Exemption From Tax To Encourage Industrialization Cannot Be Equated With Refund Of Tax: Delhi HC [Read Judgment]

Refusing to allow refund of tax which was paid despite there being an exemption sanctioned for the payee, the Delhi High Court, on Thursday, observed that such exemption to encourage industrialization cannot be equated with refund of tax.

The Bench comprising Justice S. Ravindra Bhat and Justice S.P. Garg explained, "Exemption from tax to encourage industrialization cannot be equated with refund of tax. They are two different legal and distinct concepts. An exemption is a concession allowed to a class or individual from general burden for valid and justifiable reason. The underlying intention of exemption is to incentivize production and economic activity. VAT is an indirect tax passed on to the consumer. If an industry is exempt from tax the ultimate beneficiary is the consumer. The industry is allowed to overcome its teething period by selling its products at comparatively cheaper rate as compared to others. Therefore, both the manufacturer and consumer gain one by concession of non-levy and other by non-payment.

Such provisions in an Act or Notification or Orders issued by government are neither illegal nor against public policy. A provision or agreement to refund tax due or realized in accordance with law is not justified. Refund is directed only when the amount collected is excessive, or there is no levy or for wrongful collection. In all such cases, a fault must be located within the revenue before the courts order refund."

The Court was hearing a Petition filed by M/s. Ultratech Cement Limited, challenging an order passed in January last year by the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), whereby its claim for refund of Value Added Tax and Sales Tax as well as Electricity duty from the Governments of Maharashtra and Gujarat was dismissed.

As per the factual matrix, the Board for Industrial and Financial Reconstruction (BIFR) had sanctioned a scheme for revival of the sick company- Narmada Cement Company Ltd. (NCCL) under the Sick Industrial Companies (Special Provisions) Act, 1985. The scheme provided for merger of NCCL with a healthy company- M/s. Ultratech Cement Limited with effect from 1 October, 2005.

The sanctioned scheme was in force for 7 years, up to 30 September, 2012, providing reliefs and concessions from the two States as well. However, despite such provisions in the scheme, Ultratech continued to pay VAT and duties to the States for the entirety of the scheme.

It then approached the BIFR after the scheme period ended, demanding a refund of Rs. 233.30 and Rs. 38.71 crores from the Gujarat Government and Rs. 91.90 and Rs. 2.52 crores from the Maharashtra Government, deposited by it towards VAT and duties during the scheme period.

The BIFR, however, ruled that Ultratech should not have paid the tax and duties in the first place, and refused to grant the relied prayed for. It noted that since Ultratech continued to collect VAT/Sales Tax from its customers, it cannot ask for a refund now. BIFR further opined that the scheme only provided for exemption of payment of VAT and duties and not refund. Refund of taxes already collected and paid to the State was different from exemption from its payment, it ruled.

On an appeal filed by Ultratech, AAIFR then ruled that since there was no sick company after sanctioning of the merger scheme, permitting refund of taxes already collected and paid to the State would be contrary to public interest. The AAIFR, in fact, held that the relief and concessions given to Ultratech were "neither necessary nor in public interest and are contrary to the public purpose sought to be achieved under SICA". It then ruled in favor of Gujarat and Maharashtra.

Ultratech had now challenged this order, contending that the refund will not amount to undue enrichment as the scheme has an overriding effect over other laws by virtue of Section 32(1) of the Act.

However, it did not have any luck with the Delhi High Court as well, with the Court noting that in the case at hand, the States had not consented to the exemptions as Gujarat had objected to it while Maharashtra was not even aware of it.

"Therefore, there was no consent, but opposition in one case and lack of knowledge: both contingencies could not have attracted the provision for “deemed consent”. In such event the scheme, being violative of SICA, could not have prevailed, by virtue of Section 32," it observed.

The Court then ruled that Ultratech "gave up that relief by its inaction (in not seeking exemption or approaching BIFR or the courts in a timely manner) and by collecting taxes and depositing them".