Tax Exemption Notification Must Be Construed Strictly; Promissory Estoppel Not Applicable In Taxing Matters: Supreme Court

A Bench comprising Justices M.R. Shah and Sanjiv Khanna observed that after availing the exemption under the scheme, Essar Steel Ltd. transferred the raw materials to another entity, Essar Power Ltd., even when the said scheme categorically excluded power generating industries from its ambit.

Factual Background

Arcelor Mittal Nippon Steel India Limited [erstwhile Essar Steel Ltd. (ESL)], engaged in manufacture and sale of Hot Briquetted Iron and Hot Rolled Coil at its two units in Surat, Gujarat held registration certification under both the Gujarat Sales Tax Act, 1969 and Central Sales Tax Act, 1956. Upon making requisite investment in Unit No. 1 as per the resolution dated 07.05.1986 issued by the Industries, Minus and Energy Department of the Government of Gujarat, ESL was eligible to avail incentives during 01.08.1990 to 31.07.2004 to the limit of Rs. 237.59 crore.

Later, in 1991, the Gujarat Government announced a scheme, "The Scheme for Special Incentives to Prestigious Units 1990-95 (modified)", under which a prestigious unit in core sector industries was eligible for incentives up to 90% of the fixed capital investment. Subsequently, ESL invested Rs. 5000 crores for the manufacture of Hot Rolled Coil. Accordingly, it was granted Sales Tax exemption for its Unit No. 2 for the period from 22.02.1993 to 21.02.2007 to an upper limit of Rs. 2050 crores. But, the exemption was subject to fulfilling certain conditions as notified in 1992 (parent notification), one of them being that the goods purchased by the eligible units were to be used by itself and within the State of Gujarat, as raw material. Unit No. 2 was exempted from payment to purchase tax on raw material for Naphtha and Natural Gas (goods purchased). The exemption was made available to steel manufacturing units and the units engaged in generating electricity were categorically left out of the purview of exemption as "Not Eligible".

In 2000, the above-mentioned condition for granting exemption was amended and it was specifically mentioned that the goods were to be used by the eligible units as raw materials, processing materials or consumable stores in its industrial units for which the eligibility certificate was obtained. The same was again amended in the year 2002, whereby the eligible units were to use the goods as raw materials, processing materials or consumable stores in its industrial unit for which it has obtained the eligibility certificate, in the manufacture of goods for dispatch to its another unit or division situated within the State for use in the manufacture of another goods for sale by such another unit or division or to its another unit or division situated outside the State for use in the manufacture of other goods. The eligible unit was also required to furnish to the selling dealer a declaration certificate in Form No. 26.

The Natural Gas and Naphtha purchased by ESL was sold to Essar Power Limited ("EPL") for generating electricity, which was ultimately sold back to ESL. The Sales Tax Department raised a dispute against the ESL for breaching the declaration given in Form 26, as the goods purchased were transferred to EPL for generation of electricity and eventually used in Unit No. 2 of ESL. A show cause notice was issued on 30.06.2002 for breach of conditions of exemption. The Assessing officer was convinced that no tax was due and payable by ESL. Again, on 30.05.2005 a notice was issued by a Deputy Commissioner of Sales Tax for availing the exemption in contravention of law. The said notice was issued to initiate levy of purchase tax of Rs. 480.99 crores and for levying penalty for the period 995-1996 to 2005-2006. A writ petition was filed before the Gujarat High Court challenging the notice of the Revenue and the Court directed the authorities not to enforce the assessment orders on ESL depositing 50% of its tax dues. The assessment orders were challenged before the Joint Commissioner, who imposed purchase tax under Section 50 of the Act for the years 1998-1999 and 1999-2000, confirmed levy of purchase tax in respect of purchase of goods till 14.11.2000, but set aside the penalty.

Both State and ESL approached the Tribunal in appeal. The Tribunal allowed the petition in favour of ESL and held that it was not liable to pay any tax, interest or penalty. The State filed an appeal before the Gujarat High Court, which dismissed the appeal, primarily, on the ground of promissory estoppel and observed that ESL had not violated any of the original conditions imposed by the 1992 notification.

Contentions raised by the appellant

Senior Advocate, Mr. Maninder Singh appearing on behalf of the State of Gujarat argued that the notification that came up in 1992 was the parent notification and the amendments in 2000 and 2002, which only expanded the scope of exemption, did not take away the rights conferred under the parent notification. He stated that exemption was extended only to "the eligible units" for utilizing the raw materials for manufacture of goods in that "eligible unit" itself. In view of the same, he submitted that in order to avail the exemption ESL was supposed to use the raw materials (Naphtha and Natural Gas) in the very same steel unit and only for the manufacture of steel. It was emphasized that when the scheme was introduced the concerned Department had issued the list of industries of "eligible units" and "non eligible units" and power generating companies were categorically put in the "non-eligible units" list. Thus, Mr. Singh submitted that ESL had indulged in passing on the benefit of exemption to EPL, which otherwise was ineligible to avail it. He averred that the language of the exemption notification and the condition enumerated therein were clear and unambiguous. Placing reliance on Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company And Ors. (2018) 9 SCC 1 and Union of Indian And Anr. Etc. Etc. v. V.V.F. Limited And Anr. Etc. Etc. (2020) SCC OnLine SC 378, Mr. Singh argued that exemption notifications are to be construed strictly and in absence of any ambiguity in the language, in favour of the Revenue. He argued that the argument qua promissory estoppel would not hold ground as the subsequent amendments, which merely extended the scope of exemption, did not affect the rights available under the parent notification. It was highlighted that the first amendment in 2000 clarified that the exemption shall be available to a unit only when the raw material is consumed by the same unit. Citing V.V.F Limited (supra) and Bengaluru Development Authority v. Sudhakar Hegde And Ors. (2020) 15 SCC 63, he argued that amendments, which are clarificatory in nature are to be applied from the date of the parent notification. Mr. Singh referred to V.V.F Limited (supra) and Kothari Industrial Corporation Limited v. Tamil Nadu Electricity Board And Anr. (2016) 4 SCC 134 to argue that tax exemption is a concession and not a legally enforceable right against the Government. It was submitted that benefits incorrectly extended to the unit uptil 2000 could be corrected in the subsequent assessment years.

Contentions raised by the respondent

Senior Advocate, Mr. Ritin Rai appearing on behalf of ESL argued that on the basis of concurrent findings by the Tribunal and the High Court, the subsequent amendments were not applicable to ESL. It was asserted that ESL had met the conditions prescribed in the parent notification and was therefore granted the benefit by the State up till 14.11.2000. The eligibility criteria in the parent notification is not restricted to the use of the raw material in the 'unit itself', but extends to 'anywhere within the State of Gujarat'. It was urged that the goods were transferred from ESL to EPL, which is situated in Gujarat, and the power generated by it was used by ESL in manufacturing goods. Moreover, the notification did not state that the goods have to be used in the same form in which it is purchased. In view of the same, Mr. Rai argued that the condition in the parent notification was duly met by ESL. Relying on Assistant Commissioner LTU And Anr. v. Amara Raja Batteries Limited (2009) 8 SCC 209, he submitted that while determining scope of incentive a liberal approach is to be taken by the Court. Referring to a letter dated 16.08.2002 wherein the State had confirmed that there was no breach by ESL, Mr. Rai argued that when the unit was found to be eligible under the parent notification, the position ought not to have been altered by the subsequent notifications. On perusal of the first notification it was argued that it indicated that subsequent conditions could not alter the original conditions and therefore, the amendment made by the second notification, requiring the goods purchased to be used at the unit for which the eligibility certificate was obtained, was not permitted. Mr. Rai averred that even if the amendments are considered to be applicable, they would only have prospective application. It was further submitted that the demand of purchase tax was barred by promissory estoppel and legitimate expectation. Citing Hindustan Steel Ltd. v. State of Orissa (1969) 2 SCC 627 and Excel Crop Care Limited v. Competition Commission of India And Anr. (2017) 8 SCC 47, Mr. Rai argued that, penalty is the result of a quasi-criminal adjudication and in the present matter the State had mechanically imposed a penalty without application of mind.

Analysis by the Supreme Court

The Court noted that it is the admitted position that after purchasing the raw material ESL did not itself use the same, but sold it off to another entity, EPL, which used the raw material for generation of electricity and eventually sold it to ESL. It observed that the parent notification did not provide that the eligible units could transfer or sell the raw material to another unit for their use. The Court opined that accepting the submissions of ESL would result in adding to what was actually embodied in the original notification, which would not be permissible. The Court took note of the fact that the incentive scheme had specifically put power producing companies in the list of 'ineligible' industries. EPL, which was otherwise not eligible for the exemption by the scheme, got the benefit because of the transaction with ESL, thus, defeating the very purpose of the exemption. It was emphasised that by transferring the raw materials to EPL after availing the exemption from payment of purchase tax, ESL had violated the condition mentioned in the first notification and was in breach of the declaration given in Form No. 26. The Court was of the view that even if exemption notifications are to be construed liberally, the beneficiary must fall within the ambit of the exemption.

"It is settled law that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. An exception and/or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in industrial policy and the exemption notifications.

…The exemption notification should be strictly construed and given meaning according to legislative intendment. The Statutory provisions providing for exemption have to be interpreted in the light of the words employed in them and there cannot be any addition or subtraction from the statutory provisions."

The Court stated that in a taxing statute where the language is lucid, the provisions ought to be strictly interpreted. It was noted that the intent of the State was to provide incentive to a specific class of industries enumerated in the list of "eligible industries", which it did not want to extend to the industries in the "ineligible" list. Moreover, it noted that the scope of eligibility clause in exemption notification is not to be expanded, but read strictly.

On perusal of the second notification, the Court opined that the same was clarificatory in nature as there was no change in the eligibility criteria/conditions mentioned in the parent notification. It explicitly made it clear that the raw material purchased by a unit has to be used in the same unit, which was also the requirement in the parent notification. The third notification was also clarificatory in nature and the eligibility criteria therein was that the same unit purchasing the raw material ought to actually use it, which was in consonance with the parent notification. The Court held that ESL was not entitled to avail the benefit of exemption under the notifications, including the parent notification. Consequently, it observed that the arguments on promissory estoppel do not hold water.

"The doctrine of promissory estoppel is an equitable remedy and has to be moulded depending on the facts of each case and not straitjacketed into pigeonholes. In other words, there cannot be any hard and fast rule for applying the doctrine of promissory estoppel but the doctrine has to evolve and expand itself so as to do justice between the parties and ensure equity between the parties. In the present case, the principle of promissory estoppel shall not be applicable."

Referring to Commissioner of Central Excise, Bangalore - 1 v. Bal Pharma Limited, Bangalore And Ors. (2011) 2 SCC 620, the Court asserted that doctrine of promissory estoppel was not applicable to a taxing statute and neither to an exemption notification, wherein the applicant does not satisfy the eligibility conditions.

"The rules of promissory estoppel and estoppel by conduct may not be applied to alter or amend the specific terms and against statutory provisions. All the terms and conditions contained in the exemption notification shall prevail and the person claiming the exemption has to fulfil and satisfy all the eligibility criteria/conditions mentioned in the exemption notification."

Refusing to accept the submission made by ESL on legitimate expectation, the Court stated that just because the exemption was initially granted the same benefit ought to be extended in the subsequent assessments, especially when the dealer-assessee is not eligible for the exemption. The Court was of the view that the dealer-assessee cannot benefit from the misinterpretation on the part of the State.

With respect to penalty, the Court observed that as per the statute if the difference of tax paid and tax leviable is more than 25% the dealer shall be deemed to have failed to pay tax and liable to pay penalty. Considering that ESL's case fell within the ambit of this 25%, it was held to be liable to pay penalty.

Case Name: State of Gujarat v. Arcelor Mittal Nippon Steel India Limited

Citation: 2022 LiveLaw (SC) 79

Case No. and Date: Civil Appeal No. 7710-7714 of 2021 | 21 Jan 2022

Corum: Justices M.R. Shah and Sanjiv Khanna

Counsel for the Appellant: Senior Advocate, Mr. Maninder Singh and Advocate-on-Record Ms. Deepanwita Priyanka

Counsel for the Respondent: Senior Advocates, Mr. Neeraj Kishan Kaul, Mr. Ritin Rai; Advocates, Ms. Ruby Singh Ahuja, Mr. Vishal Gehrana, Mr. Varun Khanna, Mr. Ashutosh P. Shukla, Advocate-on-Record M/s. Karanjawala & Co.

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