Supreme Court clarifies interest liability on Entry Tax: Indian Oil Corporation vs. State of U.P. (22 April 2019)

Date of the Judgment: 22 April 2019
Citation: (2019) INSC 362
Judges: Ashok Bhushan, J., K.M. Joseph, J.
Can a state government demand interest on entry tax when the initial levy was challenged and the matter was under litigation? The Supreme Court addressed this crucial question in a case involving the Indian Oil Corporation and the State of Uttar Pradesh. The core issue revolved around the liability to pay interest on Entry Tax under the Uttar Pradesh Tax on Entry of Goods into Local Areas Act, 2007, after the demanded Entry Tax was already paid. This judgment clarifies the scope of interest liability in such cases, providing significant guidance for similar disputes. The judgment was authored by Justice Ashok Bhushan, with Justice K.M. Joseph concurring.

Case Background

The case has a long history, stemming from challenges to the Entry Tax Legislations in Uttar Pradesh. The initial U.P. Tax on Entry of Goods Ordinance, 2000, effective from 01 November 1999, was replaced by the U.P. Tax on Entry of Goods Act, 2000. This Act also imposed Entry Tax on crude oil. Indian Oil Corporation (IOC) challenged this levy in the Allahabad High Court, which declared the Act of 2000 unconstitutional on 27 January 2004, citing violations of Articles 301 and 304 of the Constitution.

The State of U.P. appealed to the Supreme Court, which, on 09 February 2004, stayed the High Court’s judgment, directing the state to deposit all taxes collected after 27 January 2004 in an interest-bearing account. Subsequently, the Supreme Court’s Constitution Bench in Jindal Stainless Ltd. (2) (2006) laid down guidelines for determining whether a tax was compensatory. Following this, the Allahabad High Court ruled on 08 January 2007 that the Entry Tax on crude oil was not compensatory.

On 17 April 2007, the Supreme Court ordered that High Court orders favoring taxpayers would apply to those petitioners. The State of U.P. then promulgated the U.P. Tax on Entry of Goods into Local Areas Ordinance on 24 September 2007, with retrospective effect from 01 November 1999, repealing the 2000 Act and re-enacting it. This ordinance was later replaced by the U.P. Tax on Entry of Goods into Local Areas Act, 2007.

IOC again challenged the 2007 Ordinance in the Allahabad High Court. On 18 December 2008, the Supreme Court referred the issue of Entry Tax to a larger bench. The Allahabad High Court upheld the 2007 Act on 23 December 2011. The Supreme Court then stayed this judgment on 10 January 2012, requiring appellants to deposit 50% of the tax liability and provide a bank guarantee for the rest. On 06 December 2013, the Supreme Court modified its order, stating that if IOC lost the appeal, it would pay the tax arrears with interest as determined by the Court under the 2007 Act.

A Nine-Judge Constitution Bench on 11 November 2016, overruled the compensatory tax theory. The regular bench on 21 March 2017, allowed IOC to challenge the 2007 Act on issues left open by the Nine-Judge Bench. IOC filed a new writ petition in 2017, and the Allahabad High Court dismissed it on 04 May 2018. Following this, demand notices were issued to IOC for Entry Tax and interest from 1999-2000 to 2011-2012. IOC paid ₹3,361.55 crores towards Entry Tax, and then challenged the demand for interest in a new writ petition.

Timeline

Course of Proceedings

Initially, the Allahabad High Court declared the U.P. Tax on Entry of Goods Act, 2000, unconstitutional. This decision was appealed to the Supreme Court, which issued an interim stay. Following this, the Allahabad High Court ruled that the Entry Tax was not compensatory. Subsequently, the U.P. government enacted the 2007 Act, which was also challenged. The Allahabad High Court upheld the 2007 Act, a decision that was then appealed to the Supreme Court.

The Supreme Court referred the matter to a larger bench, which overruled the compensatory tax theory. The case was then sent back to the regular bench, which allowed IOC to challenge the 2007 Act on specific issues. The Allahabad High Court dismissed IOC’s subsequent writ petition, leading to demand notices for Entry Tax and interest. IOC then filed a new writ petition challenging the interest demand, which was dismissed by the High Court on grounds of maintainability.

Legal Framework

The core of this case involves the interpretation of the U.P. Tax on Entry of Goods into Local Areas Act, 2007. Section 4 of the Act allows the state to levy a tax on the entry of specified goods into a local area for consumption, use, or sale. The rate is capped at 5% of the goods’ value.

Section 12 of the Act deals with the collection of tax through manufacturers. According to Section 12(1), any person bringing goods from a manufacturer within the state must pay the tax to the manufacturer at the time of delivery. Section 12(2) requires the manufacturer to submit a return and deposit the tax. Section 12(3) specifies that if a manufacturer fails to deposit the tax, they are liable to pay the tax along with interest and penalty.

Section 13 of the Act is crucial, as it applies certain provisions of the U.P. Value Added Tax Act, 2008, to proceedings under the 2007 Act. Specifically, it applies Section 33 of the U.P. Value Added Tax Act, 2008, which deals with the payment and recovery of tax. Section 33(2) states that if the tax is not paid within the prescribed time, a simple interest of 1.25% per month is payable on the unpaid amount.

The interplay between these sections, particularly the applicability of Section 33 of the VAT Act to the Entry Tax Act, is central to determining the legality of the interest demand.

Arguments

Appellant’s Arguments (Indian Oil Corporation)

• No Substantive Provision for Interest: The appellant argued that the 2007 Act does not contain any substantive provisions for the recovery of interest on Entry Tax, except under Section 12(3), which is specific to manufacturers. Section 13 of the Act only adopts machinery provisions, not substantive ones, from the U.P. Value Added Tax Act, 2008.

• Bonafide Dispute: The appellant contended that there was a bonafide dispute regarding the liability to pay Entry Tax, which was only resolved on 04 May 2018, when the High Court dismissed the writ petition challenging the validity of the Act. Therefore, no interest should be charged.

• No Liability Before 24 September 2007: The appellant submitted that there was no power to recover Entry Tax before 24 September 2007, as the 2000 Act was declared unconstitutional. The 2007 Act validated the levy, but interest cannot be charged for the period prior to its enactment.

• Interim Order: The appellant referred to the Supreme Court’s interim order of 06 December 2013, which stated that interest would be determined by the Court at the final disposal of the appeal. Since neither the Nine-Judge Bench nor the Regular Bench decided on the interest liability, the High Court should not have dismissed the writ petition on the ground of res judicata.

• Uncertainty of Law: Given the legal uncertainty and the overruling of long-standing legal principles by the Nine-Judge Bench, the appellant should not be burdened with interest.

Respondent’s Arguments (State of U.P.)

• Res Judicata: The respondent argued that the High Court rightly dismissed the writ petition as not maintainable due to res judicata. The appellant’s earlier writ petition (No. 25730 of 2017) included a challenge to assessment orders that included interest, and therefore, the issue is barred by constructive res judicata.

• Substantive Provisions Exist: The respondent contended that the 2007 Act, through Section 13, adopts substantive provisions for charging interest from the U.P. Value Added Tax Act, 2008. Specifically, Section 33 of the VAT Act provides for the charging of interest on unpaid tax.

• Benefit of Interim Order: The respondent submitted that the appellant had benefited from the interim orders of the Supreme Court and is now estopped from challenging the interest liability.

• Retrospective Effect: The 2007 Act has retrospective effect from 01 November 1999, and thus, the appellant is liable to pay both Entry Tax and interest.

• Principle of Restitution: The respondent argued that the principle of restitution applies, as the appellant withheld the tax and used the money while the matter was under litigation.

• Interest as Accretion of Tax: The respondent argued that interest is an accretion of tax and an enlargement of tax liability. The liability to pay interest arises from the default in payment of Entry Tax.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the writ petitions challenging the demand notices for interest were barred by res judicata due to the dismissal of the earlier writ petition?
2. Whether the 2007 Act contains any substantive provision for charging interest?
3. Whether the appellant was liable to pay interest on Entry Tax levied between 01 November 1999 and 23 September 2007, when the 2000 Act was in operation but struck down by the High Court?
4. What is the liability for payment of interest after 24 September 2007?
5. What relief, if any, is the appellant entitled to?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court

Legal Provisions Considered by the Court

Judgment

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

How each authority was viewed by the Court?

The Supreme Court relied on several key authorities:

• Jindal Stainless Ltd. (2) and Another Vs. State of Haryana and Others, (2006) 7 SCC 241*: This case was initially relied upon for the yardsticks to determine compensatory tax, but the theory was later overruled.
• Atiabari Tea Co. Ltd. Vs. State of Assam, AIR 1961 SC 232* and Automobile Transport (Rajasthan) Ltd. Vs. State of Rajasthan, AIR 1962 SC 41406*: These cases, which propounded the doctrine of “direct and immediate effect” and the working test for compensatory tax, were both overruled by the Nine-Judge Bench.
• Jaiprakash Associates Limited Vs. State of Madhya Pradesh & Ors. (2009) 7 SCC 339*: This case was cited to show the reference to a larger bench.
• Jindal Stainless Limited & Anr. Vs. State of Haryana & Ors., (2017) 12 SCC 1*: This Nine-Judge Bench decision was crucial as it overruled the compensatory tax theory.
• J.K. Synthetics Limited Vs. Commercial Taxes Officers, (1994) 4 SCC 276*: The court affirmed that provisions for levy and collection of interest are substantive law, even if part of machinery provisions.
• V.V.S Sugars Vs. Govt. of A.P. and others, (1999) 4 SCC 192*: This case was used to reiterate that interest can only be levied if the statute provides a substantive provision for it.
• M/s. Ashok Service Centre and others Vs. State of Orissa, (1983) 2 SCC 82*: This case was used to explain the meaning of “mutatis mutandis.”
• Rajasthan State Industrial Development and Investment Corporation and another Vs. Diamond & Gem Development Corporation Limited and another, 2013 (5) SCC 470*: This case reiterated the meaning of “mutatis mutandis”.
• India Carbon Ltd. and others Vs. State of Assam, (1997) 6 SCC 479*: This case was used to show that interest can be levied only if there is a substantive provision in the statute.
• Shree Bhagwati Steel Rolling Mills Vs. Commissioner of Central Excise and another, (2016) 3 SCC 643*: This case was used to highlight that the question of levying interest is a question of jurisdiction.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure a fair and just application of the law. The Court emphasized that the issue of interest liability was not addressed in the previous proceedings and that the High Court had consciously restricted its consideration in the earlier writ petition. The Court also acknowledged the legal complexities and the need to interpret the provisions of the 2007 Act correctly. The Court’s reasoning focused on the following key points:

• ✓ Procedural Fairness: The Court was keen to ensure that the appellant was not denied a fair hearing on the issue of interest liability. The fact that the issue was de-linked from the main bunch of writ petitions and the High Court had restricted its considerations played a significant role.
• ✓ Interpretation of Law: The Court focused on the correct interpretation of Section 13 of the 2007 Act and its interplay with Section 33 of the U.P. Value Added Tax Act, 2008. The Court determined that Section 13 did provide a substantive provision for interest by applying Section 33 of the VAT Act.
• ✓ Substantive Justice: The Court was also concerned with ensuring that the appellant was not unfairly burdened with interest, especially considering the legal uncertainties and the fact that the initial levy was challenged.
• ✓ Need for Detailed Examination: The Court recognized that the issue of interest liability involved several factual and legal aspects that needed to be examined in detail by the High Court.

Sentiment Analysis of Reasons Given by the Supreme Court

The Supreme Court’s reasoning reflected a balanced approach, carefully considering both the legal provisions and the principles of fairness. The sentiment can be characterized as follows:

• Neutral to Favorable towards Appellant: The Court’s decision to set aside the High Court’s judgment and revive the writ petitions indicates a favorable stance towards the appellant’s plea for a fair hearing on the interest issue.
• Emphasis on Legal Interpretation: The Court’s focus on the correct interpretation of the relevant statutes shows a commitment to legal precision and due process.
• Concern for Equity: The Court’s emphasis on ensuring that the appellant is not unduly burdened with interest suggests a concern for equity and fairness in the application of the law.
• Judicial Restraint: The Court’s decision not to decide on the liability of interest for both periods (1999-2007 and post-2007) and instead remitting the matter to the High Court demonstrates judicial restraint and a recognition of the need for a detailed examination of the factual and legal issues involved.

Ratio Decidendi

The ratio decidendi of this case can be summarized as follows:

1. Res Judicata: A writ petition challenging the demand for interest is not barred by res judicata if the issue of interest was consciously de-linked and not decided in previous proceedings.
2. Substantive Provision for Interest: A substantive provision for charging interest can be found in a statute even if it is applied through a machinery provision, such as Section 13 of the 2007 Act applying Section 33 of the U.P. Value Added Tax Act, 2008.
3. Detailed Examination of Interest Liability: The issue of interest liability, particularly when there is a bonafide dispute and legal uncertainty, requires a detailed examination on a case-by-case basis.

Obiter Dicta

While the primary focus of the judgment was on the issues framed, the Court made certain observations that can be considered obiter dicta:

• The Court’s observation that the previous High Court judgment did not address the issue of interest and that the issue was de-linked from the main bunch of petitions can be considered obiter, as it was not essential to the main decision but provided context for the Court’s reasoning.
• The Court’s discussion on the interpretation of “mutatis mutandis” can be considered obiter, as it was not directly related to the core legal issues of the case.
• The Court’s comments on the need for a detailed examination of the interest liability, while important for the case, can also be seen as obiter as they provide guidance for the High Court rather than being a direct part of the ratio.

Conclusion

The Supreme Court’s judgment in Indian Oil Corporation vs. State of U.P. is significant for clarifying the scope of interest liability in cases where the initial levy was challenged and the matter was under litigation. The Court held that the writ petitions challenging the demand for interest were not barred by res judicata, given the specific circumstances of the case. The Court also clarified that a substantive provision for charging interest can be found in a statute even if it is applied through machinery provisions.

However, the Court did not decide on the actual liability of interest for the period from 1999 to 2007 and the period after 2007. Instead, it remitted the matter to the High Court for consideration on the merits. This judgment underscores the importance of a detailed examination of the factual and legal aspects of each case, particularly when it involves complex issues of tax liability and interest.

The case also highlights the importance of procedural fairness and the need to ensure that taxpayers are not unduly burdened with interest, especially when there is a bonafide dispute and legal uncertainty. The judgment serves as a valuable precedent for similar cases involving tax disputes and interest liability.

Flowchart of the Case

Ratio Table