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2016 (10) TMI 815 - GUJARAT HIGH COURT

2016 (10) TMI 815 - GUJARAT HIGH COURT - TMI - Whether tax credit paid on purchases of Oxygen Gas and LPG used in cutting hull of the ship during ship breaking/scrapping process is admissible - The main thrust of the contention of the opponent was that the activity of ship breaking is a manufacturing activity and in that process since the Oxygen gas and LPG gas are being consumed, is entitled to have a tax credit - Held that: - the sales tax department since about 20 years by now has continued t .....

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Sections 80 HHA and 80-I of the Income Tax Act - opponent is engaged in ship breaking activity, which is nothing but a manufacturing process under the provisions of the VAT Act and the petroleum gases (LPG) and Oxygen gases are forming part of the said process, being raw material covered within the swip of Section 2(19) of the VAT Act, and since the same are the processing material and consumable stores in the activity, the tax credit of tax paid on purchases of these commodities is admissible u .....

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x Tribunal at Ahmedabad ( Tribunal for short). 2. The brief facts are as under: The opponent herein is engaged in business activity of ship breaking and in the course of such business the opponent is purchasing ships for the purpose of dismantling and then sell the material derived there from and the opponent is deemed to be a registered dealer under the provisions of Gujarat Value Added Tax Act, 2003 ( Act for the short) precisely under Section 23 of the Act. The activity of the ship breaking r .....

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x paid on the goods purchased locally from registered dealers and used as raw materials in the process. Since the opponent had a little confusion with regard to admissibility of tax credit on the use of LPG and Oxygen gas in the said process, it approached the determining authority by raising a question which reads as under: Whether tax credit paid on purchases of Oxygen Gas and LPG used in cutting hull of the ship during ship breaking/scrapping process is admissible? 3. The determining authorit .....

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y and in that process since the Oxygen gas and LPG gas are being consumed, is entitled to have a tax credit. The learned Tribunal upon examination of material on record and after considering series of decisions came to the conclusion that the activity being undertaken by the opponent is a manufacturing activity and the petroleum gas (LPG) and Oxygen gas are forming part of raw material in the said process, are covered within the scope of Section 2(19) of the VAT Act and therefore, the tax credit .....

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h is registered as Tax Appeal No.714 of 2013. This court while considering the appeal has admitted the same for consideration of following substantial question of law which are reproduced hereinafter vide order dated 26.12.2013. (A) Whether on the facts and in the circumstances of the case, the Tribunal has rightly held that, ship breaking process is manufacturing process under the Gujarat Value Added Tax Act, 2003 and LPG and Oxygen are raw material covered within the scope of Sec. 2(19) of the .....

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has submitted that the ship breaking activity is not a manufacturing activity at all as it is not creating any new commodity out of it. It was also contended by the learned counsel that the consumption cannot be treated as manufacturing process and therefore, simply because the LPG and Oxygen gases are being consumed in the process of breaking of ship, the material in the form of same cannot attract the scope of Section 2(19) of the Act and therefore, since it is not a manufacturing process the .....

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el has further submitted that nowhere in the application of determination a mention is made by the opponent that he purchases ships and he is in the business of manufacturing plates, angles, etc. On the basis of production of statement of employees the counsel submitted that it is clearly established that above process does not involve any physical aspects of material used for building of any new material. On the contrary, opponent has never claimed at the time of determination under Section 80 .....

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t in the absence of any such explanation or clarification the learned Tribunal ought not to have passed impugned order without obtaining same from opponent. It was also contended by the counsel for revenue that looking to the proposition laid down by the Tribunal in case of Mahavir Inductomelt Pvt. Ltd. (Appeal No.13 of 2000) the transaction is not attracting any tax benefit which can be made available to the opponent and therefore, contended that order passed by the learned Tribunal is not in c .....

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ike electrical appliances, refrigerator, cable wires, etc. while scrapping the unserviceable and discarded ship and therefore, opponent is not actually manufacturing any item. The learned counsel for the appellant submitted that before the learned Tribunal, several decisions came to be relied upon, but none has been considered in its true perspective and therefore, the learned Tribunal ought not to have arrived at the conclusion without ascertaining the crux of the ratio laid down by the court&# .....

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mption of LPG gas and Oxygen gas does not attract Section 2(19) of the VAT Act and therefore, the tax credit is not awardable to the opponent under Section 11 of the Act and by referring to these contentions and various decisions which are referred to in the order of the learned Tribunal the counsel submitted to set aside the impugned order dated 27.09.2012. 6. To oppose this petition Mr. Tushar P. Hemani, learned counsel appearing on behalf of opponent no.1, contended that the learned Tribunal .....

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manufacturing process and the consumption of petroleum gases which are referred to above are raw material covered within the scope of Section 2(19) of the VAT Act and the same are being used as process material or consumable stores and so the tax credit of tax paid on purchases of those commodities are admissible under Section 11 of the VAT Act. The learned counsel for the opponent further submitted that the Legislature has considered the activities of fishing, collecting, processing, etc. as m .....

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cord of the Tribunal, however, in addition thereto even the counsel has referred to the Memorandum of Agreement dated 03.10.2009, which took place between Mrianna Shipping Ltd. Pvt. and M/s. Bansal Brothers, and by referring to various clauses contained in the agreement the counsel submitted that the process which was to be undertaken in response to that was dealing in vessels which is workable vessel and not waste vessel and therefore, opponent being registered dealer under the Gujarat Sales Ta .....

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g on series of decisions and after examination, detailed verification of record including the agreement and the detailed activities of the opponent and as such there is no irregularity of any nature committed by the learned Tribunal and therefore, the order does not call for interference. It was specifically pointed out that the sales tax department since about 20 years by now has continued to assess the opponent as a manufacturer, there was no justifiable reason for determining authority to tre .....

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nd in consonance with the proposition of law on the issue. The learned counsel further submitted that the judgment of Hon'ble Apex Court in case of N.C. Budharaja & Co. reported in 1993 204 ITR 412 was also considered by the Hon'ble Bombay High Court in the aforesaid case and therefore, referring to the ratio laid down and observation made by the High Court the counsel has submitted that ship breaking activity gives rise to manufacture and production of altogether new commercial arti .....

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process of ship breaking is a manufacturing process within the meaning of Section 2(14) of the Act. The learned counsel has further submitted that even the distinguishing feature has also been considered by this judgment which were tried to be relied upon by the counsel for revenue and after analyzing the decision placed in the service by both the sides, the Tribunal has, in a pain staking manner, come to the conclusion by a reasoned order that order passed by the determining authority deserves .....

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er the Tribunal has held specifically the process is a manufacturing process and therefore, entitled to have a tax credit and therefore, this elaborate judgment does not call for any interference. Learned counsel has submitted that the substantial question of law raised while framed are already reflected to have been elaborately dealt with by the learned Tribunal and therefore, in such a situation when a decision is delivered after giving full opportunity to both the sides and after considering .....

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as under: 2(19). raw materials means goods used as ingredient in the manufacture of other goods and includes processing materials, consumable stores and material used in the packing of the goods so manufactured but does not include fuels for the purpose of generation of electricity. 7. Having heard the learned counsels appearing for both the sides and having gone through the judgment delivered by the learned Tribunal and having gone through even independently the material adduced on record, fol .....

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of the entire process of ship breaking activity and the various facets of that activity has reflected that the activity is nothing but manufacturing activity and this view held by the Tribunal is well supported by series of decisions and therefore, the activity is rightly held to be a manufacturing activity. (iii) It is also culled out from the record that ship breaking activity is held under other statutes also as a manufacturing activity and therefore, in the context of present statutes namely .....

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s also reflecting from the record that the learned Tribunal has gone in depth to examine the issue minutely and therefore, there appears to be no error of jurisdiction in any manner which requires the court to intervene. It appears that from several angles the learned Tribunal has examined the issue and then finally came to the conclusion based upon series of decisions and therefore, we are of the opinion that the order in question is not required to be interfered with. 9. In view of aforesaid s .....

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ut the breaking of ship activity is upon examination of every aspect has been held to be an activity of manufacturing and production and therefore, learned Tribunal has rightly taken assistance out of the said decision. 10. In yet another decision delivered by the Full Bench judgment of the Tribunal itself in case of Second Appeal No.75 of 1990 related to Bhagawati Ship Breaking Industries, wherein also the definition contained under Section 2(14) was came up for consideration and there also it .....

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9;ble Supreme Court has examined the manufacturing activity and what it amounts to, and thereby after analysis, the Hon'ble Supreme Court has held that ship breaking activity gave rise to manufacture and production of altogether a different article. The relevant extract from the said decision as contained in para 15, 16, 17, 18, 19, 20, 21, 22 and 23 are reproduced hereinafter: 15. The manufacture implies a change but every change is not manufacture, yet every change of an article is the res .....

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having distinctive name, use and character? The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes, manufacture takes place. Etymologically, the word 'manufacture' properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and, that something else is a question of degree; w .....

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ion is well brought about in a passage, thus, quoted in Permanent Edition, Words and Phrases, Vol.26, from an American judgment. The passage runs thus: 'Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation, a new and different article must emerge having a distinctive name, character or use. 17. The expression manufacture ha .....

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ing into existence new goods by a process which may or may not amount to manufacture. The associated words are indicative of the mind of Legislature. Where a word is doubtful or ambiguous in nature, the meaning has to be ascertained by considering the company in which it is found and the meaning of the word associated with it. The words 'manufacture' and 'production' have received extensive judicial attention both under the Act as well as the Central Excise Act and the various sa .....

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's case (supra) observed: ..... The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterized as production, every production need not to manufacture.... (p. 423) It was further observed: The word 'production' or 'produce', when used in juxtaposition with the word 'manufacture', takes in bringing into existence new goods by a process which may or may not amount to manufacture... (p.423) Then it .....

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legislative history of the provisions, their Lordships held that construction of a dam, bridge and the like cannot be understood as a production of article or thing. In Webster's New International Dictionary, the word 'produce' is defined as 'something which is brought forth or yielded either naturally or as a result of effort and work'. In Shorter Oxford English Dictionary, the following meaning is given : 'to bring forward, bring forth or out : to bring into being or e .....

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pany of the word 'production', which has wider connotation than the word 'manufacture', then in that event, the word 'manufacture' will have to be interpreted in wider sense and will have to be understood at par with the meaning assigned tot he word 'production' and if such approach as contemplated by Legislature is adopted, then in that event it is not difficult to reach to the conclusion that assessees are the industrial undertakings, engaged in manufacture and .....

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at the scrap iron and steel which were obtained by the respondents by dismantling and breaking up of the ship must be regarded as a different commercial commodity from the ship itself, and hence the activity would amount to manufacture. The goods manufactured would be the scrap iron and steel obtained or manufactured by the dismantling and breaking up of the ship, and the goods used in the manufacture of this scrap iron and steel would be the ship itself. The case was, therefore, covered by the .....

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e of Delhi Iron & Steel (P.) Ltd. (Supra) in which more or less similar question was involved as to whether the ship-breaking amounted to manufacture. However, in the said case, the Division Bench decided the case on the facts of that particular case, taking into account factual position prevailing therein. In paras 2 and 5 of the said judgment, the Division Bench specially observed that the assessee therein had purchased condemned and unserviceable cargo vessel named State of Andhra. The pu .....

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a ship but was treated as an article sold for breaking and scrapping purposes. Therefore, the Division Bench on the facts found in that case was of the opinion that the condemned and unserviceable ship purchased by the assessee was not a ship but was a re-rollable scrap in the form of old ship for dismantling. The Division Bench, however, observed that, in fact, from the purchase of such ship the assessee acquired only the old materials and the articles contained therein, which were sold by it i .....

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ip which by itself was nothing but a scrap. In the facts and circumstances of that case, the Division Bench was perfectly justified in concluding that the assessee has purchased scrap and not a ship. 22. We may also refer to another judgment of the Division Bench of this Court in the case of Ashish Steels (P.) Ltd. v. S. Mukhopadhyay [1989] 74 STC 292, wherein the Division Bench while dismissing the petition filed by the petitioner, relying upon the judgment of this Court in Indian Metal Traders .....

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