Bombay H.C : Whether calcined petroleum coke manufactured by the appellant is the “Mineral Oil” within the meaning of section 80HHC ?

High Court Of Bombay

Goa Carbon Ltd. Vs. CIT, Panaji-Goa

Section : 80HHC

D.G. Karnik And F.M. Reis, JJ.

Tax Appeal Nos. 11 To 16 Of 2005, 65 And 66 Of 2007 And 20 Of 2010

October  21, 2010

JUDGMENT

D.G. Karnik, J. – These appeals relate to the different assessment years in respect of the same assessee namely Goa Carbon Limited and involve a common point. Hence, all the appeals are disposed of by this common judgment. Learned Counsel for the parties stated that all the relevant papers have been filed in Tax Appeal No. 13 of 2005. Hence, it would be appropriate to state the facts therein.

2. The appellant is a company involved in manufacture of Calcined Petroleum Coke (hereinafter referred to as the “CPC”) which is used for : making pre-baked anodes or carbon paste by the aluminium smelters for production of basic aluminium metal; as a carbon raiser for making carbon steel by the steel mills, foundries and steel plants; production of titanium dioxide; cathodic protection of cross countries oil/gas pipe lines; other miscellaneous uses for chemical industry; and anodes for dry cell batteries. Large part of the CPC manufactured by the appellant is exported. The appellant claimed deduction in respect of profit arising out of the export of the CPC. The Assessing Officer allowed to the appellant a deduction of the export profit under section 80HHC of the Income-tax Act, 1961 (for short ‘the Act’). However, the Commissioner of Income-tax (for short the “CIT”) exercising jurisdiction under section 263 of the Act set aside the assessment order insofar as it related to the deduction under section 80HHC. The CIT was of the view that the CPC was a mineral coke i.e., to say a residue obtained on refining petroleum crude by subjecting it to a process of calcination and, therefore, it was a processed mineral which was not specified in the Twelfth Schedule of the Act. Aggrieved by the decision of the CIT, the appellant filed an appeal before the Income-tax Appellate Tribunal (hereinafter referred to as the “ITAT”). The ITAT held that the CPC was manufactured from the raw material called as Raw Petroleum Coke (for short the “RPC”), commercially known as green coke, which in turn was obtained from petroleum crude which was a mineral oil. Hence the CPC was also a form of “mineral oil” and in view of sub-section (2)(b) of section 80HHC, the provision of deduction under section 80HHC(1) of the Act was not applicable to the CPC manufactured by the appellant. The ITAT therefore, confirmed the decision of CIT that the appellant was not entitled for deduction of the export profit derived from exports of the CPC under section 80HHC of the Act. The common decision of the ITAT dated 27-12-2004 passed in several appeals (in respect of assessment years 1995-96, 1997-98, 1998-99, 2000-01) is the subject-matter of this appeal.

3. By an order dated 29-8-2005, this Court admitted the appeal on the following substantial question of law :

“Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was justified in law in holding that calcined petroleum coke manufactured by the appellant is the “Mineral Oil” within the meaning of section 80HHC ?”

4. The appellant has annexed to this appeal a technical note describing the process of manufacture of the Calcined Petroleum Coke (CPC) at Exhibit ‘A’. The correctness of the note is not disputed by the revenue before us. The process of manufacture of the CPC is summarised below.

5. The petroleum crude oil is a naturally occurring petroleum substance quite deep beneath the surface of the earth and is obtained from on-shore/off-shore wells by an oil exploration process. Since, the petroleum crude oil is a naturally occurring substance below the surface of the earth, it is some times referred to as “mineral oil” and is commonly called as “petroleum crude” or “crude oil” or “petroleum crude oil”. This petroleum crude oil which is produced by several companies like ONGC, OIL INDIA and some foreign companies is sold to the refineries like Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL), Indian Oil Corporation (IOC) and IBP for processing into various petroleum products. After de-watering, de-salting and de-sulphurization, the petroleum crude oil, which is in liquid form at normal temperature, is then processed in petroleum refinery complexes to produce LPG, gasoline, jet fuel, naphtha, kerosene, stove distillate, tractor and diesel oil, gas oil, light motor oil, medium motor oil, heavy motor oil, extra-heavy motor oil, paraffin wax, steam cylinder stock, petroleum wax, greases and solvents, fuel oil, asphalt and tar, and bituminous materials . These petroleum products are in liquid state other than LPG which is in gaseous state and is compressed to liquid form and sold in LPG cylinders. The aforesaid various products are obtained by vacuum distillations and fractionation, catalytic cracking and reforming, thermal cracking and reforming, de-waxing and solvent extraction, filtering and finally blending. These operations are carried out at various temperatures and the products are manufactured and then stored and distributed to the consumers through petrol pumps/sales depots and other commercial outlets. These operations are carried out by the companies like BPCL, HPCL, IOC and IBP and now Reliance Industries by setting up refineries at mega investments. The products known as asphalt, tar and bituminous materials are obtained as bottom products of atmospheric and vacuum distillation when petroleum crude oil is distilled at high temperature to produce various products mentioned above. Asphalt, tar and bituminous materials are very heavy, viscous and tarry materials and are sold in the market very cheap. Some refineries, depending upon economic viability, convert these heavy fractions into value added light products as gas, gasoline and diesel oils by dealkylation and dehydrogenation at very high temperature and pressure in a separate plant called as delayed cooking units, commonly known as delayed cokers. Once asphalt, tar and bituminous materials are converted by dealkylation and dehydrogenation process in delayed cokers into gas, gasoline and diesel oil, the residue that remains at the bottom of the delayed cokers is a solid material and is called the “Raw Petroleum Coke” (RPC) which is commercially known as “green coke”. The RPC/green coke is a solid and hard material, black in colour and is obtained in powder form or lumps. The RPC/green coke is used as a raw material for the production of the CPC. The CPC is produced by calcining the RPC/green coke available as a residue from the delayed cokers. The appellant uses the RPC as raw material and manufactures the CPC from this RPC/green coke by subjecting it to a manufacturing process commonly called as the calcining process. The calcining process consists of the RPC/green coke being thermally upgraded for removal of associated moisture and volatile combustion matter and to otherwise improve critical physical properties i.e., electrical conductivity, real density and oxidation characteristics. The calcining process is essentially a time temperature function with the most important control variables being the hearing rate, volatile combustion matter/air ratio and final calcination temperature. By the calcination process the physical properties of the RPC change completely and a new product commercially known as the CPC comes into existence. A part of the CPC manufactured by the appellant is sold in domestic market which is consumed by the industry for making pre-bakes or carbon paste by aluminium smelters for production of basic aluminium metal, as a carbon raiser for making carbon steel by steel mills, foundries and steel plants, for production of titanium dioxide, cathodic protection of cross countries oil/gas pipe lines and other miscellaneous uses for chemical industry and manufacturing of anodes for dry cell batteries. The remaining CPC is exported by the appellant. In respect of the profit earned by the appellant out of the export of the CPC, the appellant claimed exemption under section 80HHC of the Act.

6. Section 80HHC of the Act provides for a deduction in respect of the profit earned from the export business. The section, so far as it is relevant for the purpose of our decision, reads as follows :-

“80HHC. Deduction in respect of profits retained for export business.—(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise :

Provided that : (Proviso not typed as not relevant)

(1A) (not typed as not relevant)

(2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange within a period of six months from the end of the previous year or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf.

(2)(b) This section does not apply to the following goods or merchandise, namely :-

(i)mineral oil; and

(ii)minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule).”

Sub-section (1) of section 80HHC of the Act provides for a deduction in respect of profit earned from the export business and says that where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which the section applies, he shall be allowed in computing the total income of the assessee a deduction of the profits derived by him from the export of such goods or merchandise. Clause (a) of sub-section (2) of section 80HHC provides that the section applies to all the goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into India by the assessee in a convertible foreign exchange within a period of six months from the end of the previous year or such extended period as the Chief Commissioner may allow. Clause (b) of sub-section (2) of section 80HHC which provides that the section would not apply to (i) mineral oil, and (ii) minerals and ores other than processed minerals and ores specified in the Twelfth Schedule to the Act.

7. The short question that arises for our consideration is whether the CPC manufactured and exported by the appellant falls within the clause (b) of sub-section (2) of section 80HHC so as to refuse to it deduction in respect of the export profits arising out of the manufacture and export of the CPC. Before we actually turn to the question at hand, it would be appropriate to refer to the object and purpose of section 80HHC of the Act. Undoubtedly, the exports by a country are necessary for its economic development. Every country needs to import raw materials as well as manufactured products which it does not produce or manufacture on its own, for meeting needs of its population and development of the country. The price required to be paid for such imports is met out of the convertible foreign exchange it earns by exports. Where the price of the imports exceeds the price of the exports made by a country, the difference is called as a trade deficit. Bulging trade deficit affects the economy of a country and even its ability to import in future. The trade deficit in India is growing and in order to narrow the gap between the imports and exports steps were required to be taken for promoting exports. After giving several incentives like cheaper rates of interest on borrowings made for exports and other export packages to further promote exports, the Legislature thought it fit to give a concession in the shape of deduction of export profit while computing liability for income-tax. Section 80HHC was introduced to promote the exports by giving a tax concession. Sub-section (1) of section 80HHC (as substituted by the Finance Act of 1985) provides for a deduction to be granted in respect of a profit earned by a company or a resident of India from a business of export out of India of any goods or merchandise. At the same time, while granting the export incentives, the Legislature has taken care to ensure that the natural resources of the country are not squan- dered by exports. The minerals and natural resources are required to be preserved for the posterity. The profit derived by a company or a person arising out of the export of mineral oil and minerals and ores (except processed minerals specified in the Twelfth Schedule) is, therefore, not be allowed to be deducted while computing the total income of the exporter. Clause (b) of sub-section (2) of section 80HHC ensures that the profit earned by exporting the natural resources, i.e., mineral oil and minerals (other than the processed minerals specified in the Twelfth Schedule) is not admissible for deduction under section 80HHC of the Act. We are inclined to interpret clause (b) of sub-section (2) of section 80HHC of the Act keeping in mind the purpose of it.

8. Clause (b) of sub-section (2) of section 80HHC of the Act provides that the section would not apply to (i) mineral oils and (ii) minerals and ores other than processed minerals and ores specified in the 12th Schedule. ITAT has held that since the CPC is derived from the crude petroleum which is a mineral oil, the CPC is a mineral oil. It was not the case of the revenue before the ITAT that the CPC is a mineral or ore falling under sub-clause (ii) of clause (b) of section 80HHC(2) but it was its case that the CPC is a mineral oil. Even before us learned Counsel for the revenue did not contend that the CPC is mineral or ore but submitted that it is a “mineral oil” being derived from the mineral oil. We would presently proceed to examine whether the CPC can be regarded as a “mineral oil”.

9. The term “mineral oil” is not defined in the Act. Therefore, submitted Mr. Inamdar, the expression “mineral oil” must be interpreted in the common parlance language. In Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 5381 (SC), while interpreting the expression “industrial undertaking” appearing in section 80J of the Income-tax Act, the Supreme Court held that since the expression ‘industrial undertaking’ was not given any meaning under the Act it must be understood as per common parlance language. Similarly in CIT v. Babcock & Wilcox of India Ltd. [2000] 241 ITR 5832, a Division Bench of the Calcutta High Court while interpreting section 32A of the Income-tax Act has held that when a ‘word or phrase’ is not defined under the Act, a normal meaning of that word should be taken, which is understood in common parlance. In CIT v. Madgul Udyog [1994] 208 ITR 541 (Cal.) relied on and cited by Mr. Inamdar appearing for the appellant, a Division Bench of Calcutta High Court held that the words which are not applied to any particular science or art are to be construed as they are understood in common parlance. The obvious and popular meaning of the language should be followed. If a statute contains language which is capable of being construed in a popular sense, such statute is not to construed according to the strict technical meaning of the language contained in it, but it is to construed in its popular sense that the people conversant with the subject-matter with which the statute is dealing could attribute to it. In CIT v. Teritex Knitting Industries (P.) Ltd. [1978] 114 ITR 634, a Division Bench of this Court has held that while interpreting the words used in statute, in case of difficulty or ambiguity a reference to a dictionary is permissible. In our view, from the above cited decisions, the following principle can be derived. When interpreting a word and used but not defined in an Act, the word must be understood as per the common parlance language. In case of a word or an expression, which relates to an article which is commonly used in commerce, the meaning in which the commercial men usually dealing with the subject-matter understand the word or expression is required to be taken into consideration and often that meaning is to be applied. While considering the meaning of a word, it is also permissible to look to the dictionary but where the meaning of a word or expression has been indicated by the higher Courts in its earlier decisions the meaning attributable to the word or expression given by the higher Court, unless there are compelling reasons to hold otherwise, must be followed. Keeping in mind these principles, we would now consider whether the Calcinated Petroleum Coke (CPC) is a mineral oil.

10. Since the expression ‘mineral oil’ is not defined in the Act, the meaning of the expression would have to be gathered from the common parlance. We would have to consider how the commercial men concerned with or dealing in “mineral oil” and other related commodities understand the expression ‘mineral oil’. If a trader were to go in the market to buy and asks for a mineral oil, he may be shown crude oil and anything and everything but the Calcined Petroleum Coke (CPC). Although the CPC is a product which is derived from the crude oil, no trader in the market would call the CPC a crude oil or mineral oil. In the common parlance, no body would mistake the CPC for a crude oil.

11. Looking the meaning given in different dictionaries, the Oxford Advanced Learner’s Dictionary, 7th Edition, gives meaning of the word “mineral oil” to be (1) Petroleum (2) Liquid paraffin. The Oxford English Dictionary, 1970 reprint, (Volume VI) states the word “mineral oil”, to be a general name for petroleum and the various oils distilled from it. It defines separately the word “mineral tar” to be : pissasphalt; mineral wax as Ozocerite. Legal dictionaries do not give precise definition to the expression “mineral oil” but give the meaning of the word “mineral”. The word “mineral” is defined in Black’s Law Dictionary, 6th Edition as any valuable inert or lifeless substance formed or deposited in its present position through natural agencies alone, and which is found either in or upon the soil of the earth or in the rocks beneath the soil. It then says that the word is not a definite term and is susceptible of limitations or extensions according to the intention with which it is used. In its ordinary and common meaning it is a comprehensive term including every description of stone and rock deposit whether containing metallic or non-metallic substances. Stroud’s Judicial Dictionary, 5th Edition, Volume 3 says the word “minerals” to means primarily all substances – other than the agricultural surface of the ground – which may be got for manufacturing or mercantile purposes, whether from a mine, as the word would seem to signify, or such as stone or clay, which are got by open working. From the meaning given in the Judicial Dictionary, it is clear that the expression “minerals” is used for primarily substances found on the earth or below the land and does not denote a product manufactured from the minerals found on the land or below the land. In Stonecraft Enterprises v. CIT AIR 1999 SC 16381, the Supreme Court held that granite exported by the appellant therein, without subjecting it to any process, was a mineral and the appellant was not entitled to the benefit of deduction of export profit in view of section 80HHC(2)(b) of the Act. However, as mentioned earlier it is not the case of the revenue that “the CPC” is a mineral but is a “mineral oil”. Hence, the decision has no application to the case at hand. The word “oil” ordinarily means a substance which is in liquid form and does not include a rock or solid substance or cystallised substance. A sample of CPC which was produced for our inspection shows that it is in the form of lumps or crystals and is in no way in a liquid or oil form. For the purpose of a substance to be regarded as mineral oil, it must ordinarily be a substance in liquid form and derived or extracted from the earth or land, from the surface of the earth or from below the earth. We express no opinion, as unnecessary in this case, as to whether a gaseous substance or a natural gas which is or can be converted in liquid form like Liquid Petroleum Gas or Compressed Natural Gas is a mineral oil. It would be ordinarily a primary substance and not a substance which is manufactured out of a mineral extracted from the earth. The mineral would ordinarily be a solid substance and mineral oil ordinarily would be in a liquid form or at least capable being converted into liquid form like LPG or CNG by simply applying or subjecting it to pressure. If these tests are applied, the CPC would not be a mineral oil.

12. The learned Counsel for the revenue referred to a decision of this Court in Burmah Shell Refineries Ltd. v. G.B. Chand, ITO [1966] 61 ITR 493 and invited our attention to the following sentence appearing at page 501 of the report :

“. . . it is clear that the expression “mineral oil” is wide enough to include both the petroleum in its crude form as well as the products secured or obtained from the crude oil by refining.”

Strongly relying upon this observation the learned Counsel submitted that since the CPC is admittedly a product derived form a crude oil or mineral oil, it must be held to be included in the meaning of the expression “mineral oil”. It is settled principle of law that the judgments or decisions of the Courts are not to be read like a statute. A sentence here and sentence there cannot be picked up and read as a sentence of a statute. The judgment must be read as a whole. The observations made in a judgment are to be read in the context in which they are made. The decision in a case is an authority for what it actually decides. The ratio decidendi of a case is binding. The obiter dicta (except of the Supreme Court) only has a persuasive value. A casual observation in a decision has no predential value. We would, therefore, examine the decision in the case of Burmah Shell Refineries Ltd. (supra) to find out its ratio. There, the Burmah Shell Refineries Ltd. (hereinafter referred to as ‘the company’) was carrying on business of refining crude oil. It filed a return of income for the assessment year 1964-65, corresponding to the calendar year 1963 ending on 31-12-1963. The Assessing Officer made a provisional assessment under section 141 of the Act by granting to the company rebate of 30 per cent and, thereafter, charged surtax at the rate of 25 per cent. The company by its letter dated 21-10-1966 requested the Assessing Officer to rectify the rebate at the rate of 35 per cent and not 30 per cent on the basis that the petitioner was a company engaged in the business of manufacture and production of mineral oil. Since no reply was given to the letter of the company, it filed a Writ Petition praying for mandamus directing the Assessing Officer to rectify the provisional assessment order by granting to the company the rebate of income-tax at the rate of 35 per cent instead of 30 per cent allowed by him. At page 500 of the report, the Court formulated the question which arose for it is consideration in the following words :

“The first question that arises is whether it could at this stage be said that the company prima facie appears to have been engaged in the business of manufacture or production of ‘mineral oil’ or whether it could at this stage be said that the company prima facie does not appear to have been so engaged.” [Emphasis supplied]

Then the Court went on to consider whether the products manufactured/produced by the company were “mineral oil”. There the company was involved in the business of refining petroleum crude. It was in that connection the Court held that prima facie the company appears to have been engaged in the business of manufacture or production of ‘mineral oil’. It may be noted from the aforementioned passage that the Court was considering only prima facie whether the company was engaged in the business of mineral oil. The stage before the Court was of provisional assessment. Further more the company was admittedly engaged in the business of refining crude oil which undoubtedly is a mineral oil. The final product in that case appears to be refined crude oil and not the CPC with which we are concerned. It was in this context the observation was made in the decision that the expression mineral oil would include the products secured from the crude oil by refining. The Court was not required to consider whether the CPC, which is a different commercial product manufactured from the Asphalt or Tar (a residue obtained in the refining process), was a mineral oil. The decision has no application to the facts of the case at hand.

13. LPG, motor spirit, diesel, jet fuel, paraffin wax, tar and bituminous materials are produced by refining petroleum crude/crude oil. These products are produced simply by atmospheric and vaccum distillation without subjecting the crude oil to any other manufacturing process. Asphalt, tar and bituminous materials are the bottom products obtained at the fractional distillation process. They are very heavy, viscous and tarry materials and are sold very cheap to be used as a raw material for producing further goods. By subjecting bituminous material to a process of dealkylation and dehydrogenation in delayed cokers, the Raw Petroleum Coke (RPC) or green coke is produced. This raw petroleum coke is a hard material or raw material used for the production of the CPC. The CPC is produced by calcination process carried out in specified high temperature up to 1200 – 1350 degree centigrade or higher. This process changes the crystalline structure of raw petroleum coke/green coke and converts it into the Calcined Petroleum Coke (the CPC). A different product known by the specific name “calcined petroleum coke” in the commercial world comes into existence by the calcination process. Physical properties like electrical conductivity, real density and oxidation characteristics are altered by subjecting the raw petroleum coke or the green coke to a calcination process. It brings into existence a different product which is sold in the market by a different name having different characteristics.

14. The learned counsel for the revenue, however, submitted that the calcination process cannot be regarded as a manufacturing process as it is a simple process of applying heat, may be by specialised methods, and mere heat treatment cannot be regarded as a manufacturing process and no new product, therefore, comes into existence. We are unable to agree. In CIT v. Tamil Nadu Heat Treatment & Fetting Services (P.) Ltd. [1999] 238 ITR 5291 , a Division Bench of the Madras High Court has held that simply by a process of heat treatment of raw untreated crankshafts, a new product of different quality and use comes into existence and this process of heat treatment was a manufacturing activity entitling the assessee to claim investment allowance under section 32A of the Income-tax Act. In the case of Sonebhadra Fuels v. Commissioner, Trade Tax [2006] 7 SCC 322, the Supreme Court has held that the ‘coal briquettes’ also known as ‘coal tikli’ produced by the assessee by grounding coal to a particular size and thereafter pressing it to form briquettes amounts to manufacture which includes processing, treating or adapting of coal. It cannot, therefore, be said that the appellant is not involved in the manufacture and does not apply any manufacturing process for converting the green coke/raw petroleum coke into the Calcined Petroleum Coke (CPC). In our view, the appellant is engaged in the business of manufacture of the CPC. Though the initial raw material used for manufacture of the CPC is a petroleum crude oil extracted from the earth, the product which is manufactured by the appellant is an entirely different product commercially known and regarded as different from petroleum crude and which is different than the one which is derived by mere distillation of the petroleum crude which is a mineral oil. The appellant does not merely squander away the mineral resource of the country by exporting a mineral resource or by superficial or inconsequential treatment to an extracted mineral oil. The mineral oil is first subjected to a distillation process wherein all valuable products like motor spirit, diesel, jet fuel etc., are taken out and what remains is a residue in the form of tar or bituminous products. This residue is again subjected to a manufacturing process known as delayed coking process to convert the tar and bituminous material into a green coke or raw petroleum coke. Yet another manufacturing process, though only a specified heat treatment, is applied to the green coke to convert it into CPC. More than one manufacturing processes are applied to the original mineral oil and a different commodity is manufactured and comes into existence which is different from the mineral oil. The mineral oil which is sold at few dollars a barrel is converted into a far higher valuable product which is sold for hundreds of dollars per ton. Valuable foreign exchange is earned not by exporting a natural resource of the country viz., the mineral oil but by exporting an entirely different value added product which is produced from the mineral oil. The CPC cannot be regarded as a mineral oil only because the original raw material is mineral oil.

15. For these reasons, we are of the view that the ITAT was not right in holding that the calcined petroleum coke manufactured by the appellant was a “mineral oil” within the meaning of section 80HHC(2)(b) of the Act. The question of law, accordingly, is answered in favour of the assessee and against the revenue. The decision of the ITAT confirming the order of the Commissioner of Income-tax as also the judgment and order of the Commissioner of Income-tax dated 4-3-1998 under section 263(1) of the Income-tax Act, 1961 are quashed and set aside.

[Citation : 332 ITR 209]

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