Introduction
Under Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002) the set off scheme is prescribed under the authority of section 48, read with rules. Rules 52 to 55 of MVAT Rules are relevant for deciding the set off quantum. Rule 52 provides that the purchases of capital assets, trading goods, as well as purchases debited to P & L A/c are eligible for set off. The set off availability is subject to retention as per rule 53 or prohibition as per rule 54.
Rule 53
Rule 53 provides for retention from set off, when the goods are used in the prescribed circumstances. In this note, the issue about reduction from set off in respect of purchases which are used as fuel is discussed. The reduction from set off in relation to fuel purchase is provided in Rule 53(1). The said rule is reproduced below for ready reference.
“53. Reduction in set-off. –
(A) The set-off available under any rule shall be reduced and shall accordingly disallowed in part or full in the event of any contingencies specified below and to the extent specified.
(1) If the claimant dealer has used any taxable goods as fuel, then an amount equal to three per cent of the corresponding purchase price shall be reduced from the amount of set-off otherwise available in respect of the said purchase.”
What is fuel?
The reduction is to be made when the item purchased is used as fuel. The term ‘fuel’ is not defined in the MVAT Act/Rules.
In common parlance, fuel means any item which is burnt for producing heat. The dictionary meaning also suggests the same thing. The fuel is defined as under in Webster’s Encyclopedic Unabridged Dictionary of the English Language:
“fuel: 1. combustible matter used to maintain fire, as coal, wood, oil etc. 2. that which gives nourishment or incentive: our discussion provided him with fuel for the debate – v.t.3. to supply with fuel- v.i.4. to obtain or replenish fuel. [ME fule(le), feuel < OF feuaile < LL focalia, neut.pl.of focalis of the hearth, fuel. See focus, – AL]..”
“com.bus.ti.ble 1.capable of catching fire and burning; inflammable; flammable: Gasoline vapor is highly combustible. 2. Easily excited: a high-strung, combustible nature -n.3.a combustible substance: Trucks carrying combustibles will not be allowed to use this tunnel….”
From the above combined meanings of fuel and combustible, it is clear that the item, which burns, to produce heat can be considered as fuel. From the examples given, the position is more clear like, oil, wood etc., which burn, are considered as fuel.
Factual position
On this background, the issue which arises is the use of combustible item. If the item is burnt for producing heat, then it can fall in the category of fuel. There may be circumstances, where the combustible item is used and may also be giving heat. However, simply because some heat is generated, it cannot become fuel and it can be raw material. In other words, whether the item is used as a fuel or a raw material is a matter of factual findings. Some guidelines can be had from the decided judgments.
Recent judgment in case of Gupta Metallics & Power Ltd. (54 VST 292)(Bom).
The dealer was manufacturer of sponge iron. The process of manufacturing of sponge iron involved use of raw material i.e. iron ore, coal and dolomite. The dealer had for the assessment year 1.4.2005 to 31.3.2006 and assessment year 1.4.2006 to 31.3.2007 claimed set-off of 100% in respect of the tax paid on the coal purchased and used in the manufacturing of sponge iron. The dealer before the assessing officer claimed that the said coal was used as raw material for manufacturing sponge iron from iron ore and that is how the respondent claimed 100% set off as per Rule 53 of MVAT Rules, 2005. While passing the assessment order for the aforesaid periods, the assessing authority came to the conclusion that the part of coal used in the manufacture of sponge iron was used as a fuel and part as raw material. The assessing officer permitted the respondent to claim set off to the extent of 50% by treating that 50% of the coal was used as a raw material and 50% of the coal was used a fuel. The reasoning of the assessing authority was that the coal, while reacting with iron in the kiln also generates heat, which is used for the said manufacturing process. Therefore, on the 50% part set off was allowed after reduction of 3% as per above rule 53(1). In the second appeal, Tribunal concurred with the dealer and held that in the given circumstances, coal was used as a raw material. Though, heat is generated and may be useful in the manufacturing process, the coal was not put up in the kiln for the said purpose but basically to act as reductant i.e. raw material. The department filed appeal before Bombay High Court. Hon’ble High Court, after discussing the facts, observed as under;
“It would be proper to deal with the arguments on both the sides on the question whether the coal used in the process by the respondent was used as a raw material or as fuel. In our view, it would be proper to reproduce the report which is contained in letter dated 29.2.2008 to which a reference has been made by all the authorities below. The text of the report is as follows:
“Report:
In the Rotary Kiln Process of manufacturing Sponge Iron, a premixed charge of Iron Ore, Non-Coking Coal and Flux is added inside the Kiln. This charge forms a bed inside the Kiln and slowly moves towards the discharge end. During the transit of the charge, the Iron Ore is slowly converted into Sponge Iron, by the process of reduction. Inside the bed, the carbon of the Non-Coking Coal reduces the Iron Oxide slowly to Iron and the carbon gets converted to Carbon-mono-Oxide gas. Thus, inside the bed the coal plays the role of a reductant. The gas Carbon-mono-oxide rises out of the bed and is now post-combusted to gas carbon-dioxide by carefully admitting air inside the Kiln. This reaction taking place in the area above the bed is a highly exothermic reaction and produces the bulk of the heat required for the process. Thus, the Non-Coking Coal provides the gas Carbon mono-Oxide for satisfying the heat requirements of the process i.e. it indirectly plays the role of a fuel in the Rotary Kiln Process.
It is impossible to quantify the ratio of coal as a reductant vs. fuel in the Rotary Kiln.
10. We have perused the report and we have also considered the submissions advanced by both the sides. A reading of the report clearly indicates that to convert iron ore into sponge iron, the noncoking coal is used. It must be mentioned that the orders passed by the authorities did not use the specific word “Noncoking coal”. The report clearly indicates that the mixture of iron ore and non-coking coal when heated from outside, would ultimately get converted into sponge iron. It is also noticed that on account of the chemical qualities of the non-coking coal, heat is generated. The carbon of non-coking coal reduces the iron oxide slowly to sponge iron and carbon monoxide gas is generated. The report specifically mentions that inside the bed, the Non-Cooking Coal plays the role of a reductant. It further indicates as to how highly exothermic reaction takes place and produces the bulk of the heat required for the process. It also shows that non-coking coal provides the gas carbon mono-oxide for satisfying the heat requirements of the process. On account of this, the author of the report has observed “It indirectly plays a role of fuel in the rotary kiln process”. It is seen that chemical qualities of Noncooking coal to generate heat are used. Merely because heat is generated in the process it cannot be a ground to hold that Noncooking coal so used was used as fuel.
The above observations clearly show that the coal used in the process of manufacturing of sponge iron is used as a raw material and not as a fuel. It is clear that the Assessing Officer as well as the Appellate Authority misread the text of the report dated 29.12.2008. We hold that the tribunal has rightly held that the coal used by the respondent was a raw material and not used as a fuel.”
Thus, simply because heat gets generated, as well as may be useful in the manufacturing process, an item does not become fuel automatically. If the prime object of using the item is as raw material, where without such use, manufacturing may not be feasible then the item is to be considered as a raw material and not a fuel.
Similar is the judgment of Gujarat Tribunal in case of Welspun Steel Ltd. (First Appeal No. 27 of 2010 dated 27.12.2011), wherein also Gujarat Tribunal has considered the use of coal as a raw material and not a fuel.
Conclusion
Set off is the backbone of VAT system. Further, the responsibility of filing correct return is on the dealer. There is no compulsory assessment for each year. Therefore, if set off is due, but not claimed in the returns, then there is no surety that the dealer will get an opportunity to claim the same. If the assessment is initiated then the claim can be lodged. However, if that is not the case, then dealer will lose it. Therefore, it is dealer, who should take care to claim correct set off. Under the above circumstances, it is necessary that the dealer determines the set off quantum correctly. The above issue is one of the issues, where minute study is required to understand the nature of the use of the item.
If it can be proved that the item is used as a raw material for manufacturing or production, then even though it maybe generating heat, it may not be fuel. Similarly, there may be circumstances, where the item is generating heat but as a prime raw material to produce new goods. Normally, when the item is burnt for giving heat to the other item, it will be in the category of fuel. However, if by burning the item, new goods are produced, then a stand can be taken that it is a raw material and not a fuel. In other words, an item can be used as raw material in the heat form. The particular use is to be decided as per facts of each case and no generalisation can be made. The above judgments may be useful for deciding the issue. If the item is coming in the category of fuel, only then reduction will apply otherwise not and the dealer will get full set off.
