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Sales tax - Kerosene returned back by RIL to BPCL after extracting N-Paraffin, will amount to 'fresh purchase' and not 'return stream', and hence taxable from prospective effect: HC

 

By TIOL News Service

MUMBAI, MAR 23, 2018: THE ISSUE BEFORE THE COURT IS - Whether Kerosene returned back by RIL to BPCL after extracting N-Paraffin, will amount to 'fresh purchase' and not 'return stream', and hence taxable from prospective effect. YES IS THE VERDICT.

Facts of the case:

The First dealer i.e., Reliance Industries Ltd (RIL) is engaged in the manufacture of petrochemicals, whereas the Second dealer i.e., Bharat Petroleum Corporation Ltd (BPCL) is engaged in the business of refining and selling petroleum products and was also the supplier of Kerosene to RIL. The dispute had arisen way back in 1992, when RIL had established a petrochemical plant in Patalganga for manufacturing Linear Alkyl Benzenes (LAB), and required N-Paraffin as a raw material for the manufacture of LAB. This N-Paraffin according to RIL was itself constituent of Kerosene, and the BPCL having a refinery at Mahul, being a producer of Kerosene was approached by RIL. Accordingly, an exclusive pipeline was laid connecting the Mahul refinery and RIL's factory at Patalganga so as to ensure continuous movement of the requisite quantity of Kerosene from BPCL to RIL and vice versa. It was in these circumstances that RIL entered into an agreement with BPCL for procurement of Superior Kerosene Oil. It was agreed between RIL and BPCL, that Kerosene would be delivered to RIL. In turn, RIL would consume the suitable quantity of Kerosene by taking out NParaffin required by it and send the balance quantity of Kerosene back to BPCL as a "return stream". In the meanwhile, BPCL filed a determination application u/s 52 of BST Act, for seeking answer as to whether the sale of Kerosene to RIL was liable to tax, and whether the return stream would be legally allowable as sales returns or whether that would amount to purchase of kerosene by BPCL from RIL. In order to answer these questions, the Commissioner sought for details regarding the manufacturing process of "Kerosene Simplicitor" and Kerosene intended for the manufacture of LAB. In response, the BPCL submitted that there were no real distinguishing features between the two. However, not satisfied with the response of BPCL, the Commissioner suo motu wrote to the Department of Chemical Technology of the University of Bombay and and requested for its opinion as to whether the feed stock supplied by BPCL to RIL and the returned quantity by RIL to BPCL could be considered as the one and the same product by character. In response, it was communicated that the return stream would qualify as per the established practice as a blendable stock for Kerosene. It was also communicated that both Kerosene supplied by BPCL for extraction of N-Paraffins and the return stream Kerosene sent back to BPCL met the specification of Superior Kerosene. Therefore, finally the Commissioner came to the conclusion that the Kerosene KO sold by BPCL to RIL was nothing but Kerosene falling under Entry 26 in Part I of Schedule C of the BST Act r/w the Notification Entry No.160 issued u/s 41 of the said Act. The Commissioner also opined that the return of Kerosene as described in the credit note, would amount to purchase. The Commissioner took the view that since the Kerosene supplied to RIL by BPCL was different from the Kerosene returned back to BPCL by RIL, it could not be termed as a "goods return".

In the meanwhile, the matter travelled to the High Court, wherein it was remanded to the Commissioner of Sales Tax, who proceeded to pass a fresh DDQ order holding that the return stream of Kerosene by RIL to BPCL amounted to purchase of Kerosene by BPCL from RIL. This was challenged in appeal before the MSTT on the ground that sufficient opportunity was not given to RIL of being heard. Accordingly, the matter was again remanded back to the Commissioner of Sales Tax, who thereafter changed its previous stand and held that the return stream, namely, the Kerosene returned by RIL to BPCL was a "sales return" and not a purchase of Kerosene by BPCL from RIL. This DDQ order was challenged in appeal before the Maharashtra Sales tax Tribunal, where the appeal was rejected being not maintenable, by opining that since the DDQ order was passed by the Commissioner of Sales Tax and who was highest executive authority of the State Government for the purpose of sales tax, it was not permissible for the State to challenge the order of the Commissioner of Sales Tax. This Court however set aside the order of the MSTT inter alia holding that the Commissioner of Sales Tax was acting in his quasi judicial capacity and not as a representative or agent of the Government and hence it was permissible for the State to file an Appeal before the MSTT u/s 55 of the BST Act. Again the matter was remanded back to the MSTT, wherein the Tribunal allowed the Appeal filed by the State of Maharashtra against DDQ order, holding that the transaction of the return stream of Kerosene by RIL to BPCL tantamounted to purchase of Kerosene by BPCL from RIL and it was not a "sales return".

High Court held that,

++ as far as competency of the officer on special duty to file an appeal on behalf of the State of Maharashtra, is concerned, it is to be noted that the Commissioner of Sales Tax, while determining the DDQ application under the provisions of the BST Act, is a quasi judicial authority and is not a representative of the Government. This being the case, he is neither a necessary nor a proper party to the appeal. Therefore, the MSTT correctly held that the Commissioner of Sales Tax who passed the DDQ order and which was impugned before the MSTT, was neither a necessary nor a proper party to the appeal. The MSTT itself has recorded that the Rules of Business have been produced on record which would show that the Secretary of the Finance Department is the head of the said department. He is authorized to sign the order of the Government. The decision of the Government to prefer an appeal is informed by the Principal Secretary of the Finance Department vide his letter of authority. The said communication is an authentication of the fact that the Government had decided to prefer an appeal against the DDQ order. This authority letter clearly states that officer on Special Duty, Finance Department, Government of Maharashtra is authorized to prepare and file the appeal memo before the MSTT. This being the case, it cannot be said that the MSTT was at all wrong when it came to the conclusion that it was competent to entertain the appeal filed by the State of Maharashtra through its Principal Secretary through officer on Special Duty, Finance Department, Government of Maharashtra. Article 154 of the Constitution of India clearly stipulates that the executive power of the State shall be vested in the Governor and shall be exercised by him either directly or through officers subordinate to him in accordance with the Constitution. When one reads Article 154 with the Rules of Business made by the Governor of Maharashtra along with the decision of the Government of Maharashtra to prefer the Appeal, there is no doubt that the MSTT was fully justified in entertaining the Appeal filed by the State of Maharashtra;

++ as far as as the question regarding supply of kerosene being a sales return, is concerned, it was abundantly clear that the first leg of the transaction, namely supply of Kerosene by BPCL to RIL was clearly a sale and not contract of bailment. When the first DDQ order was passed by the Commissioner of Sales Tax, it was held that there was no liability of sales tax on the supply of Kerosene by BPCL to RIL on the ground that they were exempted from tax by virtue of Entry No.26 under Schedule C of the BST Act r/w Notification Entry No.160 issued u/s 41 of the said Act. It was also held that the return stream was not a "sales return" but a purchase by BPCL from RIL. This decision of Commissioner attained finality as recorded in the order of this Court and that being the case, RIL today cannot be allowed to contend that the first leg of the transaction was not a sale but was only a contract of bailment. Further, the BPCL itself treated the supply of Kerosene to RIL as a sale and not as a contract of bailment. What can be seen from this agreement is that BPCL is described as the "Sellers" and RIL is described as the "Buyers" in the said agreement. The agreement further records that the Buyers have erected a petrochemical plant at Patalganga for manufacturing LAB and are desirous of entering into an agreement for purchase from the Sellers KO (LABFS) in bulk as a feedstock for the manufacturing process of N-Paraffin. The agreement further records that the title, property and risk in KO (LABFS) in each delivery shall pass to the Buyers when the said KO (LABFS) crosses the Sellers' refinery fence at Mahul through the said pipeline. A reading of the agreement as a whole, makes it clear that the first leg of the transaction was clearly a sale of Kerosene, namely KO (LABFS), by the BPCL to RIL;

++ as far as the "return stream" is concerned, it is seen from the definitions of 'sales' and 're-sale' under the BST Act, that for there to be a sales return, the goods originally supplied and the delivery of the return stream should be one and the same goods. If the goods that are sought to be returned are a product which is different from the one that was originally supplied, the same can never be termed as a sales return. In the facts of the present case, the product that was supplied by BPCL to RIL in the first leg of the transaction was different from the return stream that was supplied/returned by RIL to BPCL. As mentioned earlier, the Kerosene that was supplied by BPCL to RIL was rich in N-Paraffin, whereas, the Kerosene that was sought to be returned by RIL to BPCL was after the extraction of N-Paraffin. In other words, the Kerosene supplied by the BPCL to RIL is pre-processed and the Kerosene returned by RIL to BPCL is a processed product and hence are two different commercial products. It is true that even the returned Kerosene meets the BIS standards to be termed and used as Kerosene, but that alone cannot be the test to come to the conclusion that the product returned by RIL is one and the same as was supplied by BPCL to RIL in the first leg of the transaction. It is an admitted fact that the Kerosene supplied by BPCL to RIL can be used for extraction of N- Paraffins whereas the Kerosene returned by RIL to BPCL cannot be used for the same purpose. The process of extraction carried out by RIL is thus a manufacture within the meaning of the said expression as defined in the BST Act and the kerosene is therefore not returned to BPCL in the same form. This being the case, it is quite clear that the return stream of Kerosene and which was sought to be returned by RIL to BPCL can never be termed as a sales return but in fact a sale by RIL to BPCL;

++ further, the arguments canvassed by Revenue's counsel on the business prudence test is wholly misconceived. There is yet another reason for taking this view. As mentioned, Section 2(17) defines the words "manufacture" and with all its grammatical variations and cognate expressions, includes producing, making, extracting, altering, ornamenting, finishing or otherwise processing treating or adapting any goods, or using or applying any such process, as the State Government may, having regard to the impact thereof of any goods or to the extent of alteration in the nature, character or utility of any goods brought about by such process, by notification in the Official Gazette specify. From this definition, it is clear that at least for the purposes of the BST Act, the return stream of Kerosene had undergone the process of manufacture which will clearly again go to show that the Kerosene returned by RIL to BPCL was a different product than the one supplied by BPCL to RIL in the first leg of the transaction. Therefore, there is no hesitation in answering the question in favour of the Revenue and against RIL and BPCL;

++ as far as the question whether the MSTT ought to have given prospective effect to its judgment as contemplated u/s 52(2) of the BST Act, is concerned, it is seen that the scheme of Section 52 makes it clear is that if any question arises, otherwise than in proceedings before a Court, or before the Commissioner has commenced assessment or re-assessment of a dealer u/s 33 or 35, any person, as listed in Section 52(1) can make an application to the Commissioner for determining the disputed question. On hearing such a party, the Commissioner shall, subject to rules, make an order determining such question. Section 52 (2) clearly stipulates that the Commissioner may direct that the determination or as the case may be, review shall not affect the liability of any person under this Act, in respect of any sale or purchase effected prior to the determination or, as the case may be, review. What is ex-facie clear from reading the provisions of Section 52 is that the Commissioner, certainly has the power to exercise his discretion and give prospective effect to the DDQ order passed by him u/s 52(1). As correctly submitted by the counsel in the facts of the present case, since the DDQ order was passed in favour of the assessee, there was no occasion nor any reason to request the Commissioner to grant prospective effect to his order. The question of prospective effect would only arise when the order of the Commissioner was reversed by the Tribunal. Further, it is not in dispute that it is for the first time in the history of the Bombay Sales Tax Act that the DDQ order passed by the Commissioner u/s 52(1) was challenged by the State of Maharashtra before the MSTT. From the facts narrated in this judgment, it is also clear that bonafide litigation between the parties has gone on right from the year 1992 till 2015. Further, right from the A.Ys 1988-1989 till 2004-2005, the assessments have been allowed in favour of the assessee, namely RIL on the basis that the return stream of Kerosene was a "goods return". If prospective effect is not given to the order of the Tribunal, it would effectively lead to a situation that all past assessments would have to be reopened and which would be highly unfair and prejudicial not only to RIL but also to BPCL;

++ however, it is also not in dispute that no hearing was given to RIL on this issue at all which would clearly be in breach of the principles of natural justice. On this ground alone, it will be appropriate to set aside the impugned order on this issue and remand the matter back to the MSTT. However, looking to the totality of the facts of the case, the MSTT was unjustified in not granting the prospective effect to its judgment. Considering the long checkered history of the litigation between the parties, the assessment orders allowed earlier on the basis that the return stream Kerosene was a sales return/goods return and the DDQ order passed in favour of the assessee, this was a fit case where the MSTT ought to have exercised its discretion and granted prospective effect to its judgment and order. The order of the MSTT is accordingly set aside only to this extent.

(See 2018-TIOL-505-HC-MUM-CT)


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