Omni Forge Pvt. Ltd. Vs. Assistant Commissioner of Commercial Taxes and anr. - Court Judgment

Excerpt:
karnataka sales tax act, 1957 - entry no. 2 (a)(viii) of fourth schedule - 'forgings' - whether forgings manufactured by petitioner falls under said entry - petitioner uses mild steel ingots and billets, pounds them pressure to make forged parts - such parts subsequently subjected 'proof machining' - assessing authority held that such forgings fall under said entry - revisional authority reversed such finding holding that after 'proof machining' they lose identity as forgings and held that they would be taxable as machine components - on appeal, tribunal upheld the order of the revisional authority - revision to high court - 'forgings' are goods of special importance - 'proof machining' is done only to remove forging scales and uneven surface - it would not change identity of commodity - orders of revisional authority and tribunal set-aside. ;the activity of the petitioner as stated by the petitioner and accepted by all the authorities under the act is that the petitioner company uses mild steel ingots, mild steel billets and pounded them under great pressure to make the forged parts such as shafts spindles, forged discs, gear forgings, etc., and when they are pounded to a particular shape or design, the end product would be rough and unfinished and to meet the requirement of the customer 'proof machining' is done to remove the forging scales and uneven surface. in our opinion, mere 'proof machining' on the rough forgings would not change the identity of the commodity. ; petitions allowed. - - 2. the assessee is a private limited company incorporated under the provisions of the companies act, 1956. the assessee is also a dealer registered under the provisions of the karnataka sales tax act ('kst act' for short) as well as the central sales tax act ('cst act' for short). 3. the petitioner is engaged in the manufacture of forgings with specialisation in forging jointiess rings, ring gears, flanges of sizes up-to 750 mm outer diameter.orderh.l. dattu, j.1. since common questions of facts and law are involved in these two revision petitions, they are heard together and disposed off by this common order.2. the assessee is a private limited company incorporated under the provisions of the companies act, 1956. the assessee is also a dealer registered under the provisions of the karnataka sales tax act ('kst act' for short) as well as the central sales tax act ('cst act' for short).3. the petitioner is engaged in the manufacture of forgings with specialisation in forging jointiess rings, ring gears, flanges of sizes up-to 750 mm outer diameter. according to the petitioner, the activity that is carried on by it, is the purchase of mild steel ingots and mild steel billets and then to pound them by hammers under great pressure to form high strength parts known as forgings. it is stated by the petitioner that the metal used for forgings is never melted and poured and there is also no foundry process involved in the manufacture of forgings.4. the main customers of the petitioner are m/s bharat earth movers limited, kgf, m/s hindustan motors limited, hosur, m/s larson & toubro, bangalore, m/s lakshmi machine works limited, coimbatore etc. according to the petitioner, as per the orders placed by his customers along with the drawings, the forgings are hammered and supplied to its customers.5. the assessing authority for the assessment years 1990-1991 and 1991-1992 had passed assessment orders both under kst and cst act and had levied tax at 4% treating the goods manufactured and sold by the petitioner company as declared goods under section 14 of cst act 1956 read with section 5(4) of kst act, 1957.6. the revisional authority, being of the view that the order passed by the assessing authority for the aforesaid assessment years were irregular, improper and prejudicial to the interest of the revenue, issued a notice to the petitioner under section 21(2) of the act, inter alia directing the petitioner to show cause why the order of assessment passed by the assessing authority should not be revised and the sale of forgings manufactured and sold by the petitioner to his customers should not be treated as parts of machinery and parts of automobiles and tax them at the rate of 13% on a turnover of rs. 18,46,713.29.7. after receipt of the said show cause notice, the petitioner filed its detailed reply before the revisional authority objecting to the proposal made in the show cause notice and also produced before the revisional authority the purchase orders that were received by it from its customers and also the instructions issued by the government of india, ministry of finance (department of revenue & insurance) dated 18.12.1975. the assessee also contended before the revisional authority that the assessing authority had not committed any error whatsoever, which called for a revision of assessment orders passed for the assessment years 1990-1991 and 1991-1992 by the revisional authority. therefore, it requested the revisional authority to drop the proceedings.8. the revisional authority, after going through the purchase orders placed by the petitioner's customers and also after adverting to the opinion received from the ministry of finance dated 18.12.1975, again came to the conclusion that there is some process involved after the petitioner purchases mild steel ingots and converts them into forgings by a method called 'proof machining' and that therefore, they no more retained their identity as forgings and therefore, the assessing authority was not justified in treating the goods manufactured and sold by the petitioner as forgings referred to in section 14 of the cst act, 1956. consequently, the revisional authority, by rejecting the objection filed by the assessee, revised the assessment orders passed by the assessing authority under the kst act for the assessment years in question relating to sales of forgings and re-determined the taxable turnover of the assessee relating to forgings, 50% of it as sales of machine components taxable at 13% and other 50% as sales of automobile parts taxable at 13%.9. aggrieved by the findings of the revisional authority, the petitioner was before the karnataka appellate tribunal in s.t.a. nos. 247 and 248 of 2001. even before the appellate tribunal, petitioner reiterated the contentions that were canvassed by it before the revisional authority and also produced for inspection its sample material which was normally supplied to its customers including purchase orders etc. the tribunal in its order dated 26.10.2002 observes as under:'the next contention is that only small amount of machining is undertaken to remove forging scales and uneven surface to detect flaws and hence they do not acquire character of components or parts. the counsel referred to the sample copies of orders, invoices and two letters of its customers. they were produced by the counsel at the time of arguments. the sample copies of orders invoices and two letters of beml dated 2.8.2002 and hindustan motors limited dated, 31.7.2002 make it clear that goods ordered and supplied were in machined condition termed as proof machined condition and the products were according to the specifications such as bushings, flange, gear, gear drive, gear crank, joint yoke, ring gear, shaft, screw, sleeve, ring hup lockup, gear front internal and fly wheel. no doubt it is stated in the opinion letters of beml and hindustan motors limited, that proof machining is only to detect flaws and they undergo further process of machining and other process before using them as components and parts. however, the fact that further process of machining is undertaken by customers before using them as components and parts cannot be a ground to hold that forgings undergoing processing of machining at the hands of appellant did not change their character. because it is the prerogative of purchaser to under taken such further process to make the item more suitable according to the requirement and satisfaction of his customers. the very process of production of forgings makes it clear that the end product would be rough and un-machined. hence process of machining under taken even to remove forging scales and uneven surface would change the character of forgings.'10. the view of the tribunal appears to be that the process of production of forgings makes it clear that the end product would be rough and unmachined and the process of 'proof machining' carried out by the assessee on the rough and unmachined forgings would change the character of forgings and therefore, the revisional authority was justified in revising the orders of assessment passed for the assessment years in question.11. aggrieved by the aforesaid findings of the karnataka appellate tribunal, the petitioner is before this court in these revision petitions filed under section 23(1) of the karnataka sales tax act.12. sri. rabinathan, learned counsel for the petitioner would submit that the revisional authority and also the tribunal were not justified in coming to the conclusion that what is processed and sold by the petitioner to his customers is not forgings and therefore, not declared as goods falling under section 14(viii) of the cst act read with section 5(4) of the kst act. it is his further contention that the findings of the revisional authority and .the tribunal that by the process of production of forgings, the end product would be rough and unmachined and the process of 'proof machining' would change the identity of the forgings is unsustainable in law. the learned counsel has also shown to this court the samples of rough forging and the end product after the proof machining to demonstrate that the proof machining that is done on the rough forgings is only to remove forging scales and to detect any cracks or flaws on the forged material and the minimum process that is done in no way changes the identity of the forgings. the learned counsel also brings to our notice the information supplied by the ministry of finance dated 18.12.1975, wherein the ministry has explained the meaning of the expression 'forgings'. in the letter, it is also indicated that the secretaries of all the states should circulate that information to all the sales tax authorities in their state for their guidance.13. in world book encyclopaedia (page 409) 'forging' has been defined as 'forging is a process in which a metal is shaped by being heated and then hammered or pressed.' almost any metal can be forged, but the most commonly forged ones include steel and aluminium, and alloys of nickel and titanium. objects made by forging range in size from small hand tools to huge engine shafts weighing hundreds of tons. they include such products as wrenches, crank shafts, axles and aircraft landing supports etc.metals are composed of crystals. the hammering or pressing of metal bends the crystals and makes their structure less stable. but the heat used in forging enables new crystals to form in place of deformed ones. for this reason, forging is used in manufacturing many metal products that withstand great stress. metal can he forged either by hand or by machine.in encyclopaedia americana (vol ii page 599) the word 'forging' has been defined as 'forging is the shaping of metal by compressing between a hammer or ram and an anvil.' in the most primitive form of the process, the metal is held in a large block, or anvil and beaten into the desired shape with a hammer.14. the expression 'forgings' is explained in the letter of the ministry of finance dated 18.12.1975 as follows:'(i) forgings; the term 'forgings' under section 14(viii) would include crank shaft forgings, main shaft forgings, drop arm forgings, bearing bush forgings, wheel forgings, gear blank forgings, lever forgings for lift link.assembly, front nut forgings, clutch plate lever forgings, differential turnover forgings, bevel pinion forgings, element clamp-washer forgings, operation shaft forgings, shift fork of front drive clutch, lower bush forgings, steering knuckle forgings, grooved nut forgings. door hinge forgings, lever r.h. forgings, torque plate forgings, engaging gear pad forgings, buffer spring centre washer forgings, buffer spindle forgings, shackle pins, joggled fish plates, screw coupling forgings, spring shackle forgings, door hinge, foot forging, pull rod.(ii) finished tools made of steel or steel alloys: from sub-item(ix) under section 14(iv) of c.s.t. act, 1956, it would, and not finished tools.2. the above advice of dgtd/department of steel may please be brought to the notice of all the sales tax authorities in the state for their guidance.3. this issues with the concurrence of the dgtd/department of steel.'15. the circular letters issued by the government of india interpreting a particular item mentioned in section 14 of cst act does not bind the sales tax authorities or the courts in interpreting the entries mentioned under that section. therefore, the circular letter issued by the ministry of finance will not assist the petitioner.16. 'forgings' are one of the goods of special importance in interstate trade and commerce. forgings are specified in section 14(iv/ vii) of the cst act, 1956. the entry is as under:'section 14: certain goods to be of special importance in interstate trade or commerce: (iv) iron and steel that is to say;(i) pig iron, sponge iron.(viii) discs, rings, forgings and steel castings. the corresponding entry in kst act, 1957, is entry no. 2(a)(viii) of the fourth schedule:'2. iron and steel, that is to say: (a)(1) pig iron, sponge iron(viii) discs, rings forgings and steel castings.' the entry under sec. 14(viii) of the cst act, 1956 and entry no. 2(a)(viii) of fourth schedule to the act speak of 'forgings'.17. in the present case, the activity of the petitioner as stated by the petitioner and accepted by all the authorities under the act is that the petitioner company uses mild steel ingots, mild steel billets and pounded them under great pressure to make the forged parts such as shafts spindles, forged discs, gear forgings, etc., and when they are pounded to a particular shape or design, the end product would be rough and unfinished and to meet the requirement of the customer 'proof machining' is done to remove the forging scales and uneven surface. in our opinion, mere 'proof machining' on the rough forgings would not change the identity of the commodity. in the present case, having seen the commodity which was produced before us and having perused the purchase orders placed by the petitioner's customers and meaning of the expression defined in the dictionaries, we are of the view that in the present case, the revisional authority could not have come to the conclusion that 'proof machining' undertaken by the petitioner company to remove the forging scales and uneven surface would change the character of the 'forgings' prepared and sold by the petitioner company. in view of the above conclusion of ours, we cannot sustain the findings of the tribunal, which has confirmed the findings of the revisional authority.17. in the result, the petitions are allowed. the order passed by the karnataka appellate tribunal in sta nos. 247 & 248/01 dated 26.10.2002 and the order passed by the revisional authority for the assessment years 1990-1991 and 1991-1992 dated 8.12.2000 are set aside. the order made by the assessing authority for the assessment year 1990-91 dated 29.5.1992 and for the assessment year 1991-92 dated 12.8.1992 are restored. ordered accordingly.

Judgment:
ORDER

H.L. Dattu, J.

1. Since common questions of facts and law are involved in these two revision petitions, they are heard together and disposed off by this common order.

2. The assessee is a Private Limited Company incorporated under the provisions of the Companies Act, 1956. The assessee is also a dealer registered under the provisions of the Karnataka Sales Tax Act ('KST Act' for short) as well as the Central Sales Tax Act ('CST Act' for short).

3. The petitioner is engaged in the manufacture of forgings with specialisation in forging jointiess rings, ring gears, flanges of sizes up-to 750 mm outer diameter. According to the petitioner, the activity that is carried on by it, is the purchase of mild steel ingots and mild steel billets and then to pound them by hammers under great pressure to form high strength parts known as forgings. It is stated by the petitioner that the metal used for forgings is never melted and poured and there is also no foundry process involved in the manufacture of forgings.

4. The main customers of the petitioner are M/s Bharat Earth Movers Limited, KGF, M/s Hindustan Motors Limited, Hosur, M/s Larson & Toubro, Bangalore, M/s Lakshmi Machine Works Limited, Coimbatore etc. According to the petitioner, as per the orders placed by his customers along with the drawings, the forgings are hammered and supplied to its customers.

5. The Assessing Authority for the assessment years 1990-1991 and 1991-1992 had passed assessment orders both under KST and CST Act and had levied tax at 4% treating the goods manufactured and sold by the petitioner company as declared goods under Section 14 of CST Act 1956 read with Section 5(4) of KST Act, 1957.

6. The Revisional Authority, being of the view that the order passed by the Assessing Authority for the aforesaid assessment years were irregular, improper and prejudicial to the interest of the revenue, issued a notice to the petitioner under Section 21(2) of the Act, inter alia directing the petitioner to show cause why the order of assessment passed by the Assessing Authority should not be revised and the sale of forgings manufactured and sold by the petitioner to his customers should not be treated as parts of machinery and parts of automobiles and tax them at the rate of 13% on a turnover of Rs. 18,46,713.29.

7. After receipt of the said show cause notice, the petitioner filed its detailed reply before the revisional authority objecting to the proposal made in the show cause notice and also produced before the revisional authority the purchase orders that were received by it from its customers and also the instructions issued by the Government of India, Ministry of Finance (Department of Revenue & Insurance) dated 18.12.1975. The assessee also contended before the revisional authority that the assessing authority had not committed any error whatsoever, which called for a revision of assessment orders passed for the assessment years 1990-1991 and 1991-1992 by the revisional authority. Therefore, it requested the revisional authority to drop the proceedings.

8. The revisional authority, after going through the purchase orders placed by the petitioner's customers and also after adverting to the opinion received from the Ministry of Finance dated 18.12.1975, again came to the conclusion that there is some process involved after the petitioner purchases mild steel ingots and converts them into forgings by a method called 'proof machining' and that therefore, they no more retained their identity as forgings and therefore, the assessing authority was not justified in treating the goods manufactured and sold by the petitioner as forgings referred to in Section 14 of the CST Act, 1956. Consequently, the revisional authority, by rejecting the objection filed by the assessee, revised the assessment orders passed by the assessing authority under the KST Act for the assessment years in question relating to sales of forgings and re-determined the taxable turnover of the assessee relating to forgings, 50% of it as sales of machine components taxable at 13% and other 50% as sales of automobile parts taxable at 13%.

9. Aggrieved by the findings of the revisional authority, the petitioner was before the Karnataka Appellate Tribunal in S.T.A. Nos. 247 and 248 of 2001. Even before the Appellate Tribunal, petitioner reiterated the contentions that were canvassed by it before the revisional authority and also produced for inspection its sample material which was normally supplied to its customers including purchase orders etc. The Tribunal in its order dated 26.10.2002 observes as under:

'The next contention is that only small amount of machining is undertaken to remove forging scales and uneven surface to detect flaws and hence they do not acquire character of components or parts. The counsel referred to the sample copies of orders, invoices and two letters of its customers. They were produced by the counsel at the time of arguments. The sample copies of orders invoices and two letters of BEML dated 2.8.2002 and Hindustan Motors Limited dated, 31.7.2002 make it clear that goods ordered and supplied were in machined condition termed as proof machined condition and the products were according to the specifications such as bushings, flange, gear, gear drive, gear crank, joint yoke, ring gear, shaft, screw, sleeve, Ring Hup Lockup, Gear Front Internal and Fly wheel. No doubt it is stated in the opinion letters of BEML and Hindustan Motors Limited, that proof machining is only to detect flaws and they undergo further process of machining and other process before using them as components and parts. However, the fact that further process of machining is undertaken by customers before using them as components and parts cannot be a ground to hold that forgings undergoing processing of machining at the hands of appellant did not change their character. Because it is the prerogative of purchaser to under taken such further process to make the item more suitable according to the requirement and satisfaction of his customers. The very process of production of forgings makes it clear that the end product would be rough and un-machined. Hence process of machining under taken even to remove forging scales and uneven surface would change the character of forgings.'

10. The view of the Tribunal appears to be that the process of production of forgings makes it clear that the end product would be rough and unmachined and the process of 'proof machining' carried out by the assessee on the rough and unmachined forgings would change the character of forgings and therefore, the revisional authority was justified in revising the orders of assessment passed for the assessment years in question.

11. Aggrieved by the aforesaid findings of the Karnataka Appellate Tribunal, the petitioner is before this Court in these revision petitions filed under Section 23(1) of the Karnataka Sales Tax Act.

12. Sri. Rabinathan, learned Counsel for the petitioner would submit that the revisional authority and also the Tribunal were not justified in coming to the conclusion that what is processed and sold by the petitioner to his customers is not forgings and therefore, not declared as goods falling under Section 14(viii) of the CST Act read with Section 5(4) of the KST Act. It is his further contention that the findings of the Revisional Authority and .the Tribunal that by the process of production of forgings, the end product would be rough and unmachined and the process of 'proof machining' would change the identity of the forgings is unsustainable in law. The learned Counsel has also shown to this Court the samples of rough forging and the end product after the proof machining to demonstrate that the proof machining that is done on the rough forgings is only to remove forging scales and to detect any cracks or flaws on the forged material and the minimum process that is done in no way changes the identity of the forgings. The learned Counsel also brings to our notice the information supplied by the Ministry of Finance dated 18.12.1975, wherein the Ministry has explained the meaning of the expression 'forgings'. In the letter, it is also indicated that the Secretaries of all the States should circulate that information to all the Sales Tax Authorities in their State for their guidance.

13. In World Book Encyclopaedia (Page 409) 'forging' has been defined as 'Forging is a process in which a metal is shaped by being heated and then hammered or pressed.' Almost any metal can be forged, but the most commonly forged ones include steel and aluminium, and alloys of nickel and titanium. Objects made by forging range in size from small hand tools to huge engine shafts weighing hundreds of tons. They include such products as wrenches, crank shafts, axles and aircraft landing supports etc.

Metals are composed of crystals. The hammering or pressing of metal bends the crystals and makes their structure less stable. But the heat used in forging enables new crystals to form in place of deformed ones. For this reason, forging is used in manufacturing many metal products that withstand great stress. Metal can he forged either by hand or by machine.

In Encyclopaedia Americana (Vol II Page 599) the word 'Forging' has been defined as 'Forging is the shaping of metal by compressing between a hammer or ram and an anvil.' In the most primitive form of the process, the metal is held in a large block, or anvil and beaten into the desired shape with a hammer.

14. The expression 'forgings' is explained in the letter of the Ministry of Finance dated 18.12.1975 as follows:

'(i) Forgings; The term 'forgings' under Section 14(viii) would include crank shaft forgings, main shaft forgings, Drop Arm Forgings, Bearing Bush Forgings, wheel forgings, gear blank forgings, Lever forgings for Lift Link.

Assembly, Front Nut forgings, clutch plate lever forgings, Differential Turnover forgings, Bevel Pinion forgings, Element clamp-washer forgings, operation shaft forgings, shift fork of front drive clutch, lower bush forgings, steering knuckle forgings, Grooved nut forgings. Door hinge forgings, lever R.H. forgings, Torque Plate forgings, Engaging Gear Pad forgings, Buffer Spring Centre washer forgings, Buffer spindle forgings, Shackle pins, Joggled fish plates, screw coupling forgings, spring shackle forgings, door hinge, foot forging, pull rod.

(ii) Finished tools made of steel or steel alloys: from sub-item(ix) under Section 14(iv) of C.S.T. Act, 1956, it would, and not finished tools.

2. The above advice of DGTD/Department of Steel may please be brought to the notice of all the Sales Tax Authorities in the State for their guidance.

3. This issues with the concurrence of the DGTD/Department of Steel.'

15. The circular letters issued by the Government of India interpreting a particular item mentioned in Section 14 of CST Act does not bind the sales tax authorities or the Courts in interpreting the entries mentioned under that Section. Therefore, the circular letter issued by the Ministry of Finance will not assist the petitioner.

16. 'Forgings' are one of the goods of special importance in interstate trade and commerce. Forgings are specified in Section 14(iv/ vii) of the CST Act, 1956. The entry is as under:

'Section 14: Certain goods to be of special importance in interstate trade or commerce:

(iv) Iron and steel that is to say;

(i) pig iron, sponge iron.

(viii) discs, rings, forgings and steel castings.

The corresponding entry in KST Act, 1957, is entry No. 2(a)(viii) of the Fourth Schedule:

'2. Iron and Steel, that is to say:

(a)(1) pig iron, sponge iron

(viii) discs, rings forgings and steel castings.'

The entry under Sec. 14(viii) of the CST Act, 1956 and entry No. 2(a)(viii) of Fourth Schedule to the Act speak of 'forgings'.

17. In the present case, the activity of the petitioner as stated by the petitioner and accepted by all the authorities under the Act is that the petitioner company uses mild steel ingots, mild steel billets and pounded them under great pressure to make the forged parts such as shafts spindles, forged discs, gear forgings, etc., and when they are pounded to a particular shape or design, the end product would be rough and unfinished and to meet the requirement of the customer 'proof machining' is done to remove the forging scales and uneven surface. In our opinion, mere 'proof machining' on the rough forgings would not change the identity of the commodity. In the present case, having seen the commodity which was produced before us and having perused the purchase orders placed by the petitioner's customers and meaning of the expression defined in the dictionaries, we are of the view that in the present case, the revisional authority could not have come to the conclusion that 'proof machining' undertaken by the petitioner company to remove the forging scales and uneven surface would change the character of the 'forgings' prepared and sold by the petitioner company. In view of the above conclusion of ours, we cannot sustain the findings of the Tribunal, which has confirmed the findings of the revisional authority.

17. In the result, the petitions are allowed. The order passed by the Karnataka Appellate Tribunal in STA Nos. 247 & 248/01 dated 26.10.2002 and the order passed by the Revisional Authority for the assessment years 1990-1991 and 1991-1992 dated 8.12.2000 are set aside. The order made by the Assessing Authority for the assessment year 1990-91 dated 29.5.1992 and for the assessment year 1991-92 dated 12.8.1992 are restored. Ordered accordingly.