IN THE HIGH COURT OF KARNATAKA AT BANGALORE PRESENT THE HON'BLE MR.JUSTICE N.KUMAR AND THE HON'BLE MR.JUSTICE B.MANOHAR

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1 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE BETWEEN: DATED THIS THE 17 TH DAY OF APRIL 2013 PRESENT THE HON'BLE MR.JUSTICE N.KUMAR AND THE HON'BLE MR.JUSTICE B.MANOHAR TAET NO.7/2011 AND TAET NOs.8-9/2011 Carl Bechem Lubricants (India) Pvt. Ltd., Plot No 28-D, Sy.No.Part 5 to 8 Bidadi Industrial Area, Ayyanakuppe, Bangalore Represented by its Appellant (By Smt.Rukmani Menon, Advocate) AND: 1. The State of Karnataka, Represented by The Additional Commissioner of Commercial Taxes, Zone II, Gandhi Nagar, Bangalore Deputy Commissioner of Commercial Taxes, Audit 61, DVO 6, Bangalore Respondents (By Sri.T.K.Vedamurthy, AGA for R1 & 2)

2 2 These TAETs are filed U/s.16 of the KTEG Act, 1979 against the revision order dated passed in No.SMR/KTEG/APP-II/CR-21/ ,T.No.257/ , on the file of the Addl. Commissioner of Commercial Taxes Zone-II, Bangalore, setting aside the order dated passed by the JCCT(Appeal)-2, Bangalore and restoring the orders dated passed by the DCCT (Audit) 61, Bangalore for the Assessment year , and These appeals are coming on for hearing this day, N.KUMAR J., delivered the following: J U D G M E N T These appeals are preferred by the assessee challenging the order passed by the Revisional Authority dated setting aside the order of the First Appellate Authority and the order of Assessing Authority restoring levy of tax, penalty and interest for the assessment years , and The assessee is a dealer registered under the provisions of the Karnataka Tax on Entry of Goods Act, 1979 (for short, hereinafter referred to as the Act ). The assessee had effected purchase of a commodity known as IPOL Cylinder Oil 1200 which was used in the

3 3 manufacture of Grease. Thus, the said oil is used as base oil in the manufacture of Grease which was meant for use in open gears in steel and cement Mills. During the aforesaid assessment years, the assessee had purchased the same from the State of Maharashtra from one M/s. Sah Petroleum Products Ltd., and caused entry into the local area within the Karnataka State. While filing the returns under the Act, the assessee claimed exemption on the entire turnover of the said oil purchased by it on the ground that the same was not taxable under the provisions of the Act read with the Notifications issued there under. Therefore, the assessee did not pay any entry tax on the value of the said oil. The case of the assessee was taken for audit by the Deputy Commissioner of Commercial Taxes (Audit). After inspecting the premises of the assessee and on inspecting the returns, books of accounts and other relevant documents, the authority passed the assessment order dated under Section 5(4) of

4 4 the Act for the three assessment years. The Assessing Authority held that the oil purchased and caused entry by the assessee was liable to tax under Section 3(1) of the Act read with the notification dated at the rate of 5%. The Authority held that the goods caused entry by the assessee were liable to be classified as Lubricating Oil, which was taxable at the rate of 5%. Penalty and interest were also levied. Aggrieved by the said order, the assessee preferred an appeal before the Joint Commissioner of Commercial Taxes(Appeals-2) (hereinafter referred to as the First Appellate Authority ). The First Appellate Authority held that the oil is in the nature of base oil and not a lubricating oil as has been held by the Assessing Authority. Therefore, it set aside the levy of tax, penalty and interest. The Additional Commissioner of Commercial Taxes by virtue of the power conferred under Section 15(2) of the Act, proposed to revise the order of the First Appellate Authority on the ground that the said order was

5 5 erroneous insofar as it is prejudicial to the interest of the Revenue. The assessee filed his reply to the notice contending that the oil in question is the base oil and not the lubricating oil. They relied upon the Test Certificate issued by M/s.Shiva Analyticals (India) Limited, a Government of India approved, independent laboratory wherein it was held that it was base oil and not lubricating oil. The assessee also relied upon the order of the Advance Ruling Authority constituted under the provisions of 12-C of the Act in the case of M/s.Karol Lubricants Specialties Pvt. Ltd. wherein it was held that the oil in question is base oil and not lubricating oil. Ignoring the said material facts, the Revisional Authority confirmed the proposal set out in the notice and set aside the order passed by the First Appellate Authority and restored the order of the Assessing Authority dated for the three assessment years. Aggrieved by the said order, the present appeals are filed.

6 6 4. Learned counsel for the appellant Smt.Rukmini Menon assailing the impugned order contended that the levy of tax under Section 3(1) of the Act is permissible only in respect of goods which are mentioned in the First Schedule. Entry-67 deals with the petroleum products. In the said entry there is no reference to IPOL Cylinder oil whereas there is a specific reference to the lubricating oil in the notification issued under the said Act. 5% tax is levied on the goods mentioned in Entry-67. The IPOL Cylinder oil is the base oil. It is not one of the oils mentioned in entry 67 read with notification. No tax is leviable under the Act under sub- Section (1) of Section 3 of the Act. The reliance was placed by the authorities on the invoice and reading of the same by them is incorrect. Invoice specifically mentions the goods purchased which is described as IPOL Cylinder Oil However, in the column mentioned in Chapter/Heading/Sub-heading No is

7 7 mentioned with reference to lubricating oil i.e. classification under the provisions of the Central Excise Act. Therefore, that cannot be taken into consideration to decide the tax leviable under the Act. Therefore she submits that the impugned order passed is erroneous and requires to be set aside. 5. Per contra, the learned counsel appearing for the Revenue Sri.T.K.Vedamurthy submitted that admittedly IPOL Cylinder Oil is raw material used for manufacture of lubricant oil. When 5% tax is leviable on the raw material out of which, the lubricating oil is manufactured, in the Invoice, the assessee has mentioned the oil as lubricating oil and therefore, the Revisional Authority was justified in passing the impugned order and restoring the original assessment order. Therefore, no case for interference is made out.

8 8 6. In the light of the aforesaid facts and rival contentions urged by the learned counsel for the parties, the point that arise for our consideration in these appeals is: Whether the IPOL Cylinder Oi l is liable to tax under sub-section (1) of Section 3 of the Act? 7. Section 3 of the Act is the charging section which provides that there shall be levy and collection of tax on entry of any goods specified in the First Schedule into a local area for consumption, use or sale therein, at such rates not exceeding 5% of the value of the goods as may be specified retrospectively or prospectively by the State Government by Notification. Different dates and different rates may be specified in respect of different goods or different classes of goods or different local areas.

9 9 8. First Schedule to the Act specifies items of goods on which tax is levied. Item No.67 deals with the petroleum products which reads as under: Petroleum products; that is to say; petrol, diesel, crude oil, lubricating oil, transformer oil, brake or clutch fluid, bitumen (asphalt), tar and others, but excluding aviation fuel, liquid petroleum gas (LPG), kerosene and naptha for use in the manufacture of fertilizers. 9. In terms of the charging Section, a notification came to be issued which is duly published in the Karnataka Gazette extraordinarily on 30 th March These petroleum products find place at clause 8 of Sl.No.1 to the table attached to the notification. In the said notification there is no mention about the word IPOL Cylinder Oil and the same is also not mentioned in Entry-67. The Assessing Authority as well as the Revisional Authority after noticing the invoice held that

10 10 the oil which was brought into the local area is lubricating oil and therefore, it is exigible to tax at 5%. If the oil that the assessee purchased is the lubricating oil, then by virtue of the Schedule as well as by notification, it is excisable to tax. The question is what is the oil purchased by the assessee. Is it a lubricating oil.? The said invoice clearly mentions, variety of goods in respect of which, a concessional rate of duty is claimed as IPOL Cylinder Oil The description in the column mentioned as Name of Excisable Goods : Chapter/Heading/Sub-heading No., the word Lubricating oil ; No ; and rate of duty as 16% is mentioned. The said particulars disclose that it is an excisable goods under the Central Excise Act. The said goods is given the No and it is described as lubricating oil and the rate of duty payable is 16%. The said classification is under the Central Excise Act. That classification has no application under this Act. Under

11 11 said invoice, it is clearly mentioned that the oil which is purchased is IPOL Cylinder Oil The First Appellate Authority in its judgment has briefly narrated how the lubricating oil is manufactured, which reads as under: The base oil (Cylinder oil) is heated to 180 to 200 degree C to prepare the base grease. At this juncture, thickners and chemicals are added (Komad+ IPA). It is allowed to set the grease. After cooling, different types require additives are added (OGM+ Graphite) for creating load capacity and to give lubricating properties. For certain variety of Grease, polybutenes are added to make the grease adhesive. With this process, the base oil i.e., Cylinder Oil is converted into a lubricating Grease which is used in open gears in Steel & Cement Mills. 11. The Advance Ruling Authority in the Case of M/s.Karol Lubricants Specialities Private Limited, Bangalore held as under:

12 12 8. It is true that the items of petroleum products mentioned in the Notification No.FD 11 CET 2002, dated attract entry tax at the rates mentioned in the notification. For this purpose certain selected items are notified. Petroleum products mentioned under the notification are lubricating oil, transformer oil, brake fluid or dutch fluid, bitumen (asphalt), tar and others excluding LPG, aviation fuel and kerosene. Base oil does not find a place in the above list. Tar and others mentioned therein takes into its net items like tar, bitumen and related products and not base oil. 9. When lubricating oil and Transformer oil are included under the notification, base oil is specifically excluded. In this context it may be seen that as rightly pointed out by the applicant those goods which are finished products only are included in the notification. Base oil being a raw material is left out Lubricants and transformer oil are prepared by a process of blending base oil with suitable additives and chemicals to make them finished products. Base oil therefore, is not a finished product and by itself it is not a petroleum product.

13 In view of the above it is clarified that base oil purchased by the applicant which is used as raw material is exempt from levy of entry tax as per Notification No.FD 11 CET 2002, date The Test Certificate issued by M/s.Shiva Analyticals (India) Limited after examining the IPOL Cylinder Oil has given the contents of the same and their opinion that the sample appears to be base oil and not the lubricating oil. Even the Revisional Authority in the impugned order has observed as under: Nodoubt, the assessee is involved in upgrading the goods bought by them for the purpose of marketing and usage and this process of upgrading the lubricating oil for refinement does not take away the legal liability on the goods. 13. The Revisional Authority has proceeded on the ground that the assessee has purchased the lubricating oil and thereafter is upgrading it. That is the factual

14 14 error on the part of the Revisional Authority. What is purchased is IPOL Cylinder Oil and not the lubricating oil. After purchasing the IPOL Cylinder Oil as set out above, certain processes are conducted to convert it into a grease which is used for industrial purposes. Under these circumstances, when the IPOL Cylinder oil is not one of the petroleum products included in Entry 67 for the purpose of levying tax under Section 3(1) of the Act, the same does not find place in the Notification issued under the said provisions. The order passed by the First Appellate Authority setting aside the order passed by the Assessing Authority was legal and valid. The Revisional Authority committed a serious error in interfering with such an order without reading the invoice properly. Thus, the impugned order is liable to be set aside.

15 Hence, we pass the following order: (a) The appeal is allowed. (b) The impugned order is hereby set aside (c) The order of the First Appellate Authority setting aside the order of the Assessing Authority is restored. (d) Parties to bear their own costs. Sd/- JUDGE Sd/- JUDGE mpk/-*