference between the Industrial Policy announced and the

notification issued and held that the notification was

repugnant to the policy.

21. He also submitted that it was not essential for the

petitioner to have a diesel generating unit since the said

generating unit did not constitute an essential and vital

component of the manufacturing process. He basically

submitted that even without the diesel generating unit, the

petitioner could have still manufactured the goods. It was his

submission that the consumables were goods which were

consumed in the manufacturing process and without these

goods the manufacturing could not take place at all. He

therefore submitted that reasoning of the Commissioner in

rejecting the claim for refund was correct and was required to

be confirmed.

22. As stated above, the only question which arises for

consideration in this writ petition is

"Whether the diesel used in the diesel generator by the petitioner in its Export Oriented Unit during the period of load shedding while undertaking the manufacture of goods meant for export, could be considered as a consumable as contemplated under the notification issued in terms

of the Industrial Policy 1996 and therefore be liable for refund of sales tax and entry tax?

23. The term consumable, as the name itself suggests,

is an article which is consumed in the process of

manufacturing goods or the processing of goods. In order to

be considered as a consumable, the use of the said article

should be a core ingredient which is absolutely essential for

the manufacturing of the goods. If that article is neither an

integral part nor an essential part of the manufactured article

or in the process of manufacturing, it cannot be said that it is

a consumable. An article, which is not absolutely necessary

but could, nevertheless, aid and assist in the productivity of

the goods sought to be manufactured cannot be really

considered as a consumable. A tool or a machinery which

would only assist in the manufacture of the goods, in the

event of a breakdown in the normal manufacturing process,

cannot really be considered as a consumable.

24. A diesel generating unit would essentially used as a

back up, in the event of a power failure, cannot be considered

as a vital ingredient or an essential requirement for the

manufacturing process. A DG set would only be a

supplementary tool which would assure a guaranteed

productivity even if a vital ingredient such as electricity

becomes unavailable.

25. If, without the Diesel generating unit, the product

could not be manufactured, only then can it be said that it is

an absolutely vital ingredient needed for the manufacture of

the goods. It is only in such an eventuality can the diesel be

used for running the DG set would be a consumable.

26. It is to be borne in mind that what was being

offered under the notification was an incentive for export and

not an exemption from payment of Sales Tax. In order to

incentiveize exports, the State had decided to refund the

sales tax and entry tax in respect of the goods which were

purchased and used for creating a product which was to be

exported. It was for this purpose all the goods which were

directly and integrally required for the manufacture were

entitled for a refund of sales tax and entry tax. This incentive

cannot therefore be utilised to claim refund in respect of an

article, which was to be consumed by a back up machinery.

27. If, it was the case of the petitioner, that there was

absolutely no power available for manufacturing the goods

and it had to solely rely upon a captive generating plant for

its manufacture, could it be said that the DG set would be an

integral and absolutely essential part of the manufacturing

process and as a consequence the Diesel consumed by it

would have to be considered as a consumable and the sales

tax and entry tax be refunded.

28. The matter could be looked at another way also. As

per the Government Order dated 15.11.1996 the sanction has

been accorded for refund of sales tax and entry tax to

industrial units with an export effort of a minimum of 25% of

the value of total turnover in a year, for a period of 05 years

upto 31st March, 2001 or for a period of 05 years from the

date of commencement of commercial production, whichever

is later.

29. The refund has been made applicable on purchase

made from registered dealers in the State and on entry

caused from place outside Karnataka in respect of (i) Raw

materials, (ii) Components, (iii) packing materials, (iv)

intermediates, (v) semi-finished goods and (vi) sub-

assemblies. This is however made subject to the condition

that the Unit is registered with the Director of Industries and

Commerce, Government of Karnataka or Government of India

as an export oriented unit, with an export effort of a

minimum of 25% of the value of the total turnover.

30. In order to be eligible for refund of sales tax the unit

is required to purchase (i) Raw materials, (ii) Components,

(iii) packing materials, (iv) consumables, (v)capital goods,

(vi) spares, (vii) material handling equipment, (viii)

intermediates, (ix) semi-finished goods and (x) sub-

assemblies from registered dealers in the State.

31. It is also made clear that the refund of sales tax and

entry tax was being limited to sales and entry tax paid on the

goods which are used in the manufacture or processing of

goods in the unit in Karnataka and goods so manufactured or

processed are exported out of the Territory of India. It is also

made clear that this was with exception of consumables,

capital goods its spares and material handling goods, its

spares and material handling equipment.

32. As could be discerned from the above, the refund of

sales tax and entry tax has been limited only to the goods

which are used in the manufacturing or processing of goods

in the unit. The intent behind this is rather obvious. It is only

those goods which are actually used in the manufacture or

processing of the goods that would be entitled for refund of

sales tax and entry tax. If the goods purchased are were

indirectly relatable and were not the core requirement for

manufacture of the goods, the unit would not be entitled for

incentive of refund of sales tax and entry tax.

33. It is also emphasized that in order to eligible for

refund of sales tax, the unit should purchase the (i) Raw

materials, (ii) Components, (iii) packing materials, (iv) capital

goods, (v) spares, (vi) material handling equipment, (vii)

intermediates, (viii) semi-finished goods and (ix) sub-

assemblies from the registered dealers in the State. It is quite

obvious that all the above mentioned items are fundamental

inputs required for manufacture of the goods. Without

purchase of these goods, obviously, the manufacture of the

goods would not be possible at all. It is, thus, clear that only

goods which are absolutely necessary for the manufacture

and without which the goods cannot be manufactured alone

would be entitled for refund of sales tax and entry tax.

34. It is to be stated here that a captive power

generating plant, by itself, would not be absolutely essential

for the manufacture of the goods in an export oriented unit.

It is the electricity supply by the utilities which alone would

be absolutely essential. A captive generating plant installed in

the unit as a backup cannot be considered as an integral part

of the manufacturing process even if it is used as and when

the situation demands. A diesel generating plant may or may

not be used by the EOU at all and since use of the diesel

generating plant is only a probability, the diesel consumed by

it cannot be considered as a consumable as contemplated

under the Government Order.

35. The Commissioner, has infact, noticed that the

Government Order makes a specific mention about grant of

refund of sales tax on diesel towards power generation in

respect of new industrial units which utilize petrol, diesel,

furnace oil, naphtha and LS HS used for captive power

generation for a period of 05 years as an incentive for

installation of equipment for utilization of renewable source of

energy/captive generation (Clause-3 of the Policy).

36. Infact this refund of sales tax on diesel towards

power generation, exemption from electricity tax, subsidy for

a existing units installing CPG units and incentives for

installation of equipment towards captive power generation

makes it obvious that the refund of sales tax as an incentive

was being granted only on items which were directly

associated with the manufacturing unit. This is clear from the

fact that in respect of the installation of equipment for

utilization of renewable source of energy or captive

generation, diesel was an absolutely essential item. A captive

generating plant, cannot be functional without fuel. It is for

this reason that refund of sales tax on diesel towards power

generation was explicitly made exempt.

37. The Commissioner is right when he states that if the

Government intended to grant refund of sales tax and entry

tax for diesel consumed, as had been clearly stated, in

Clause-3 of the policy. It would have also clearly stated that

the fuel used for running a DG plant in an EOU would also be

liable for refund. Having regard to the language employed in

the notification that the refund of sales and entry tax was

being limited to certain items which were to be used directly

in the manufacturing of the goods, it cannot be said that the

diesel consumed in a DG set would be a consumable.

38. It must be kept in mind that the State was aware

that the export oriented unit may have to use captive power

generating units for ensuring an assured production. The

State would have therefore provided for such a situation as it

had done in Clause-3 of the Policy and would have granted

refund. However, since the said refund has not been

specifically provided for in the package of incentives granted

to export oriented units, the argument that the diesel

consumed by the DG plant will have to be considered a

consumable cannot be acceptable at all.

39. The decision relied upon by the learned counsel in

the case of "Dhanvantari's referred supra cannot be of any

assistance since the question as to what was a consumable in

a manufacturing process was not at all considered in the said

decision. The Court in that case was essentially dealing with a

difference between the declaration made in the Industrial

Policy and the statutory notification issued by the

Government pursuant to the said policy. The Court found in

that case that what was not mentioned in the policy was

sought to be introduced in the notification and therefore

notification was repugnant. This is not the case in the present

case. Whatever has been mentioned in the policy has been

faithfully reproduced in the notification without any additions

or exclusions.

40. Similarly, the following Judgments relied upon by

the learned counsel would also not be applicable:

a. AMI PIGMENTS PVT. LTD. AND OTHERS V. STATE

OF GUJARAT AND ANOTHER, reported in (2010) 32

VST 97X (GUJ),

b. COMMERCIAL TAXATION OFFICER, UDAIPUR V.

RAJASTHAN TAXCHEM LIMITED, reported in

2007(62) Kar. L.J. 405 (SC)

c. M/s. Shree Bhawani Paper Mills Ltd. vs. State of

U.P. and Another, reported in 2012 49 VST 148.

41. In AMI Pigments' case the Hon'ble Supreme Court

was considering the question as to whether the expression

"raw materials" "processing materials" or "consumable

stores" would cover various fuels like naphtha, liquid diesel

oil, natural gas, etc. The Hon'ble Supreme Court was not

considering whether a diesel used in respect of a diesel

generating plant could be considered as a consumable.

42. In the case of Rajasthan Taxchem Limited's

case, the question that the Hon'ble Supreme Court was

considering was whether diesel could be called or raw

materials in the manufacture of polyester yarn. In that

particular case, the assessee who was engaged in the

manufacture of polyester yarn had purchased diesel and used

it for manufacture of electricity by D.G. sets. The said

decision cannot be also have any application since in that

case electricity was generated only through the D.G. sets.

43. In M/s.Shree Bhawani Paper Mills's case, the

Court was considering the effect of non grant of concessional

rate of tax under Section 4(B) of the Act on purchase of

diesel for use in generator sets in the factory and the ratio

therein cannot be made applicable to the present case.

44. It may be noticed that the petitioner has himself

stated in its representation dated 30th June, 2006 as follows :

"Sir, you are aware that there was power cut/load shedding by KEB and we had to have our own standby power generating unit to maintain the production level and to maintain the work force. During the years under reference, due to load shedding by State Electricity Board, we had

to resort to generation of power by our Diesel generator sets to have uninterrupted power supply and continuous production as our unit runs on a 3 shift basis. We furnish hereunder the units of power generated/consumed during the above years through difference source of power :

  Year       KEB Lakh        Old         New         Diesel       Total     % of
               Units        Hydro       Hydro      Generators     Lakh     D.G.to
                            Lakh        Lakh                      Units     total
                            Units       Units                              power.
 1997-98         122.80     187.53      93.60        220.86      624.79    35.38%
 1998-99         67.84      191.16      112.09       211.76      582.85    36.33%
1999-2000        94.17      201.80      113.67       196.73      606.37    32.45%
 2000-01         288.94     153.44      78.30        113.62      634.30    17.91%
  Total          573.76     733.93      397.66       742.98      2448.65   30.34%

From the above, you will kindly observe that we had to resort to power generation through Diesel Generators and we had consumed more units generated through this source as compared to other sources. In fact 30% of total power generation was from Diesel generators. It may not be out of place to mention here that power generated through diesels generators amounting to 742.98 lacs units during the above period could not be used for any other purpose than production."

45. As could be seen from the above, the percentage of

electricity generated through diesel generating set varied

from 17.91 % to 36.33% of the total electricity consumed. It

is therefore clear that merely 2/3rd of the electricity utilized

for manufacturing was from power supplied by KEB and by

the old Hydro and new Hydro units and only 1/3rd of the

electricity utilized was from diesel generating plant. This

further proves that even without the use of DG sets, the

manufacturing process would be materially affected, though it

may have partially affected. This also establishes that the DG

set was not absolutely essentially for the purpose of

manufacturing of their goods.