Supreme Court Clarifies Exemption Start Date for Export Units: State of Kerala vs. Akay Flavours (2023)

Date of the Judgment: 2nd February 2023
Citation: (2023) INSC 79
Judges: S. Ravindra Bhat, J. and Dipankar Datta, J.

When does a tax exemption begin for a company setting up an export-oriented unit? The Supreme Court of India recently addressed this question, focusing on whether the exemption period starts from the date of initial approval or the date the unit begins production. This case clarifies the interpretation of a Kerala state notification regarding tax exemptions for export-oriented units. The court’s decision impacts how such exemptions are applied, ensuring a uniform and objective approach.

The judgment was delivered by a two-judge bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta. Justice S. Ravindra Bhat authored the opinion for the bench.

Case Background

M/S Akay Flavours and Aromatics Ltd. (the assessee) claimed exemption from sales tax on the purchase of raw materials like pepper, ginger, and turmeric. The company argued that the five-year exemption period should begin from the date they started production, which was October 1, 1995. The assessing authority initially granted the exemption but later attempted to re-open the assessment, imposing penalties. The State of Kerala (the Revenue) contended that the exemption period should start from December 16, 1993, the date the Central Government issued a permission letter to the assessee. This letter allowed the company to import capital goods and start exporting finished products. The Revenue argued that allowing exemptions before 1995 would be contradictory, as the assessee appeared to have purchased raw materials and machinery after December 1993.

Timeline:

Course of Proceedings

The assessing authority initially granted the tax exemption to the assessee. However, it later attempted to re-open the assessment and imposed penalties. The State of Kerala challenged the observations of the Tribunal regarding the interpretation of the exemption notification. The Tribunal had concluded that the exemption period should not be calculated before the unit was set up. The assessing authority had calculated the five-year exemption period from December 16, 1993. The revision to the High Court was time-barred, and the High Court refused to condone the delay. The matter was then appealed to the Supreme Court. A Division Bench of the High Court had remitted the matter for fresh consideration, even though a single judge had reduced the penalty.

Legal Framework

The core of the dispute revolves around the interpretation of SRO 1727/1993, an exemption notification issued by the State of Kerala. This notification provides an exemption from sales tax on the purchase of raw materials, plant, and machinery for 100% export-oriented units (EOUs). The relevant part of the notification states:

“The exemption shall be for a period of five years from the date of approval of such units by the Central Government.”

The key legal provision is the phrase “date of approval of such units by the Central Government.” The differing interpretations of this phrase by the assessee and the Revenue led to the present dispute.

Arguments

Arguments by the Revenue:

• The Revenue argued that the Central Government’s permission letter dated 16.12.1993, was the date of approval. This letter enabled the assessee to import capital goods and begin exporting finished products.
• The assessee had purchased raw materials and machinery after December 1993, so granting exemptions for the period before 1995 would be contradictory.
• The date of commencement of production is irrelevant in determining the start of the exemption period.

Arguments by the Assessee:

• The letter dated 16.12.1993 was merely a letter of intent and not a final approval.
• The “Green Card” issued on 27.10.1994, was the final approval by the Central Government for the unit under the export-oriented scheme.
• The exemption period should commence from 01.10.1995, the date the assessee began production.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. What is the meaning of the term “approved by the Central Government” in SRO 1727 of 1993, particularly in determining the commencement date of the five-year exemption period?

Treatment of the Issue by the Court

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

Authorities

The Court did not cite any cases or books in the judgment.

The Court considered the following legal provisions:

• SRO 1727 of 1993: This is the exemption notification issued by the State of Kerala, which provides tax exemptions for 100% export-oriented units. The specific clause under consideration was the one stating: “The exemption shall be for a period of five years from the date of approval of such units by the Central Government.”

Judgment

The Court held that the term “approval” in the notification refers to the unambiguous approval by the Central Government, which was given on 27.10.1994, when the “Green Card” was issued. The Court rejected the assessee’s argument that the date of commencement of production should be the starting point for the exemption. The Court stated that if a unit holder chooses not to start production, they should not be rewarded for such inaction.

What weighed in the mind of the Court?

The Supreme Court emphasized the need for an objective and unambiguous determination of the exemption period. The Court reasoned that linking the exemption to the commencement of production would introduce subjectivity and could lead to unequal treatment of different unit holders. The court noted that the assessee was aware of the requirements it had to fulfill and if the unit holder delays the commencement of production, it should not be rewarded with an extended exemption period. The Court also focused on the fact that the letter dated 16.12.1993 was a mere permission letter and not an approval, and the actual approval was the Green Card issued on 27.10.1994.

The court’s reasoning was based on the plain reading of the documents and the need for an objective interpretation of the notification. The court rejected the argument that the exemption should be linked to the commencement of production because it would introduce subjectivity and could lead to unequal treatment of different unit holders.

The court considered the alternative interpretation that the exemption should start from the date of commencement of production. However, the court rejected this interpretation because it would introduce subjectivity in the assessment process. The court reasoned that a unit holder who sets up the unit early should not be penalized, and a unit holder who delays production should not be rewarded with an extended exemption period.

The Supreme Court decided that the date of approval for the purpose of the exemption was 27.10.1994, the date on which the “Green Card” was issued by the Central Government.

The court reasoned that:

• The letter dated 16.12.1993 was a mere permission letter, not a final approval.
• The “Green Card” issued on 27.10.1994 was the final approval by the Central Government for the unit under the export-oriented scheme.
• Linking the exemption to the commencement of production would introduce subjectivity and could lead to unequal treatment of different unit holders.

“In these circumstances, this Court is of the opinion that the term “approval“ has to relate to unambiguous approval by the Central Government which in the present case was given on 27.10.1994.”

“The assessee’s contention that it commenced production only on 01.10.1994 which is the reckonable date in the opinion of this Court, is not persuasive.”

“In a given case, the unit holder may be vigilant and set up his or its unit early whereas in another case, the concerned unit-holder may be laid back or drags its feet resulting in the unit not commencing production. In the latter case, though it might have secured approval, the delay in the commencement of production should not be rewarded with an exemption.”

Key Takeaways

• The five-year tax exemption period for export-oriented units under SRO 1727/1993 starts from the date of unambiguous approval by the Central Government.
• The date of commencement of production is not the relevant date for determining the start of the exemption period.
• A permission letter or letter of intent is not considered the date of approval.
• The “Green Card” issued by the Central Government is considered the final approval for the purpose of the exemption.
• The judgment ensures an objective and uniform approach to determining the start of tax exemption periods for export-oriented units.

Directions

The appeals were partly allowed in the above terms.

Development of Law

The ratio decidendi of this case is that the date of approval for the purpose of tax exemption under SRO 1727/1993 is the date of unambiguous approval by the Central Government, which is the date of the “Green Card” in this case. The Court clarified that the date of commencement of production is not relevant for determining the start of the exemption period. This case clarifies the interpretation of the term “approval” in the context of tax exemptions for export-oriented units.

Conclusion

The Supreme Court’s judgment in State of Kerala vs. M/S Akay Flavours and Aromatics Ltd. clarifies that the five-year tax exemption period for export-oriented units begins from the date of final approval by the Central Government, specifically the date of the “Green Card,” and not from the date of commencement of production. This decision ensures an objective and uniform approach to determining the start of tax exemption periods.