Supreme Court clarifies Entry Tax set-off for Oil Companies in Bihar: Indian Oil Corporation vs. State of Bihar (2017)

Date of the Judgment: 14 November 2017
Citation: (2017) INSC 980
Judges: R.F. Nariman, J. and Sanjay Kishan Kaul, J.

Can an oil company claim a set-off of Value Added Tax (VAT) against Entry Tax when the VAT is not directly paid by them but by other Oil Marketing Companies (OMCs) to whom they sell their products? The Supreme Court of India addressed this question in a case involving Indian Oil Corporation Limited and the State of Bihar. The core issue revolved around the interpretation of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993, specifically concerning the set-off provisions.

The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice Sanjay Kishan Kaul. The majority opinion was authored by Justice R.F. Nariman.

Case Background

Indian Oil Corporation Limited (IOCL) has a marketing division in Bihar with branches in Barauni and Patna. IOCL imports crude oil, refines it into petroleum products, and sells these products. A portion of these products, specifically High-Speed Diesel and Petrol, is sold to Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL). These OMCs then sell the products to their retail dealers or through their outlets.

IOCL pays Entry Tax at 16% when the products enter the local area of Patna and 24.5% VAT, which is set off against the Entry Tax for sales within the local area. However, when sales are made to BPCL and HPCL, the VAT is not set off against the Entry Tax. This is because, as per a notification dated 4th May, 2006 under the Bihar Value Added Tax Act, 2005, the VAT levy is at the point of sale by BPCL and HPCL to their retailers, not at the point of sale by IOCL to BPCL and HPCL.

Until 2014, the set-off was allowed, but following audit objections by the Accountant General, Bihar, the set-offs were disallowed retrospectively from the assessment year 2008-09. This resulted in an Entry Tax demand of Rs. 1,683.03 crores against IOCL.

Timeline

Course of Proceedings

The Patna High Court, in its judgment dated 22nd October, 2013, agreed with the Advance Rulings Authority and rejected IOCL’s claim for set-off under Section 3(2) of the Entry Tax Act. The High Court held that the set-off was not allowable under the said provision.

Subsequently, in a common judgment dated 19th April, 2017, the Patna High Court framed five questions, answering four against the assessee and one in its favor. The court held that interest could not be levied due to the lack of a substantive provision for it.

Legal Framework

The case primarily revolves around the interpretation of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 (Entry Tax Act) and the Bihar Value Added Tax Act, 2005 (VAT Act).

Key provisions of the Entry Tax Act include:

• Section 2(1)(c): Defines “entry of goods” as the entry of goods into a local area from outside the area, outside the state, or outside India, for consumption, use, or sale therein.
• Section 3(1): Levies a tax on the entry of scheduled goods into a local area for consumption, use, or sale therein.
• Section 3(2): States that the tax is to be paid by every dealer liable to pay tax under the VAT Act. It also includes a proviso that allows for a reduction in tax liability under the VAT Act to the extent of tax paid under the Entry Tax Act, under certain conditions. The relevant proviso reads as follows:
  Provided further that where an importer of Scheduled goods liable to pay tax under the Act, incurs tax liability, at the rate specified under Section 14 of the Bihar Value Added Tax Act, 2005 (Act 27 of 2005), by virtue of sale of imported Scheduled goods or sale of goods manufactured by consuming such imported Scheduled goods, his tax liability under the Bihar Value Added Tax Act, 2005 (Act 27 of 2005) shall stand reduced to the extent of tax paid under the Act:

Key provisions of the VAT Act include:

• Section 3(1): States that every dealer registered under the Bihar Finance Act, 1981, is liable to pay tax under the VAT Act.
• Section 13(1): Levies tax on the sale of goods at each point in a series of sales.
• Section 13(2): Provides that the tax on goods specified in Schedule IV shall be levied at such point or points as the State Government may specify.
• Section 14: Specifies the rates of tax for different categories of goods.
• Schedule IV: Lists goods including High-Speed Diesel Oil and Light Diesel Oil.

A notification dated 4th May, 2006, issued under Section 13(2)(a) of the VAT Act, specifies that the tax on motor spirit, High-Speed Diesel Oil, and Light Diesel Oil is levied at the point of sale by oil companies to the retailer or directly to the consumers.

Arguments

Appellant (Indian Oil Corporation Limited) Arguments:

• The Entry Tax Act in Bihar is designed to ensure VAT collection. Therefore, a set-off should be allowed when goods suffer VAT.

• Section 3(2) second proviso of the Entry Tax Act should be interpreted to align with the objective of allowing set-off for goods that bear VAT.

• The practice of allowing set-off until 2014 indicates that the authorities also understood the provision in this manner.

• The retrospective reopening of assessments based on an audit objection in 2014 was flawed.

• A significant portion of the demand relates to sales by HPCL and BPCL outside Patna, which should not attract Entry Tax.

• If the court does not agree with the interpretation of Section 3(2) second proviso, then the proviso should be read down to make it constitutionally valid under Article 14 of the Constitution of India, as it discriminates between similar goods.

• The matter should be sent back to the Appellate Tribunal to determine the sales made by HPCL and BPCL outside Patna.

Respondent (State of Bihar) Arguments:

• Section 3(2) second proviso is assessee-based, not goods-based. The conditions for set-off have not been met by IOCL.

• Rewriting the provision is a legislative function outside the judiciary’s purview.

• VAT and Entry Tax are separate taxes. Granting a set-off is a matter of indulgence, not a right.

• The same person must pay both Entry Tax and VAT to claim set-off. IOCL only pays Entry Tax, not VAT.

• Article 14 cannot be invoked because there is no clear and hostile discrimination.

• Striking down the second proviso would result in no set-off being claimable, which is counterproductive.

• Interest should be granted to the government as a matter of restitution for the period of stay orders.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the Appellant is entitled to a set-off of VAT against Entry Tax under Section 3(2) second proviso of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993, when the VAT is levied at the point of sale by other OMCs and not the Appellant.
2. Whether the matter should be sent back to the Appellate Tribunal to determine the sales made by HPCL and BPCL outside Patna.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

On the interpretation of “liable to pay tax”:

• Associated Cement Companies Ltd. v. State of Bihar & Ors., (2004) 7 SCC 642 – The Supreme Court of India. This case was distinguished by the court.
• The State of Tamil Nadu v. M.K. Kandaswami & Ors., (1975) 4 SCC 745 – The Supreme Court of India. This case was distinguished by the court.
• A.V. Fernandez v. The State of Kerala, 1957 SCR 837 – The Supreme Court of India. This case was distinguished by the court.

On the object of the Entry Tax Act:

• State of Bihar & Ors. v. Bihar Chamber of Commerce & Ors., (1996) 9 SCC 136 – The Supreme Court of India. This case was distinguished by the court.
• Commissioner of Income Tax, Bangalore v. J.H. Gotla, Yadagiri, (1985) 4 SCC 343 – The Supreme Court of India. This case was distinguished by the court.

On Article 14 of the Constitution:

• The Twyford Tea Co. Ltd. & Anr. v. The State of Kerala & Anr., (1970) 1 SCC 189 – The Supreme Court of India
• Ganga Sugar Corporation Ltd. v. State of Uttar Pradesh & Ors., (1980) 1 SCC 223 – The Supreme Court of India
• P.M. Ashwathanarayana Setty & Ors. v. State of Karnataka & Ors., (1989) Supp. (1) SCC 696 – The Supreme Court of India

On the claim of set-off:

• Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v. Commissioner of Sales Tax & Ors., (1992) 3 SCC 624 – The Supreme Court of India
• State of Karnataka v. M.K. Agro Tech Pvt. Ltd, C.A. 15049-15069 of 2017 – The Supreme Court of India.

On arbitrary and discriminatory taxation rates:

• Ayurveda Pharmacy & Anr. v. State of Tamil Nadu, (1989) 2 SCC 285 – The Supreme Court of India. This case was distinguished by the court.
• Aashirwad Films v. Union of India & Ors., (2007) 6 SCC 624 – The Supreme Court of India. This case was distinguished by the court.
• State of Uttar Pradesh & Ors. v. Deepak Fertilizers and Petrochemical Corporation Ltd., (2007) 10 SCC 342 – The Supreme Court of India. This case was distinguished by the court.
• Union of India & Ors. v. N.S.Rathnam and Sons, (2015) 10 SCC 681 – The Supreme Court of India. This case was distinguished by the court.

On the grant of restitution:

• State of Rajasthan & Anr. v. J.K. Synthetics Limited & Anr., (2011) 12 SCC 518 – The Supreme Court of India
• Nava Bharat Ferro Alloys Limited v. Transmission Corporation of Andhra Pradesh Limited & Anr., (2011) 1 SCC 216 – The Supreme Court of India

Legal Provisions Considered:

• Section 2(1)(c) of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993
• Section 3(1) of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993
• Section 3(2) of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993
• Section 3(1) of the Bihar Value Added Tax Act, 2005
• Section 13(1) of the Bihar Value Added Tax Act, 2005
• Section 13(2) of the Bihar Value Added Tax Act, 2005
• Section 14 of the Bihar Value Added Tax Act, 2005
• Schedule IV of the Bihar Value Added Tax Act, 2005
• Notification dated 4th May, 2006 issued under Section 13(2)(a) of the Bihar Value Added Tax Act, 2005
• Article 14 of the Constitution of India

Judgment

How each submission made by the Parties was treated by the Court?

Judgment

How each authority was viewed by the Court?

Final Decision

The Supreme Court, in its final decision, held that:

• Indian Oil Corporation Limited (IOCL) is not entitled to a set-off of Value Added Tax (VAT) against Entry Tax under Section 3(2) second proviso of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993, when the VAT is levied at the point of sale by other Oil Marketing Companies (OMCs) and not by IOCL.
• The matter is remitted back to the Appellate Tribunal to determine the sales made by Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) outside the local area of Patna.
• The court declined to grant interest to the government as a matter of restitution.

The court clarified that the set-off provision under Section 3(2) second proviso is person-specific, not goods-specific. Since IOCL does not pay VAT at the point of sale to BPCL and HPCL, it cannot claim a set-off.

The court also noted that the Revenue was in a hurry to issue demand notices without taking into account the sales made by BPCL and HPCL outside the local area of Patna. The court directed the Appellate Tribunal to consider this aspect.

Ratio Decidendi

The ratio decidendi (the legal principle on which the decision is based) of the Supreme Court’s judgment in this case is:

The set-off of Value Added Tax (VAT) against Entry Tax under Section 3(2) second proviso of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993, is person-specific and not goods-specific. The importer must be the same entity that is liable to pay VAT on the sale of the goods to claim the set-off.

This means that if the VAT is levied at a later point in the supply chain (i.e., when the goods are sold by a different entity), the original importer is not eligible for a set-off of the Entry Tax against the VAT paid by the other entity.

Obiter Dicta

The obiter dicta (statements made by the court that are not essential to the decision but provide additional commentary) in this case include:

• The court observed that the Revenue was in a hurry to issue demand notices without properly considering the sales made by BPCL and HPCL outside the local area of Patna. This highlights the importance of a thorough and fair assessment process.
• The court reiterated that set-off is not a matter of right but a matter of indulgence granted by the statute. This underscores the fact that set-off provisions are to be strictly construed, and the conditions for availing them must be strictly met.
• The court emphasized that purposive interpretation cannot be used to alter the clear language of the statute. This underscores the importance of adhering to the literal interpretation of the law when the language is clear and unambiguous.

Flowchart

Ratio Table