Can Generator Set be purchased against C Form by a Goods Manufacturer

1. Analysis of Section 8(3)(b) of Central Sales Tax Act read with Rule 13 of the Central Sales Tax (Registration and Turnover) Rules, 1957

To have an understanding on the mater we would first have to refer Section 8(3)(b) of the Central Sales Tax Act, 1956 which lays down the law for purchase of goods against C form for use in manufacturing or processing of goods for sale or for use in the telecommunications network or in mining or in the generation or distribution of electricity or any other form of power. Section 8 sub-section 3 of the Central Sales Tax Act 1956 provides as follows:

“The goods referred to in sub-section (1),—

a)……

b) are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or in the telecommunications network or in mining or in the generation or distribution of electricity or any other form of power;

Rule 13 of Central Sales Tax (Registration and Turnover) Rules, 1957 provides that

“13. Prescription of goods for certain purposes—The goods referred to in clause (b) of sub-section (3) of section 8 which a registered dealer may purchase shall be goods intended for use by him as raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel, or lubricants, in the manufacture or processing of goods for sale or in mining, or in the generation or distribution of electricity or any other form of power.”

The combined analysis of the two limbs i.e. provision of the section and rules are as follows:

A) Goods being purchased for being used in the manufacture or processing of goods for sale

On a combined reading of provisions of Section 8(3)(b) of the Central Sales Tax Act, 1956 and Rule 13 of the Central Sales Tax (Registration and Turnover) Rules, 1957, following are the primary conditions, all of which should be satisfied before C form can be used for purchase of goods for being used in manufacturing or processing of goods for sale.

• Goods should be specified in the certificate of registration of the registered dealer purchasing the goods.
• The purpose mentioned for the purchase of goods should be as being intended for use by him in the manufacturing or processing of goods.
• The goods intended to be used in manufacturing or processing should be in the nature of raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel, or lubricants.
• The goods being manufactured or processed should be goods meant for sale.
• The decision of the Hon’ble Apex Court in the matter of M/S. J. K. Cotton Spinning & … vs Sales Tax Officer, Kanpur And … on 28 October, 1964 Equivalent citations: 1965 AIR 1310, 1965 SCR (1) 900 is considered as the landmark decision in terms of analysis of the provision in Central Sales Tax Act relating to use of C form for purchase of goods intended to be used in manufacturing or processing of goods for sale.

The Hon’ble Apex Court first laid down the criteria as laid down in Rule 13 read with Section 8(3)(b) of the Central Sales Tax Act as follows:

“It is true that under Rule 13, read with s. 8 (3) (b) mere intention to use the goods in the manufacture or processing of goods for sale, will not be a sufficient ground for specification: the intention must be to use the goods as raw materials as processing materials, as machinery, as plant, as equipment, as tools, as stores, as spare parts, as accessories, as fuel or as lubricants.” 

Thereafter the Hon’ble Apex Court defined the words “in the manufacture of goods”

“The expression “in the manufacture of goods” would normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process is so integrally connected with the ultimate production of goods that but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would, in our judgment, fall within the expression “in the manufacture of goods”. “

The Hon’ble Apex Court then went ahead to lay down the critical test for qualification to be “used in manufacturing of goods”

“In our judgment if a process or activity is so integrally related to the ultimate manufacture of goods so that without that process or activity manufacture may, even if theoretically possible, be commercially inexpedient, goods intended for use in the process or activity as specified in Rule 13 will qualify for special treatment. This is not to say that every category of goods “in’ connection with” manufacture of or “in relation to” manufacture, or which facilitates the conduct of the business of manufacture will be included within Rule 13.”

“But there is no warrant for limiting the meaning of the expression “in the manufacture of goods” to the process of production of goods only. The expression “in the manufacture” takes in within its compass, all processes which are directly related to the actual production. Goods intended as equipment for use in the manufacture of goods for sale are expressly made admissible for specification.”

♣ The Hon’ble Apex Court in the matter of Indian Copper Corporation … vs Commissioner Of Commercial … on 19 October, 1964 Equivalent citations: AIR 1965 SC 891, 1965 (0) BLJR 460, 1965 16 STC 259 SC was faced with the following questions

a) Where there is a statutory obligation imposed upon the owner of the factory or the mine to maintain hospital facilities to maintain effective health services for the benefit of the workmen, whether goods purchased for the hospital such as equipment, furnishings and fittings are intended for use in the manufacture or processing of goods for sale or in the mining operations.

The Hon’ble Apex Court held that

“But rule 13 requires that the goods including equipment should be intended for use by the owner as equipment in the manufacture or processing of goods for sale or mining operations. If the equipment is not so intended to be used, rule 13 will not be attracted. For reasons already mentioned, we are unable to hold that hospital equipment, furnishings and fittings fall within the description of equipment intended for use in the manufacture or processing of goods for sale or in mining operations.”

b) Whether use of Stationery which facilitates carrying out of business can be termed as intended to be used in manufacturing

“”Stationery” also is not intended for use in the manufacture or processing of goods for sale or for mining operations. Use of stationery undoubtedly facilitates the carrying on of a business of manufacturing goods or of processing goods or even mining operations; but the expression “intended to be used” cannot be equated with “likely to facilitate” the conduct of the business of manufacturing or of processing goods or of mining.”

c) The next question with which the Hon’ble Apex Court was faced was whether cane baskets used by the sanitary department for collecting refuse to protect the health and cleanliness of the colony and the workmen employed and cane baskets which are required for carrying ore and other materials used in mining or in the manufacture of goods are goods intended to be used in manufacturing

“12. Those cane baskets which are intended to be used by the sanitary department for collecting refuse to protect the health and cleanliness of the colony and the workmen employed in the manufacture of goods, cannot, on the test set out earlier, be specified in the certificate of registration. But we are unable to agree with the High Court that the cane baskets which are required for carrying ore and other materials used in mining or in the manufacture of goods are not intended for use in the process of manufacturing or mining operations.”

♣  Hon’ble Apex Court in the matter of M/S. J. K. Cotton Spinning & … vs Sales Tax Officer, Kanpur And … on 28 October, 1964 Equivalent citations: 1965 AIR 1310, 1965 SCR (1) 900 was faced with the issue that whether electrical goods can also be purchased against C form.

The Hon’ble Apex Court held that

“The expression “electricals” is somewhat vague. But in a factory manufacturing cotton and other textiles, certain electrical equipment in the present stage of development would be commercially necessary. For instance, without electric lighting it would be very difficult to carry on the business. Again electrical humidifiers, exhaust fans and similar electrical equipment would in the modern conditions of technological development normally be regarded as equipment necessary to effectually carry on the manufacturing process. We are not prepared to agree with the High Court that in order that “electrical equipment” should fall within the terms of Rule 13, it must be an ingredient of the finished goods to be prepared, or “it must be a commodity which is used in the creation of goods”. If, having regard to normal conditions prevalent in the industry, production of the finished goods would be difficult without the use of electrical equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale and such a test, in our judgment, is satisfied by the expression “electricals”. ‘Ibis would of course not include electrical equipment not directly connected with the process of manufacture. Office equipment such as fans, coolers, air-conditioning units, would not be admissible to special rates under s. 8(1).” 

Analysis of the Decisions: Following conclusions can be derived from the above two landmark decisions of the Apex Court, regarding purchase of goods against C form for being used in manufacturing or processing of goods for sale:

• The expression “in the manufacture of goods” would normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. The expression “in the manufacture” takes in within its compass, all processes which are integrally connected to the actual production.

• If, having regard to normal conditions prevalent in the industry, production of the goods would be difficult without the use of equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale.

• If a process or activity is so integrally related to the ultimate manufacture of goods so that without that process or activity manufacture may, even if theoretically possible, be commercially inexpedient, goods intended for use in the process or activity as specified in Rule 13 will qualify for special treatment.
  

• Every category of goods “in’ connection with” manufacture of or “in relation to” manufacture, or which facilitates the conduct of the business of manufacture would not be included in Rule 13.”The expression “intended to be used” cannot be equated with “likely to facilitate” the conduct of the business of manufacturing or of processing goods.
  

• It is not at all necessary that to fall within the terms of Rule 13, goods must be an ingredient of the finished goods to be prepared, or “it must be a commodity which is used in the creation of goods”.

• The goods are used for dual purpose i.e. to the extent where the goods are used for purpose of carrying out the manufacturing process, such goods can be procured against C form and goods which are not part of the manufacturing process cannot be procured against C form at concessional rate.

B) For use by him in the telecommunications network or in mining or in the generation or distribution of electricity or any other form of power.

On a combined reading of provisions of Section 8(3)(b) of the Central Sales Tax Act, 1956 and Rule 13 of the Central Sales Tax (Registration and Turnover) Rules, 1957, following are the primary conditions, all of which should be satisfied before C form can be used for purchase of goods for being used in telecommunications network or in mining or in the generation or distribution of electricity or any other form of power:

• Goods should be specified in the certificate of registration of the registered dealer purchasing the goods.
• The purpose mentioned for the purchase of goods should be as being intended for use by him in telecommunications network or in mining or in the generation or distribution of electricity or any other form of power.
• The goods should be in the nature of raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel, or lubricants.
• There is no obligation to sale or re-sale.

♣  This part of section 8(3)(b) has been explained by Hon’ble Karnataka High Court in the matter of M/s Indus Towers Limited, VERSUS The Commercial Tax Officer, W.P.Nos. 31462 & 31482/2011 and 8205/2012 as follows:

“The concessional rate of tax of 2% is thus available either for re-sale, for use by the purchasing dealer in the manufacturing or processing of goods for sale or for use in the telecommunications network. There is no condition attached to the last limb of clause (b) of Section 8(3) that the purchasing dealer must either re-sell the goods as such or must use them in the manufacture or processing of goods for sale. There is no obligation to sell or re-sell and mere use in the telecommunications network is sufficient to bring the transaction within the fold of Section 8(1).”

It has been clearly held that the condition of sale is not attached with the goods purchased for use by the dealer in telecommunications network or in mining or in the generation or distribution of electricity or any other form of power. The issue regarding the dealers engaged primarily in the business of generation or distribution of electricity has not been discussed here as this article focuses squarely on the issue regarding purchase of generator set at concessional rate by the Manufacturer of goods.

The issue now arises that although Central Sales Tax Act allows goods to be purchased at concessional rate for generation of electricity but whether merely installing the generator for generation of electricity would make the dealer eligible for purchase at concessional rate and therefore whether a trader, wholesaler or manufacturer can claim the benefit of purchase at concessional rate of generator set and use the electricity generated for his personal or purpose other than manufacturing or processing of goods.

Differing views and interpretations have been expressed on the same. One of the views have been that as the condition of resale of electricity has not been attached with the goods used for generation of electricity, therefore any person who purchases the goods for generation of electricity, even for private consumption can also purchase goods at concessional rate. However, there are contrary views as well on the subject.

♣  The decision of Hon’ble Allahabad High Court in the matter of The Commissioner, Trade Tax vs S/S Subham Cane Crusher on 30 March, 2007 throws some light on the matter as follows:

The Hon’ble court observed that Section 8(3)(b) of the Central Sales Tax Act, 1956 does not lays down the condition of sale of the electricity for purchase of goods at concessional rate for generation of electricity. The judgement provides that

“8. Perusal of section 8(3)(b) of Central Act and Rule 13 of Rule show that the benefit of concessional rate of tax is available to the goods used in the manufacturing or processing of goods or used in the generation or distribution of the electricity or in any other form of power. The word “in the generation or distribution of the electricity or in any other form of power” is not qualified by the word “for sale”. Therefore, any item mentioned in the Rule used in the generation of electricity is eligible for the benefit of concessional rate of tax.”

However in the succeeding paragraph following was the conclusion of the Hon’ble Court regarding the use of the Generator set as follows:

“9. Generator was installed in the factory. There is nothing to suggest that the electricity generated in the generator was not for use in the production.”

♣  Hon’ble Allahabad High Court in the matter of Micro Abressive India Limited Versus Commissioner Of Sales Tax U P Lucknow has held that

“It is not the case of the Revenue that the electricity produced by the diesel generating set in question was not being used in running the plant and machinery and other allied purpose and was being used for a different purpose, e.g., the supply of electricity to residential houses.”

Therefore, it is clear that one of the main consideration favoring the assessee in the above judgment’s was that electricity generated through the generator was used exclusively in production of goods and was not used for any other purpose.

Hence, in my opinion any manufacturer of goods who is generating electricity through generator for personal purpose or for purposes other than being used in manufacturing or processing of goods like for office use etc., he would not be able to purchase generator set at concessional rate under this clause merely on the basis of the plea that he is satisfying the condition of generation of electricity and further there is no condition attached for sale of the electricity generated under the section.

However, even if the generator is being exclusively used for production activities, there have been varied decisions by various Hon’ble Courts in the given matter and the situation is far from clear. There is a very thin line distinguishing the judgments. Some of the decisions have been given by Hon’ble Courts in favour of the assessee and specifying that the Generator sets can be purchased against C form and some have gone against the assessee. A gist of some of the major cases is as follows:

2.  Decisions Favoring the Assessee:

♣  Hon’ble Allahabad High Court in the matter of Micro Abressive India Limited Versus Commissioner Of Sales Tax U P Lucknow has held that

“Admittedly, the diesel generating set that has been purchased by the dealer and that has been mentioned in the registration certificate was intended only to produce electricity for running the other plant and machinery for the manufacture of the lapping abrasive powder. Neither the assessing officer not the Tribunal has mentioned that when the assessing officer granted the registration certificate, the dealer had mentioned some other use of the diesel engine and alternator or that the assessing officer was under the impression that the same would be used for some other purpose. Any other use of the diesel engine was not in contemplation of either the dealer or the assessing officer. After the purchase of the diesel engine, the dealer used the same for the purpose of generating electricity for running its other plant and machinery, a purpose that was in contemplation of both the parties. It is not the case of the department that the diesel generating set was used for a purpose other than the production of electricity for running the plant and machinery for production of the goods.”

The Hon’ble High Court further went on to provide that

“As pointed out above a diesel generating set has no other use except to produce electricity which is necessary for running the plant and machinery for the production of goods. It cannot therefore, be said that the dealer is using the generating set for any other purpose. It is not the case of the Revenue that the electricity produced by the diesel generating set in question was not being used in running the plant and machinery and other allied purpose and was being used for a different purpose, e.g., the supply of electricity to residential houses. The dealer is not accused of having made any mis-statement while applying for the inclusion of the said item in the registration certificate and was using the generating set for the purpose that was in contemplation by the dealer as well as the assessing officer. In such circumstances, no penalty could be levied on the dealer for purchasing the diesel generating set against from “c” and paying tax at a concessional rate.”

Analysis of the Decision: Hon’ble Allahabad High Court has given decision in favour of the assessee wherein the issue raised was whether generator engaged in generation of electricity meant for running the machineries for production can be purchased against C form. It was held that Generator set had no other use except to produce electricity which is necessary for running the plant and machinery for the production of goods and therefore it can be purchased against C form. The Hon’ble High Court categorically mentioned that electricity generated has been exclusively used in production and not for any other purpose and further the revenue has also not raised any such contrary matter. Therefore, the final conclusion by the Hon’ble High Court can be inferred that where the generator set is being used for generating electricity exclusively for the manufacturing or processing and not for any other use, then the generator set can be purchased against C form.

It would be pertinent here to refer that Hon’ble Rajasthan High Court in the matter of Jai Glasskow vs Commercial Taxes Officer on 18 May, 2007 Equivalent citations: (2007) 8 VST 770 Raj followed the principle laid down by the Hon’ble Allahabad High Court in the matter of MICRO ABRESSIVE INDIA LIMITED VERSUS COMMISSIONER OF SALES TAX U P LUCKNOW. However the subject matter of decision before the Hon’ble Rajasthan High Court was not relating to the generator set.

♣  The matter before the Hon’ble Allahabad High Court in the matter of The Commissioner, Trade Tax vs S/S Subham Cane Crusher on 30 March, 2007 was that the dealer was involved in the manufacturing of khandsari, gur ruskat in its factory and applied for the registration of High Speed Diesel Oil under Central Sales Tax Act for the purchase at concessional rate of tax on the ground that they were required for the production of gur. The Hon’ble High Court referring to the decision that whether Diesel Generator set was a capital good for the generation of electricity held as follows:

“5. Generator is held as machinery by the Apex Court in the case of C.I.T. v. Mir Mohammad Ali reported in 53 ITR, 165 and by this Court in the case of Snow White Industries, Rishikesh v. Commissioner of Trade Tax (Surpa).”

It then further observed that

“8. Perusal of section 8(3)(b) of Central Act and Rule 13 of Rule show that the benefit of concessional rate of tax is available to the goods used in the manufacturing or processing of goods or used in the generation or distribution of the electricity or in any other form of power. The word “in the generation or distribution of the electricity or in any other form of power” is not qualified by the word “for sale”. Therefore, any item mentioned in the Rule used in the generation of electricity is eligible for the benefit of concessional rate of tax.

9. Generator was installed in the factory. There is nothing to suggest that the electricity generated in the generator was not for use in the production.”

It further referred to the decision of Hon’ble Orissa High Court in the matter of Mohavir Prasad Jain and Anr. v. State of Orissa and Ors. reported in 67 STC, 376 as follows:

“10. In the case of Mohavir Prasad Jain and Anr. v. State of Orissa and Ors. reported in 67 STC, 376, the dealer sought addition of generator and its accessories for the purposes of providing electricity for the manufacture of goods, generators accessories, spare parts and diesel oil for the purposes of running generator. The addition was refused on the ground that when normal conditions prevail, it will not necessitate the use of generator. The Division Bench of the Orissa High Court held that the language of Section 8(3)(b) of the Central Sales Tax Act is wide and it is not open to read it in a restricted manner, as has been done by the Sales Tax Officer. The provision applies, whether the generator is required as the exclusive source of supply of electricity or as a subsidiary one. There is nothing in the provision excluding its applicability to generator, if the same was required as a stand-by measure. The Division Bench, accordingly, directed to include all the items in the registration certificate.”

There after it held that

“High Speed Diesel Oil required for the operation of generator for the generation of the electricity is eligible under Rule 13 of the Rule and under Section 8(3)(b) of central Act for the benefit of concessional rate of tax. Tribunal rightly held so.”

Analysis of the decision: The decision clearly provides that there is no condition of sale for electricity generated through the diesel generator set but entire electricity must be used for production of goods. It has to be pointed out that decision of Orissa High Court in case of Mohavir Prasad Jain followed and accepted by the Hon’ble Allahabad High Court in the matter of The Commissioner, Trade Tax vs S/S Subham Cane Crusher on 30 March, 2007 was not followed and accepted by Orissa High Court in its own decision in the matter of Orient Paper Mills vs State Of Orissa And Ors. on 6 November, 2006 Equivalent citations: 103 (2007) CLT 147, (2007) 10 VST 547. It would be pertinent here to refer that decision of Allahabad High Court in the matter of Subham Cane Crusher was given on 30^th March 2007 whereas the decision in the matter of Orient paper mills was delivered on 6^th November 2006. Thus the decision in the matter of Subham Cane Crusher is a later judgement as well.

♣  Hon’ble Allahabad High Court in the matter of The Commissioner, Trade Tax vs Elmech Engineers on 4 May, 2005 has while approving the decision of the tribunal that diesel generator is a machinery held that

“19. In common parlance diesel generator set is generally known as machinery. Now a days due to shortage and irregular: power supply from the power corporation use of diesel generator set by shopkeepers and at residence is common. Common people normally know it as machinery and not as plant. It is not known as electrical goods. It may be mentioned here that that diesel generator set is not specifically notified under any of the notification. It is not defined under the Act. However, in various decisions referred hereinabove this Court and other Courts have consistently held diesel generator set as machinery.”

Hon’ble Apex Court in the matter of Commissioner of Income Tax v. Mir Mohd. Ali, reported in 53 ITR, 165, Hon’ble Allahabad High Court in the matter of CST v. Tek Invest (India) Pvt. Ltd., Haridwar, reported in 1998 UPTC, 128 and Snow White Industries, Rishikesh v. CTT, reported in 1999 UPTC, 130 also held diesel generator set as machinery. Further, Karnataka High Court in the matter of Associated Cement Companies Limited Vs State of Karnatka (2007) 7 VST 691 and Venkateshwara Engineering Works Vs Additional Commissioner of Commercial Taxes, Zone II, Bangalore 146 STC 681 has also held that Diesel Generator is a machinery.

♣  It would be appropriate further here to mention decision of the Hon’ble Supreme Court in the matter of Commercial Taxation Officer, … vs M/S Rajasthan Taxchem Ltd on 12 January, 2007 wherein the issue before the Hon’ble Apex Court was

“Whether diesel can be called raw material in the manufacture of polyester yarn.”

The facts of the case were as follows:

“In the present case, the respondent is engaged in the business of manufacture of polyester yarn and for the said purpose, it purchased diesel and used it for manufacturing electricity by D.G.-sets. The respondent has claimed a benefit under Section 10(1) of Rajasthan Sales Tax Act, 1994 (hereinafter referred to as ‘the Act’) claiming that diesel purchased is a raw material for the manufacture of the ultimate final product _ Polyester Yarn.”

The contention by the department has been reproduced below only to highlight the stand of the department and the very basis upon which the department does not allow either diesel or generator set to be purchased at concessional rate:

“It is also submitted that the later part of Section 2(34) (raw material) which includes fuel as a raw material, is qualified by the words “required for the process of manufacture” and that diesel is not required for the process of manufacture. The respondent requires electricity for the manufacture of its final product and, therefore, it may be entitled to a lesser rate of tax on the purchase of electricity but not for the purchase of diesel which is used to manufacture electricity. According to the learned counsel, the respondent is using the DG-sets as a back-up/stand by and is generally manufacturing goods by purchasing electricity from the electricity board in the State and that the diesel did not get transformed in the ultimate product and it is also not used as raw material in the manufacture of the ultimate product. It was further submitted that generation of electricity is not part of the process of manufacture and diesel used in the same cannot become raw material entitled to a lesser rate of tax. In other words, diesel is used in the instant case in generating electricity and hence it cannot be said to be a raw-material but it is a processing material.”

The Hon’ble Apex Court held as follows:

“In view of the fact that the diesel is being used for the purpose of running the generator set for the production of the ultimate product which is also required for the purpose of manufacturing the end product the diesel can only be termed as raw material and not otherwise. The Rajasthan Tax Board was, therefore, justified in setting aside the orders passed by the Assessing Authority as confirmed by the Deputy Commissioner (Appeals).”

Analysis of the decision: Hon’ble Apex Court held that diesel is being used for the purpose of running the generator set for the production of the ultimate product. Therefore, it was held by the Hon’ble Apex Court that diesel required for running the generator set is a raw material.

♣  It was held by Hon’ble Allahabad High Court in the matter of Commissioner of Trade Tax vs. M/s Goel India, Moradabad. Source : Sales Tax Matters, Vol. 11, Part 3, Page 286 after considering the provisions of Section 8(3)(b) of the Central Sales Tax Act, read with Rule 13 of the Central Sales Tax (Registration & Turnover) Rules 1957, that fuel and lubricants used in the manufacture or processing of goods for sale were eligible to be included in the Registration Certificate. In the case before the Court, diesel oil and other fuels were used for running Generator sets that were treated as part of the manufacturing process.

The issue raised herein is that if diesel can be considered as a raw material and can be allowed to be purchased against C form or at concessional rate then in such case, generator set which is producing electricity for running of machinery for manufacturing of ultimate goods using the diesel purchased, has to be considered as a capital goods for the purpose of manufacturing of goods.

♣  It would further be appropriate here to refer to the clarification issued by Financial Commissioner & Principal Secretary, Government of Haryana, Excise And Taxation Department, Under Section 56(3) Of The Haryana Value Added Tax Act, 2003. In the matter of M/s Bhaskar Gensets Pvt. Ltd. Udyog Vihar, Phase- V, Gurgaon wherein the query was whether Diesel Generating Set is machinery or not:-

The reply to the given query has been reproduced as follows:

“As per Oxford English Reference Dictionary the word ‘plant’ means machinery etc. used in an industrial or manufacturing process”.

“Now a days, due to shortage of power and erratic power supply there is wide application of Diesel Generating Sets and these Generating Sets are being used in a domestic, commercial as well as industrial sectors. Hence application of Diesel Generating Sets is not exclusively in the manufacturing sector and while interpreting as to whether diesel generating set is covered under ‘plant and machinery’, the use to which the same is being put is material.”

The Hon’ble Commissioner further held that

”The applicant has cited the judgement delivered by Allahabad High Court in his defence and there is no dispute as to that decision. No doubt when the Diesel Generating Set is being used as a standby generator to ensure uninterrupted power supply to the manufacturing plant the same is a part of plant and machinery. However when the same is being used in domestic sector, the same cannot be termed as a part of plant and machinery.

Since generating set in such a situation facilitates the smooth running of the plant and machinery the same undoubtedly is a part of plant and machinery. However, there cannot be an absolute approach in regard to interpretation of this item. When the same is being used for running the industry, it is part of plant and machinery and the provisions of Haryana VAT Act and Rules there under provide for purchase of Diesel Generating Set by a manufacturing unit at concessional rate of tax against form VAT D-1. Further overall scheme of the Haryana VAT Act and Rules there under provides for availing input tax credit by a manufacturing unit in respect of tax paid on purchases of such diesel generating set and in that respect a diesel generating set is a part of plant and machinery.”

3. Decision against the assessee:

♣  Hon’ble Orissa High Court in the matter of Orient Paper Mills vs State Of Orissa And Ors. on 6 November, 2006 Equivalent citations: 103 (2007) CLT 147, (2007) 10 VST 547 Orissa held that purchase of plant and machinery for a new captive power plant cannot be covered by “C” Form inasmuch as those machinery are not integrally connected with the manufacture of paper and pulp.

It would be pertinent here to observe that how Hon’ble Orissa High Court reached to this decision. In para 13, 14 15 and 18 Hon’ble Court came to following conclusion:

”13. It is nobody’s case that electricity is a raw material for paper which are the finished goods manufactured by the Petitioner.

14. The Learned Judges in J.K. Cotton Spinning & Weaving Mills Co. Ltd. (supra) on a combined reading of Rule 13 read with Section 8(3)(b) of CST Act further clarified the position as under: …mere intention to use the, goods in the manufacture or processing of goods for sale, will not be a sufficient ground for specification the intention must be to use the goods as raw materials, as processing material, as machinery, as plant, as equipment, as tools, as stores, as spare parts, as accessories, as fuel or as lubricants.

15. Therefore, if the process is so integrally connected with the ultimate production of goods that without the material in question the goods will become commercially inexpedient. In such cases the goods used in the process will fall within the expression “in the manufacture of goods”. It cannot be said that without a captive power plant the manufacturing of paper is not possible. ”

Analysis of the decision: It was observed by the Hon’ble Orissa High Court that only such goods would fall under expression “in the manufacture of goods” where they are so integrally connected with the ultimate production of goods that in normal circumstances without the material in question the manufacturing of goods will become commercially inexpedient. The conclusion of the Hon’ble High Court was that it cannot be said that without captive power plant, manufacturing of paper is not possible. Therefore, plant & machinery for captive power plant cannot be purchased against C Form.

The Hon’ble Orissa High Court then provided that the decision of the Hon’ble Allahabad High Court in the matter of Micro Abressive India Limited v. Commissioner of Sales Tax, UP Lucknow reported in (1996) 102 STC 19 is not applicable in the case of captive power plant. The Hon’ble Allahabad High Court in the matter of Micro Abressive India Limited v. Commissioner of Sales Tax, UP Lucknow reported in (1996) 102 STC 19 held that Diesel Generator Set can be purchased against C form. The judgement was held by the Hon’ble Orissa High Court on different facts then the present case in hand as follows:

”On those facts, the Allahabad High Court held that the diesel generating set which had been purchased by the dealer had no other use except to produce’ electricity which was necessary for running the plant and machinery for production of goods and therefore held that penalty was not leviable. But in the instant case, the Petitioner, as noted above, had not purchased machinery and spares against ‘C Forms for its existing power plant but for the erection of a new power complex for facilitating the manufacture of paper. Therefore, the machinery and plant purchased for erection of the new captive power plant cannot be said to be integrally connected with the manufacturer of paper. Therefore, the decision in Micro Abressive India Ltd. (supra) does not support the Petitioner’s contention. ”

The Hon’ble Orissa High Court then referred to the decision of Hon’ble Apex Court in the matter of Indian Copper Corporation Limited and J.K. Cotton Spinning & Weaving Mills Co. Ltd and observed that

“Saying so the Learned Judges made it very clear that expression “goods intended to be used in the manufacture or processing of goods for sale” cannot be equated with those good which are likely to facilitate the conduct of the business of manufacturing”.

The Hon’ble Court further observed in para 18 of the judgement that

”18. Here also the new captive power plant might facilitate the manufacturing of paper, but the erection of such a plant is not integrally connected with the manufacturing process of paper. ”

Analysis of the decision: Thus, Hon’ble Orissa High Court held that as machinery and spares against C form were purchased for a new captive power plant facilitating the manufacture of paper, the same would not be allowed to be purchased against C form.

It seems that one of the major consideration going against the assessee before the Hon’ble Orissa High Court was that manufacture of paper by the assessee was already being carried out without the captive power plant and erection of new captive power plant in view of the Hon’ble High Court was only to facilitate the existing production and therefore was not treated as integral to the manufacturing process as without captive power plant also the manufacturing was previously being carried out by the assessee.

The Hon’ble Orissa Court overruled its own decision in the matter of Mohavir Prasad Jain and Anr. v. State of Orissa and Ors. reported in (1987)67 STC 376 wherein it was held that Diesel Generator set is capital goods citing following decisions as follows:

”23. This Court, finds that the said decision was peculiar to the facts of that case, but the said decision cannot be treated as a binding precedent on construction of Section 8(3)(b) of CST Act since the said decision was rendered without at all adverting to the decisions of the Supreme Court, referred to above on, construction of Section 8(3)(b) of CST Act. Therefore, the decision in Mohavir Prasad Jain (supra) must be confined to facts of that case and cannot be treated as a binding precedent. ”

Analysis of the decision: It would be pertinent here to refer that decision of Hon’ble Orissa High Court in the matter of Mohavir Prasad Jain and Anr. v. State of Orissa and Ors. reported in (1987)67 STC 376 was later on followed by the Hon’ble Allahabad High Court in the matter of The Commissioner, Trade Tax vs S/S Subham Cane Crusher on 30 March, 2007. It would be pertinent here to refer that decision of Allahabad High Court in the matter of Subham Cane Crusher was given on 30^th March 2007 whereas the decision in the matter of Orient paper mills was delivered on 6^th November 2006. Thus the decision in the matter of Subham Cane Crusher is a later judgement as well.

The Hon’ble Orissa High Court Orient Paper Mills vs State Of Orissa And Ors. on 6 November, 2006 Equivalent citations: 103 (2007) CLT 147, (2007) 10 VST 547 Orissa then following the decision of Hon’ble Madras High Court in the matter of Koodal Industries Limited Vs State of Tamilnadu decided the matter against the assessee that plant and machinery for captive power plant cannot be purchased against C form as follows:

“The decision cited by the Learned Counsel for the Revenue on this aspects has some application to the present case. In the case of Koodal Industries Limited v. State of Tamil Nadu reported in (1994)93 STC 446, the High Court of Madras has held that a generator cannot be said to be machinery particularly connected with a floor milling even though generally a generator may be used in any industry for generation of electricity for running its machinery. In that case, the Petitioner’s certificate of registration under CST entitled the Petitioner to purchase “machinery connected with flour milling” and on the strength thereof the Petitioner had purchased the generator. The Court held that even though the generator may be used for generation of electricity and running the machinery, it cannot be said that the same is covered by the certificate of registration.”

The peculiarity of decision and why the decision of Madras High Court in Koodal Industries cannot be generalized has been explained by Hon’ble Rajasthan High Court in the matter of Jai Glasskow vs Commercial Taxes Officer on 18 May, 2007 Equivalent citations: (2007) 8 VST 770 Raj as follows:

“The Madras High Court judgment relied upon by learned Counsel for the Revenue is distinguishable in as much as in the case before the honourable Madras High Court the goods mentioned in registration certificate were “machinery connected with flour milling”.

Analysis of the decision: It would be pertinent here to mention that the matter before the Hon’ble Rajasthan High Court was whether assessee was entitled to purchase lathe machine at concessional rate against the declaration in form C under Section 8(1) of the Central Sales Tax Act, 1956 read with Section 8(3)(b) of the said Act.

Hon’ble Rajasthan High Court in the given matter held that the decision of Hon’ble Madras High Court in the matter of Koodal Industries was relating to peculiar facts and therefore not applicable. However, Hon’ble Rajasthan High Court followed the principle laid down by the Hon’ble Allahabad High Court in the matter of MICRO ABRESSIVE INDIA LIMITED VERSUS COMMISSIONER OF SALES TAX U P LUCKNOW and allowed goods to be purchased against C form.

It would be pertinent here to discuss the facts and decision of Hon’ble Madras High Court in the matter of Koodal Industries Limited v. State of Tamil Nadu reported in (1994)93 STC 446, it was held that

“A generator cannot be said to be a machinery, particularly connected with flour milling, though generally a generator may be used in any industry for generation of electricity for running the machineries in the factory. Therefore, it cannot be said that the petitioner was under the bona fide impression that the generators also would come under the term “machineries connected with flour milling””

In the given case the appellant sought to include Generator set in the certificate of registration as machinery connected with a flour mill. Therefore although the generator set was used in generation of electricity but the same was held not to be machinery connected with the Flour Mill. Therefore, Generator in the above case was not allowed to be purchased against C form. The peculiarity of the facts of the decision can also be understood from the arguments advanced by departmental representative which are as follows:

“On the other hand, the learned counsel for the Revenue argues that what is mentioned in the certificate of registration of the petitioner is machineries, etc., “connected with flour milling” and that the generators could not be treated as machineries “connected with flour milling”. According to her, if at least the certificate of registration mentioned only “machineries” generally, and not added the rider “connected with flour milling”, there may be some scope for the argument advanced by the learned Counsel for the petitioner. But, in view of the fact that the certificate of registration also contains the above said rider “connected with flour milling”, according to the learned counsel for the Revenue, there cannot be any scope for the argument advanced by the learned counsel for the petitioners, since generator cannot be termed as machinery particularly connected with flour milling, though it may be generally connected with any industry.”

Analysis of the decision: It has been contended that had the entry in registration certificate been “machineries” rather than “machinery connected with flour mill”, there would have been some scope for purchasing of generator on C form but under the words “machinery connected with flour mill”, it cannot be said that generator is machinery connected with flour mill.

It can be seen that the above judgement has been given on peculiar facts of the case and therefore in my humble view, the decision was given on facts which are not generally applicable.

♣  Hon’ble Madras High Court in the matter of Hwashin Automotives India Pvt vs The State Of Tamil Nadu on 21 November, 2013 disallowed the claim of the assessee for purchase of the generator set against C Form as follows:

The facts of the case were as follows:

”The assessee herein is engaged in the manufacture of automobile parts. The assessee had his registration Certificate on the provisions of the Central Sales Tax Act, 1956, mentioning the following goods:

“for use in manufacture or processing of goods for sale”

“machines, mechanical press, welding machine, fig crane, CO2 welder and Spot Steel its CO2 gas, paint, electrodes, tools”

The assessee purchased Diesel Generator Set and Air Conditioners by using “C” forms, which even as per the Certificate of Registration issued to the dealer, the assessee was not entitled to purchase.

The assessee contested the proposal by taking the view that the diesel generator sets were only machines and as machines had been included for use in manufacture or processing of goods for sale in the Certificate of Registration, there was no mistake on their part in the issuance of “C” forms. The assessee, thus, contended that being a machinery, diesel generator sets were covered under the said head and being in the first year of preparation in 2002-03, they had no qualified person to advise them on this. ”

The appeal of the assessee was rejected by the Appellate Assistant Commissioner on following grounds:

”3. Aggrieved by this, the assessee went on appeal. The Appellate Assistant Commissioner, who once again confirmed the view of the Assessing Officer, pointed out that if the claim of the assessee that generators and air conditioner fall under the category of machines was correct, then, they would not have included welding machines and mechanical press in the Certificate of Registration. Thus once the assessee had included welding machines and mechanical press in the Certificate they should also have included the diesel generator sets as well as the air conditioners in the Certificate. Consequently, going by the false representation made, that the items in question were covered under Certificate of Registration, the levy of penalty was confirmed. ”

The appeal of the assessee was rejected by the Appellate Tribunal on following grounds:

”5. Referring to the decision of this Court reported in 93 STC 446 [Koodal Industries Limited vs. State of Tamil Nadu], the Sales Tax Appellate Tribunal, held that the diesel generator set could not be held to be a machinery. Thus going by the facts available, the Sales Tax Appellate Tribunal, confirmed the view of the Authorities below. ”

The Hon’ble Madras High Court rejected the appeal of the assessee on the following grounds as follows:

“12. As far as the present case is concerned, we do not find that the nature of the business would justify the purchase of diesel generator sets as forming part of the machinery to be used in the manufacture. Admittedly, the purchase of the generator set was only a standby to supply electricity whenever there was power failure.”

Analysis of the decision: Hon’ble Madras High held that as far as the instant case is concerned, nature of business would not justify purchase of diesel generator set as forming part of machinery. Therefore it might be inferred that diesel generator set can be considered as forming part of machinery to be used in manufacture but in the given case, the Hon’ble High Court considering the nature of business did not treat the same as part of machinery. However, further it seems that other major factor which also went against the assessee was that the generator was used as a standby in case of failure of electricity supply.

On the same given facts of use of generator sets as standby, Hon’ble Supreme Court in the matter of Commercial Taxation Officer, … vs M/S Rajasthan Taxchem Ltd on 12 January, 2007 has held Diesel as a raw material entitled to be purchased on concessional rate even when used for generating set kept on a standby for production activities in case of power failure. Hon’ble Orissa High Court in the Matter of Mohavir Prasad Jain and Anr. v. State of Orissa and Ors. reported in 67 STC, 376 on similar facts of stand by diesel generator set allowed use of C form for purchase of generator set. Further clarification issued by Financial Commissioner & Principal Secretary, Government of Haryana, Excise And Taxation Department, Under Section 56(3) Of The Haryana Value Added Tax Act, 2003. In the matter of M/s Bhaskar Gensets Pvt. Ltd. Udyog Vihar, Phase- V, Gurgaon has also upheld the generator set used as a standby to be in the nature of plant and machinery and therefore capital goods.

♣  Hon’ble Allahabad High Court in the matter of Hira Industries Vs Commissioner of Sales Tax 1993 UPTC 471:

It was held in the given matter that in the manufacture of khandsari sugar, the generator and the alternator is not directly involved and, therefore, the assessing officer was justified not to include this item in the registration certificate of the sugar manufacturer. However, Hon’ble Allahabad High Court later on its decision in Micro Abressive India Limited Versus Commissioner Of Sales Tax U P Lucknow distinguished this decision stating that

“Admittedly, the diesel generating set that has been purchased by the dealer and that has been mentioned in the registration certificate was intended only to produce electricity for running the other plant and machinery for the manufacture of the lapping abrasive powder. Neither the assessing officer not the Tribunal has mentioned that when the assessing officer granted the registration certificate, the dealer had mentioned some other use of the diesel engine and alternator or that the assessing officer was under the impression that the same would be used for some other purpose.”

4. Generation of Electricity through use of generator set must be for exclusive use in manufacturing or processing of goods and not for any other purpose:

The common principle running through the above judgment’s going in favour of the dealer is that the dealer has used the electricity generated through the generating sets exclusively in manufacturing or processing of goods. The electricity generated has not been used for personal or factory purposes other than manufacturing or processing operations. The courts have in the above judgments at different places emphasized that if the revenue would have been able to prove that the electricity generated from the generating sets has been used for purpose other than manufacturing or processing then the benefit of purchase against concessional rate would not have been applicable. The relevant extracts of judgement are as follows:

♣  Hon’ble Allahabad High Court in the matter of MICRO ABRESSIVE INDIA LIMITED VERSUS COMMISSIONER OF SALES TAX U P LUCKNOW has held that

“As pointed out above a diesel generating set has no other use except to produce electricity which is necessary for running the plant and machinery for the production of goods. It cannot therefore, be said that the dealer is using the generating set for any other purpose. It is not the case of the Revenue that the electricity produced by the diesel generating set in question was not being used in running the plant and machinery and other allied purpose and was being used for a different purpose, e.g., the supply of electricity to residential houses. ”

♣ Hon’ble Allahabad High Court in the matter of The Commissioner, Trade Tax vs S/S Subham Cane Crusher on 30 March, 2007

”9. Generator was installed in the factory. There is nothing to suggest that the electricity generated in the generator was not for use in the production. ”

♣  Hon’ble Orissa High Court in the matter of Mohavir Prasad Jain and Anr. v. State of Orissa and Ors. reported in 67 STC, 376 as follows:

“Petitioner No. 2 required a generator for use by it in the generation of electricity for its factory. Therefore, its case was clearly covered by Clause (b). So also its case for accessories, spare parts of generator and diesel oil would be covered by the said clause.

5. Conclusion:

It can be concluded that the very reason that generator sets have become an integral part of manufacturing set-up is the erratic power supply and requirement of the industry of continuous power supply. Thus it’s very normal for the industries now-a- days to have the back-up of supply of electricity through generator set and in some case as a main source of power supply.

Thus applying the principle as laid down by the Hon’ble Apex Court in the matter of M/S. J. K. Cotton Spinning & … vs Sales Tax Officer, Kanpur And … on 28 October, 1964 of having regard to normal conditions prevalent in the industry, if production of the goods would be difficult without the use of equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale, it can be safely concluded that on account of the erratic power supply and other factors relating to supply and continuous requirement of power by the industries, installation of generator for running of the machineries has become a very normal condition. Generator set have become an integral part of the manufacturing set-up and therefore the same can be termed as part of plant and machinery and part of manufacturing set up of the Industry.

However in my humble view, the above conclusion would be subject to the use of electricity generated from the generator set as follows:

• Exclusive use in Manufacturing or Production activity: Although there are differing decisions on the matter but it can be argued in favour of the assessee that generator set can be purchased against C form where the electricity generated from the generator set has been used exclusively in the manufacturing or processing of goods irrespective of the fact that whether the generator set was used as a standby or exclusive source of supply of power.

• Not used in Manufacturing or Production activity: In the prevailing legal scenario, generator set in such a situation should not be purchased against C form.
  

• Partial use in Manufacturing or Production activity: Wherein the use of the electricity generated from the generator set is not limited to the exclusive use in running of plant and machinery and is used partly for manufacturing and partly for other purpose then in such case ratio and principle laid down by the Hon’ble Apex Court in the matter of Indian Copper Corporation … vs Commissioner Of Commercial … on 19 October, 1964 Equivalent citations: AIR 1965 SC 891, 1965 (0) BLJR 460, 1965 16 STC 259 SC would be applicable. It was held in the above matter with regard to the cane baskets that cane baskets to the extent used for purpose of carrying out the manufacturing process can be procured against C form and cane baskets which are not part of the manufacturing process cannot be procured against C form at concessional rate.
  

Therefore in such a scenario, if the assessee is able to identify the generator set which would be used exclusively in manufacturing process, then in such case, he can purchase particular generator set against C form and if that is not possible and electricity generated from the generator set is being used for dual purposes i.e. partly in manufacturing process and partly otherwise, then in such case, the generator set should not be purchased against C form.

Disclaimer:  This article contains interpretation of the Act, Rules and personal views of the author are based on such interpretation. It is not intended to be a professional advice and should not be relied upon for real time professional facts. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article. Author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write up.